JobKeeper payments, schemes and the anti-avoidance regime

Despite the overarching intention behind the JobKeeper payment, being to support employees affected by COVID-19 in these unprecedented times, there are already numerous instances of entities seeking to exploit the JobKeeper provisions in order to access payments that they should not be entitled to.

The Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Act) contains an anti avoidance mechanism to ensure that the Commissioner can deal with a “contrived scheme” (see section 19) with the effect of denying the recipient the benefit of a JobKeeper payment, in addition to significant financial penalties and interest. 

This anti-avoidance mechanism relies in much the same way as Part IVA, tax avoidance schemes, whereby the recipient’s entitlement to JobKeeper can be denied where “it would be concluded” that “any” of the participants entered into or carried out the scheme “for the sole or dominant purpose of” making the recipient entitled to the payment or increasing the payment than what the entity would otherwise be entitled to.

Section 19(3) sets out the matters that are to be regarded in assessing whether there is any such scheme:

1. the manner in which the scheme was entered into or carried out;
2. the form and substance of the scheme;
3. the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
4. the result in relation to the operation of the Act that, but for this section, would be achieved by the scheme;
5. any change in the financial position of the recipient that has resulted, will result, or may reasonably be expected to result, from the scheme;
6. any change in the financial position of any entity that has, or has had, any connection (whether of a business, family or other nature) with the recipient, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
7. any other consequence for the recipient, or for any person referred to in paragraph 6 above, of the scheme having been entered into or carried out;
8. the nature of any connection (whether of a business, family or other nature) between the recipient and any person referred to in paragraph 6.

The Commissioner of Taxation has released Practical Compliance Guide PCG 2020/4 (PCG) which supports this approach and explains how the ATO will apply their compliance resources to schemes that would satisfy section 19 and recipients that have obtained access to the coronavirus economic response payment or an increased amount of JobKeeper payment.

The effect of the PCG applying is that an entity’s entitlement to an amount of JobKeeper payment that results or would result from schemes may be denied in whole or in part.

What is covered by the PCG?

The PCG is positioned in terms of what the Commissioner considers examples of “low” or “high” risk activities.

Generally, where the arrangement is due to external factors that are COVID-19 related or are due to real commercial circumstances, the ATO has stated that such cases are “low” risk.

At paragraph 3 of the PCG, the ATO has advised that the “Commissioner will be concerned with an entity that accesses or increases JobKeeper payment entitlements” where:

1. the entity’s business is not significantly affected by external environmental factors beyond its control; and / or
2. in excess of those that would maintain pre-existing employment relationships.

However, the Commissioner will “generally” not apply his compliance resources to consider the application of a scheme if:

1. the external operating environment is affected by factors beyond the control of the entity (and its related parties);
2. that affected external operating environment significantly impacts the business or the entity or another entity the entity’s employees serve in;
3. the entity enters into the scheme in response to that impact and satisfies the decline in turnover test; and
4. the JobKeeper payment the entity receives is for individuals who were employed by the entity and serving in the significantly impacted business prior to that time and who remain employed as a result of that JobKeeper payment.

Is the PCG a sign-off on certain cases?

The PCG does not sanction any actions or arrangements and only highlights the risk of the ATO deploying compliance resources. Care should be taken of relying on these examples as a safe harbour. In all cases, commercial decisions should be made by the client and the risks associated with the integrity provision need to be clearly outlined before a client makes any decision. Due to the penalties involved, we recommend significant care be taken by an entity in all cases (the issue of discussing a case with the ATO is covered later in this article).

Examples and ATO risk rating

The ATO has put together eight examples of common arrangements that will / will not likely give rise to compliance activity.  These are set out from paragraph 14 in the PCG onward. 

Whilst each case will turn on its facts, it is insightful to see the ATO’s approach to “risk” bearing in mind that this position is not conclusive in terms of whether the Commissioner should / would make a determination based on the integrity provisions set out at section 19 or not.

Example 4: Employer entity reduces a service fee

Given the potential impact on our client base, we have restated below example 4 for illustrative purposes of how the Commissioner would approach a change in service fee arrangement.  To reiterate, where an entity is a participant / recipient of a JobKeeper payment, it is important to approach any material changes to the underlying business with caution and we recommend that tax / accounting advice be obtained prior to changes being made.

Paragraphs 27-34:

Service Company E employs 100 individuals. These employees perform activities on behalf of Operating Company E.

For a typical period, Operating Company E will pay a service fee of $750,000 to Service Company E. Service Company E in turn will pay wages of $738,000 to the 100 employees.

Operating Company E’s GST turnover for the quarter ended 30 June 2019 is $1 million. This turnover is from external parties. Operating Company E’s projected GST turnover for the quarter ended 30 June 2020 is $200,000. Service Company E’s GST turnover for both quarters remains at $750,000 – because the agreement between Service Company E and Operating Company E provides for that result.

Without any change to the agreement between Service Company E and Operating Company E, Service Company E would not have satisfied the decline in turnover test in subsection 8(1) of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (the Payment and Benefit Rules) as there had been no reduction in its projected GST turnover.

The group of entities then enter into a scheme the result of which is a reduction in the service fee by an amount that is proportional to the reduction in Operating Company E’s external turnover. This scheme results in a reduction of the service fee from $750,000 to $150,000. This means Service Company E does satisfy the decline in turnover test in subsection 8(1) of the Payments and Benefits Rules.

Because this scheme is entered into in response to the significant impact the external operating environment has had on the business of Operating Company E where the employees of Service Company E serve (and those external factors are beyond the group’s control), there is a low risk the Commissioner would apply his compliance resources to consider the application of section 19.

Taking this principle further, we refer you to example 5, which also has a low risk of audit activity associated with the scheme:

Paragraph 35-36:

This example involves the same facts as Example 4 except that, due to the changed operations of Operating Company E, Service Company E reduces the amount of labour it provides to Operating Company E under the service agreement and stands down employees or reduces their work hours.

This in turn results in a reduction in service fees not by way of a renegotiation between the companies, but simply by virtue of the service agreement itself.

Even if the reduction in services fees was a scheme within the meaning of paragraph 1 of this Guideline, because that scheme was entered into in response to the significant impact the external operating environment has had on the business of Operating Company E where the employees of Service Company E serve (and those external factors are beyond the group’s control), there is a low risk the Commissioner would apply his compliance resources to consider the application of section 19.

The situation concerning legitimate changes to business activity

The term ‘scheme’ has a deliberately very broad meaning both for present purposes and under the general anti avoidance provisions of the income tax legislation.

Essentially, a scheme can exist or be determined in relation to any arrangement or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

An arrangement covers any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

On the basis that anything can be determined to be a scheme, the essential question is whether, despite there being a scheme, the purpose of the activity involved was in response to the significant impact that the external operating environment has had on the business because of COVID-19.  To reiterate, the client must satisfy the following elements as set out above and prescribed by the PCG:

1. the external operating environment is affected by factors beyond the control of the entity (and its related parties);
2. that affected external operating environment significantly impacts the business, the entity or another entity the entity’s employees serve in;
3. the entity enters into the scheme in response to that impact and satisfies the decline in turnover test; and
4. the JobKeeper payment the entity receives is for individuals who were employed by the entity and serving in the significantly impacted business prior to that time and who remain employed as a result of that JobKeeper payment.

If there is any doubt regarding the application of section 19, we recommend contacting the ATO for consideration of your specific circumstances and the action required.

If you have any queries or require more information, please contact us.

We’re here to help.

Ann-Maree Ventura, Special Counsel