The Omnibus Bill 2020, covering both Government Coronavirus Economic Response Packages, has received royal assent and is now law.
While this will become an accountant’s bible at a time where people are seeking instant cash flow, it is advised that advisers proceed with caution.
This communication outlines three measures of critical relevance to businesses (particularly SME businesses but in some cases those with a turnover of up to $500m) and highlights integrity provisions that may apply to deny benefits for claims found to be swindling the system.
Cash boost for business
Broadly, under this measure, eligible entities are entitled to payments of between $20,000 and $100,000 in aggregate.
Eligible employers will receive a refundable credit of up to $50,000 (with a minimum of $10,000) for the following activity statement periods: March, April, May and June 2020.
Entities entitled to the first cash flow boost payment will receive an additional payment to be made upon lodgement of activity statements for the periods from June to September 2019.
Entities are eligible if:
- They make payment of salary or wages or similar remuneration that is subject to withholding obligations; either
- They were a small or medium business entity (or a charity or other not-for-profit entity of equivalent size) for the most recent income year for which an assessment of income tax has been made. This means they must have an aggregated turnover of under $50m; or
- The Commissioner is reasonably satisfied that it is likely that the entity is a small or medium business entity (or a charity or other not-for-profit entity of equivalent size) for an income year that includes the quarters ending in March 2020 or June 2020 or the months of March, April, May or June 2020;
- If the entity is not a registered charity, it held an ABN on 12 March 2020 and continues to be active. More specifically, it must have derived assessable income from carrying on a business in the 2019 income year or made one or more supplies for consideration in the course of an enterprise it carried on within Australia in tax periods commencing after 1 July 2018 and ending before 12 March 2020 and notice of the income or supplies was held by the Commissioner on or before 12 March 2020 or within such further time as the Commissioner allows; and
- They have notified the Commissioner of their entitlement by lodging the Instalment or Business Activity Statement
An entity will be ineligible for the cash boost if it (or an associate or agent of an entity) has engaged in a scheme for the sole or dominant purpose of seeking to make the entity entitled to the cash flow boost (or to increase its entitlement).
This rule is intended to defeat artificial or contrived arrangements. The term “sole or dominant purpose” is also found in the general anti-avoidance provisions of Part IVA. In a Part IVA context, the High Court has ruled that notwithstanding a taxpayer may enter into a scheme to pursue a commercial outcome or to maximise their after tax returns, a scheme can attract the anti-avoidance provisions where the dominant, prevailing or most influential purpose for entering into the scheme is to obtain a tax benefit.
A commercial purpose for entering into a scheme is not, in itself, necessarily a safety net. The ATO will likely compare a taxpayer’s prior period PAYG-W payments to those PAYG-W obligations during the cash boost payment period (March to September 2020).
The following circumstances might raise cause for concern:
- Registering for PAYGW and commencing to pay wages to the owner(s) of the business who have not previously drawn wages;
- Paying one-off or large bonuses/director fees;
- Paying wages to a shareholder or associate as opposed to dividends in order to satisfy Division 7A loan obligations.
- Changing shareholders return on investment from dividends to wages;
- Employing children, etc. in the business for the first time;
- Artificially increasing wages.
Advisors should consider their obligations under the Tax Agent Services Act 2009 and Promoter Penalty Laws before such options are raised with their clients.
Instant asset write-off
Broadly, this measure allows eligible business entities to claim an immediate (rather than over the effective life) tax deduction for a depreciating asset costing less than $150,000 (previously this was $30,000). The cost of the depreciating asset includes the cost to bring the asset to its present condition and location, such as the cost of improving the asset.
To be eligible for the instant asset write-off:
- The entity must have aggregated turnover of between $10m and $500m; and
- The depreciating asset, whether new or second-hand, must
- Cost less than $150,000 (excluding input tax credits); and
- Be first used, or installed ready for use, between 12 March 2020 and 30 June 2020. Taxpayers should consider the potential for delivery to be delayed due to the COVID-19 pandemic.
There are no specific integrity rules that apply to this measure. Part 4a may still be applied – general anti-avoidance.
From 1 July 2020, the instant asset write-off is due to revert to $1,000 and only available for entities with an aggregated turnover of less than $10m.
Accelerated depreciation (‘backing business investment’) measure
Broadly, this measure allows businesses with an aggregated turnover of less than $500m to claim depreciation deductions at an accelerated rate.
Entities that do not use the simplified depreciation rules may claim an immediate deduction of 50% of an eligible asset’s cost, with existing depreciation rules applying to the balance.
Entities that use the simplified depreciation rules may claim 57.5% (rather than 15%) of the taxable purpose portion of an eligible asset’s cost in the first year.
Regardless of its cost, a depreciating asset is a qualifying asset if the commitment to hold, construct or use the asset was entered into post 12 March 2020 and the asset:
- Is a new (not second-hand) asset that has not previously been held by another entity (other than as trading stock or for testing and trialling purposes);
- Is an asset for which an entity has not claimed depreciation deductions, including under the instant asset write-off rules;
- Is first held, and first used or installed ready for use, for a taxable purpose between 12 March 2020 and 30 June 2021 (inclusive); and
- Is located and used in Australia.
An intangible asset (for example intellectual property, in-house software or mining, quarrying or prospecting rights or information) may be a qualifying asset where it has not have been used for the purpose of producing ordinary income, or installed ready for use by the entity for any purpose (whether taxable or non-taxable).
Under integrity provisions, accelerated depreciation will not be available where:
- The entity entered into a commitment to acquire the asset prior to 12 March 2020 and, after that date, the entity engages in conduct for the purpose, or for purposes that include the purpose of accessing the accelerated deduction (e.g. by entering into an arrangement with the supplier to change the date of the purchase contract to post 12 March 2020). An option to enter into a contract to acquire a depreciating asset is not considered to be a commitment for these purposes. The purpose does not need to be the sole or dominant purpose.
- The entity has split or merged the asset. This ensures that the reconstitution of assets by splitting or merging them does not result in the reconstituted asset being a qualifying asset by starting to be held and being first used, or installed ready for use, for a taxable purpose in the relevant income year.
The Commissioner may also seek to apply the general anti-avoidance rules under Part IVA where the taxpayer has entered a scheme with the sole or dominant purpose of obtaining a tax benefit.
The economic stimulus measures are designed to encourage investment and to assist businesses suffering from the immediate impact of COVID-19. Any abuse of these measures by taxpayers or their agents will not be treated lightly by the ATO.
For more information
If you require further information, please contact your local RSM adviser.