The ATO has issued a new ruling to help with the task of performing the decline in turnover test for JobKeeper eligibility purposes.
The ruling, known as Law Companion Ruling LCR 2020/1 ‘JobKeeper payment – decline in turnover test’, confirms that GST turnover is not necessarily what has been reported in the business activity statements and offers several alternative methods that can be used by an entity to calculate its turnover. In this bulletin we summarise the methods that can be used to calculate JobKeeper turnover and the evidence that should be retained to support the calculation.
GST turnover for JobKeeper purposes
To access the JobKeeper scheme an employing entity must satisfy the decline in turnover test, which compares its turnover in the turnover test period with its turnover in the relevant comparison period. The entity must experience (or expect to experience) a decline in turnover that meets or exceeds the requisite threshold, being either 15%, 30% or 50% depending upon the status of the entity.
The decline in turnover test requires a calculation of projected GST turnover for the turnover test period and current GST turnover for the relevant comparison period.
LCR 2020/1 sets out a three-step process to determine:
- what supplies are relevant when calculating projected GST turnover and current GST turnover;
- how to allocate supplies to a relevant turnover period; and
- how to determine the value of those supplies.
The ruling also outlines the Commissioner’s compliance approach and tolerance around predicting supplies that are likely to be made. The 3 steps are as follows –
- Step A: What supplies are relevant when calculating projected and current GST turnover
- Step B: How to allocate supplies to relevant periods
- Step C: How to determine the value of supplies that have been allocated to a relevant period
The ruling focuses on the basic test for calculating a decline in turnover and does not directly address the alternative tests; however, the Commissioner states that the principles outlined in the ruling may assist in applying the alternative tests.
STEP A: What supplies are relevant?
The JobKeeper decline in turnover test is based on GST turnover as defined in the GST Act, subject to a number of modifications set out in the JobKeeper Rules. Examples of what supplies are relevant for calculating JobKeeper turnover are outlined below. For more detailed guidance, please refer to our GST JobKeeper Turnover Checklist.
STEP B: How to allocate supplies to a relevant period
Your current GST turnover for the relevant comparison period is the sum of the value of all taxable and GST-free supplies you made during that period. Your projected GST turnover during a turnover test period is the sum of the value of all taxable and GST-free supplies you have made, or are likely to make, during that period.
When a supply is made is determined by reference to the terms of the particular contract and the nature of the supply. The attribution rules used for reporting GST are not relevant in determining when a supply is made. The ruling refers to the principles outlined in the A New Tax System (Goods and Services Tax Transition) Act 1999 for determining when a supply is made.
When is a supply made?
- A supply of goods is made when the goods are removed or made available to the recipient.
- A supply of services is made when the services are performed.
- A supply of property is made when the property is made available to the recipient. In the case of a sale this will generally be at settlement.
- A supply of anything other than goods, real property or services (for example a supply of rights) is made when the thing is performed or done.
- For a supply of a service, right or lease that is made on a progressive or periodic basis, the Commissioner will accept that the supply is made on a continuous and uniform basis (e.g. monthly), or when the revenue is recognised in financial reports prepared in accordance with accounting principles relevant to the business.
When is a supply “likely” to be made?
A supply is likely to be made when, on the balance of probabilities, it can be predicted that the supply is more likely than not to be made. The Commissioner accepts the difficulties associated with predicting the likelihood of a supply occurring and will accept a calculation based on a bona fide business plan, accounting budget or other reasonable estimate that relies on the evidence about the projected facts and circumstances that exist at the time you calculate your projected GST turnover. See below for details about how to support your decline in GST turnover calculation.
Alternative methods for working out when a supply is made or likely to be made
As an alternative to allocating a supply to a relevant period based on the time a supply is made, the Commissioner has set out three alternative methods that may be used to allocate supplies to a period, and to determine the value of those supplies.
Method 1: Accrual accounting
The Commissioner will accept that the value of all supplies you have made, or are likely to make in a relevant period may closely align with when revenue is, or would be recognised for accounting purposes. Therefore, you may use the GST-exclusive revenue from making supplies that would be recognised in financial accounts prepared in accordance with accounting principles as a proxy for the value of supplies made or likely to be made in a turnover test period.
You may use this method even if you would otherwise account for GST or income tax on a cash basis.
Method 2: GST attribution
You may use the total GST exclusive value of your supplies that you would allocate to a relevant period under the GST attribution rules as a proxy for the value of all supplies made, or likely to be made in a relevant period.
You may need to make adjustments where the value of the supply used for GST reporting purposes does not reflect the value of supplies for JobKeeper purposes (see adjustments below).
Using a GST cash or accruals (non-cash) basis
The ruling allows GST registered businesses to calculate a decline in turnover using either a cash or accruals basis. However, the ATO expects that you will use the method that you normally use for GST reporting. This means that:
- Employers who account for GST on an accruals basis and have lodged their BAS on that basis, would be expected to use the GST attribution rule that applies to them (i.e. issue of invoice or receipt of any consideration, whichever occurs first).
- Employers who account for GST on a cash basis and have lodged their BAS on that basis, would be expected to use the GST attribution test that applies to them (i.e. cash receipts).
Regardless of the method chosen, the same method must be used for both the test period and the comparison period. If you do choose to use a different method of calculating your turnover from the one you ordinarily use for GST reporting, the ATO may seek to understand your circumstances to ensure that the calculation achieves an appropriate reflection of your turnover.
Method 3: income tax accounting
Entities that are not registered for GST may use the same accounting method used for income tax purposes. This means you can treat income or gains you derive, or are likely to derive in a relevant period for income tax purposes as being the value of the supplies you make, or are likely to make in that relevant period.
If you use one of the alternative methods for allocating supplies to the relevant periods, you must apply the chosen method in good faith. You must also use the same method, and apply it consistently, for both the test period and the comparison period and must keep reasonable records to show which method was used.
In addition, the method chosen must also be used for the monthly JobKeeper reporting requirements.
STEP C: How to value relevant supplies
The value of a supply for JobKeeper turnover purposes is the GST-exclusive value of a taxable supply and the price of a GST-free supply. Often the amounts used for GST reporting do not reflect the value of the supplies for the decline in turnover test.
An example of where the value reported for GST purposes and the value for the decline in turnover test are different is a supply of real property under the margin scheme. Only the margin on which GST is payable is reported in the BAS, but the total price paid needs to be included in turnover for JobKeeper purposes.
Adjustments that should be included in your turnover
If your test time for projected GST turnover is before the end of the period, you may take into account events that are likely to occur up to the end of that period that would change the value of a supply you have allocated to that period. For example, where a business ordinarily offers a discount for prompt payment, and experience shows this is likely to occur after the relevant period, the discount can be taken into account when calculating projected turnover.
However, once the value has been determined, any other event which may occur after the relevant period which changes the value of the supply, cannot be taken into account.
Adjustments that should be excluded from your turnover
GST adjustments that have the effect of cancelling or changing the agreed price of an earlier supply are generally attributed to the period in which the entity becomes aware of the adjustment. The ruling confirms that you should exclude adjustments that are attributable to the test period or comparison period, where they reduce the value of supplies made in an earlier period. These include:
- Discounts, rebates and refunds applied for supplies made in an earlier period;
- Forfeited security deposits; and
- Bad debt adjustments.
Note: The ATO will accept where an entity has already determined that it has satisfied the decline in turnover test prior to this ruling being issued and has included GST adjustments in its calculations, as long as it has done this consistently for both the test period and the comparison period.
How to support your turnover calculations
Regardless of the method chosen to predict supplies you are likely to make for the decline in turnover test, you must have evidence to support that prediction. The ruling sets out the following as examples that could evidence a decline in turnover:
- A decline in supplies since March 2020 as a result of government COVID-19 restrictions;
- Customers cancelling or modifying existing contracts;
- Being required to close due to government COVID-19 restrictions;
- Delays in being able to access stock sourced from overseas;
- Evidence of a reliance on tourism;
- Economic forecasts undertaken by a reputable organisation relevant to your business type;
- Likely timing of government COVID-19 restrictions being lifted; and
- Any other information known to the business, whether publicly available or not.
ATO’s compliance approach
The Commissioner acknowledges the difficulties associated with predicting future supplies and understands that actual turnover may differ from the assessment made by an entity when enrolling for the JobKeeper payment. Where an entity has made a reasonable assessment of turnover at a point in time, the Commissioner will accept that assessment. If there is a significant difference between an entity’s projected GST turnover and what eventuates, the Commissioner may seek further information to ascertain if the assessment was reasonable.
What are the next steps?
It is important to consider how the ruling impacts your decline in turnover test calculations and to retain evidence to support the assumptions relied upon for the purpose of enrolling in the JobKeeper scheme. Please contact your Pitcher Partners’ representative for assistance with your decline in turnover calculations.