The legislative instrument setting out the modified rules for service entities, among other things, was registered by Treasury late in the evening on Friday 1 May 2020. The registration of the legislative instrument followed the release of the Australian Taxation Office (ATO) Practical Compliance Guideline (PCG) 2020/4 which outlines the ATO’s compliance approach to schemes designed to obtain the JobKeeper payment or increase entitlement to the JobKeeper payment.
The modified rules registered by Treasury followed on from intense lobbying by industry groups and professional bodies who sought to have common service entity structure recognised as eligible employers for the purposes of the JobKeeper payment.
Service entities are commonly used in industries such as medical, pharmaceutical, child-care and property development to manage the service and administration aspects of a wider economic group. Service entities often ‘engage’ the employees who work within trading entities that provide services to independent third parties.
Business owners expecting the modified service entity rules would result in their business satisfying the eligibility requirements for JobKeeper, thus enabling them to continue to engage their employees through the COVID-19 crisis, may be bitterly disappointed. The service entity rules on face value are restrictive and appear to have limited application.
In order to qualify for the modified rule, the service entity must be part of a:
- Consolidated group;
- A consolidateable group (ie one that could be consolidated for income tax if it made the election); or
- A GST group (broadly where there is 90% common ownership and one member of the group deals with the GST liabilities).
In addition, in order to qualify for the modified test, the ‘principal purpose’ of the service entity must be the supply of employee labour services. Further guidance will be required from the ATO as to what service arrangements will satisfy the ‘principal purpose’ test, as service entities often provide administration services in addition to the provision of employee labour. The Explanatory Statement (ES) to the legislative instrument indicates the service entity may provide other services to the group, however the main or predominant activity must be the provision of employee labour services. The ES states the service entity must not be an operating entity of the group and must provide no more than incidental services to third parties.
Business owners and their advisers may need to turn to service agreements (where there are formal agreements in place) in order to determine if the principal purpose of the entity is the provision of employee labour services. In the absence of a clear agreement, a considered analysis must be undertaken of the operation of the service entity and the activities it undertakes in order to determine if the modified test applies.
If service entities do not satisfy the eligibility criteria to access the modified test, they may be able to access JobKeeper if any of the scenarios described in PCG 2020/4 apply. Whilst the PCG refers to schemes, example 4 and 5 under the PCG refer to service entity arrangements where the Commissioner is not likely to commit compliance resources.
These include scenarios where:
- The employer entity reduces a service fee in proportion to the decline in turnover of the main operating entity;
- The employer entity reduces the amount of labour it provides the main operating entity, and stands down employees; and
- The main operating entity is unable to pay the service fee due to the impact of COVID-19 on the revenue, expenditure and cashflow.
Overall, the modified turnover test set out in the legislative instrument is disappointing and appears to have ‘missed the mark’. Many typical business structures that include a service entity will not qualify under the modified test and may not be able to continue to support their employees. This is not consistent with the intent of the legislation.
The PCG also sets out a number of JobKeeper schemes the Commissioner will target with compliance resources and business owners are on notice that if they engage in certain activities in order to access the JobKeeper payment they will face significant penalties and in certain cases criminal charges.
Common schemes set out in the PCG include:
- The deferral of making supplies to obtain the JobKeeper payment;
- Bringing forward the making of supplies solely to obtain the JobKeeper payment;
- Parent of a corporate group reduces, or manipulates the timing of, a management fee in order to obtain the JobKeeper payment.
Advisers may be at risk of promoter penalties if they assist or advise clients in respect of schemes where the sole or dominant purpose is to enable the business to obtain the JobKeeper payment, particularly where the business would not otherwise be eligible.
With further guidance to be provided by the ATO on the interpretation of the modified test for service entities (and other measures in the legislative instrument), and a looming cut off date for ‘top-up’ payments to eligible employees, it will be no surprise if employers decide the risk is too high, the rules are too complex and choose not to enrol. Disappointing outcome for many employees who as a result, may be at risk of job losses.
Disclaimer: The content of this article is for general guidance only, if your business is impacted by the change in the JobKeeper rules, please contact your local RSM office for advice specific to your circumstances.