The Commissioner of Taxation has released several alternative tests to assess decline in turnover. The alternative tests can be applied where the basic decline in turnover test is not otherwise satisfied.
The alternative tests apply in the following cases:
- commencement of a business
- acquisition or disposal of a business
- business restructures
- substantial increases in turnover during a prior period
- drought or natural disasters
- irregular turnover periods that are not cyclical
- where there is sickness, injury or leave of a sole trader or a partner of a small partnership
Background to the alternative tests
At the heart of the JobKeeper payment scheme is a requirement that, in order to be eligible to participate, an entity must satisfy a decline in turnover test. The Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (the Rules), which were registered on 9 April 2020, set out the “basic test” and provided the Commissioner of Taxation with a power to determine alternative tests. The alternative tests are set out in the Coronavirus Economic Response Package (Payments and Benefits) Alternative Decline in Turnover Test Rules 2020 (the Alternative Test Rules), which were registered on 23 April 2020.
What is the scope of the Commissioner’s power to determine alternative tests?
The Rules (subsection 8(6)) provided that:
“the Commissioner may, by Legislative Instrument, determine that an alternative decline in turnover test applies to a class of entities, if the Commissioner is satisfied that there is not an appropriate relevant comparison period for the purposes of an entity in the class of entities satisfying the [basic] decline in turnover test …”.
The explanatory statement accompanying the Alternative Test Rules indicates that the Commissioner considers his power to be constrained to “some event or circumstances … outside the usual business setting” that results in the relevant comparison period being inappropriate. For example, the Commissioner does not consider that the power extends to determining an alternative test for an entity that ordinarily only makes input taxed supplies (the value of which are excluded for purposes of the basic test).
Accordingly, to the disappointment of many, the Commissioner does not believe he has the power to provide an alternative test to service entities (employment entities) through this legislative power.
Circumstances when an alternative test is appropriate
The Alternative Test Rules identify the following scenarios when the comparison required under the basic test is not appropriate.
| Case | Where alternative case may be applied |
| 1 | The entity commenced its business (i.e. commenced its first business not an additional business) before 1 March 2020 and after the relevant comparison period in 2019. |
| 2 | The entity acquired or disposed part of its business before the applicable turnover test period and after the relevant comparison period. The acquisition or disposal must have changed the entity’s turnover. |
| 3 | The entity restructured its business (or part thereof) before the applicable turnover test period and after the relevant comparison period. The restructure must have changed the entity’s turnover. |
| 4 | The entity’s turnover has substantially increased before the applicable turnover test period. This will occur where turnover has increased by:
(a) 50% or more over the 12-month period immediately before the applicable turnover test period; (b) 25% or more in the 6-month period immediately before the applicable turnover test period, or (c) 12.5% or more in the 3-month period immediately before the applicable turnover test period. |
| 5 | The entity conducted its business (or part thereof) in a declared drought or other natural disaster zone during the relevant comparison period and the drought or natural disaster changed the entity’s turnover. |
| 6 | The entity has an irregular turnover. This will occur if the lowest turnover for a quarter in the 12-months before the applicable turnover test period is no more than 50% of the highest quarterly turnover. This alternative test is not available to an entity that has cyclical turnover (for example, entities with regular seasonal variance in their turnover). |
| 7a | The entity is a sole trader with no employees whose turnover for the relevant comparison period was affected due to the individual being unable to work during all or part of the relevant comparison period due to sickness, injury or leave. |
| 7b | The entity is a partnership of no more than four individuals (a “small partnership”) with no employees and the partnership’s turnover for the relevant comparison period was affected due to at least one of the partners being unable to work during all or part of that period due to sickness, injury or leave. |
What are the alternative tests?
Where the entity meets the requirements to apply an alternative test, the entity is provided with an alternative period or amount that may be used to compare against the projected GST turnover for the relevant “test period”. The table in Appendix A provides a high-level summary of the Commissioner’s alternative tests that may be used in the scenarios identified above.
What are the next steps?
The application of the Alternative Test Rules is very fact specific and requires a number of GST turnover calculations to be made for the various alternative periods. Due to the breadth of the alternative tests, taxpayers will likely be able to test using at least one of these alternative methods. Furthermore, in some cases, it may be possible for an entity to be able to access multiple tests (for example, where the business commenced, there was a restructure and an acquisition during the 12-month period).
Given the 30 April deadline for access to the first two JobKeeper payments is drawing near, taxpayers should start looking at these alternative tests now. Please contact your Pitcher Partners representative for further information or for assistance in applying these measures.
Appendix A – Summary of the alternative tests
The following table provides a high-level summary of the Commissioner’s alternative tests that may be used in the scenarios identified above.
| Scenario | Comparison – monthly testing | Comparison – quarterly testing |
| Business commenced | First alternative
Where the entity commenced business before 1 February 2020, projected GST turnover for a test period is compared to the average of the current GST turnover for each whole month after the entity commenced business up to and including February 2020. This is referred to as “the average monthly current GST turnover”. Where the entity started in February 2020, projected GST turnover for the test period is compared to the current GST turnover for February 2020 (which is multiplied by 29 and divided by the number of days the entity was in business in February). This is also referred to as “the average monthly current GST turnover”. |
First alternative
Projected GST turnover is compared to the average monthly current GST turnover multiplied by three. |
| Second alternative
Projected GST turnover is compared to the entity’s 3 months’ current GST turnover (i.e. the total for the period including December 2019, January 2020 and February 2020) divided by 3. This alternative cannot be used if the business did not commence at least 3 months before 1 March 2020. |
Second alternative
Projected GST turnover is compared to the entity’s 3 months’ current GST turnover. This alternative cannot be used if the business did not commence at least 3 months before 1 March 2020. |
|
| Acquisition / disposal | Projected GST turnover is compared to the current GST turnover for the month immediately after that in which the acquisition or disposal occurred. | Projected GST turnover is compared to the current GST turnover for the month immediately after that in which the acquisition or disposal occurred multiplied by three. |
| Restructure | Projected GST turnover is compared to the current GST turnover for the month immediately after that in which the restructure occurred. | Projected GST turnover is compared to the current GST turnover for the month immediately after that in which the restructure occurred multiplied by three. |
| Substantial increase in turnover | Projected GST turnover is compared to one-third of the total of the entity’s GST turnover for the three months immediately before the applicable turnover test period. | Projected GST turnover is compared to the total of the entity’s GST turnover for the three months immediately before the applicable turnover test period. |
| Drought/Natural disaster | Projected GST turnover is compared to the current GST turnover for the corresponding turnover test period in the year prior to the declaration of the drought or natural disaster zone. | Projected GST turnover is compared to the current GST turnover for the corresponding turnover test period in the year before the declaration of the drought or natural disaster zone. |
| Irregular turnover | Projected GST turnover is compared to the average of the current GST turnover for each month in the 12 months immediately before the applicable turnover test period. | Projected GST turnover is compared to the average of the current GST turnover for each month in the 12 months immediately before the applicable turnover test period multiplied by three. |
| Sole trader and small partnership | Projected GST turnover is compared to the current GST turnover for the month immediately after that in which the individual returned to work. | Projected GST turnover is compared to the current GST turnover for the month immediately after that in which the individual returned to work multiplied by three. |
Note, there are additional adjustments to each of the tests where the entity qualified for the ATO’s Bushfires 2019-2020 lodgement and deferral program or receive Drought Help concessions during the relevant period.
