The Inspector-General and Taxation Ombudsman (IGTO) reports in its latest IGot News that over recent months its office has received an influx of complaints from a number of small businesses (as well as their representatives in the accounting and tax profession) around their eligibility for JobKeeper and Boosting Cash Flow payments.
Ombudsman Karen Payne says the IGTO office has supplied information on these issues to the relevant authorities. One of the concerns raised was essentially whether genuinely active new small businesses were being found by the ATO to be ineligible for JobKeeper and the Boosting Cash Flow measure because they lodge their BAS quarterly rather than monthly.
Both COVID-19 support measures include specific integrity rules to prevent entities being established or revived for the sole or dominant purpose of receiving these COVID-19 economic payments. The concerns, as the IGTO understands them, were that new small businesses would automatically register to lodge their BAS quarterly (rather than monthly) and therefore did not report their first sale until the first quarter of 2020 – that is after 12 March 2020.
The IGTO grouped these complaints together and escalated them to its highest complaint category. Through the course of the IGTO investigations, it confirmed (all following emphasis from IGTO) that:
- The integrity rules for existing businesses and new businesses are not the same;
- an existing business may satisfy the requirement that an amount was included in the entity’s assessable income for the 2018- 19 income year in relation to it carrying on a business,
- a new business may not be able to satisfy the former and therefore may be required to satisfy the requirement that the entity made a taxable supply in a tax period that applied to it that:
(i) started on or after 1 July 2018; and
(ii) ended before 12 March 2020.
- Taxable supply and tax period are as defined for the purposes of A New Tax System (Goods and Service Tax) Act 1999 [GST act], but importantly, the former is modified for JobKeeper and the Boosting Cash Flow purposes;
- The taxable supply must be made for consideration but there is no requirement for that consideration to be received in the same tax period in which the taxable supply made;
- The attribution requirement that applies for GST purposes to link a tax period and a taxable supply does not apply in the JobKeeper and the Boosting Cash Flow integrity rules;
- Lodging a BAS is not a mandated requirement (and not the only way to provide notice to the Commissioner);
- Taxable supply for JobKeeper and the Boosting Cash Flow includes both GST free supplies and input-taxed financial supplies – as defined for GST purposes. Financial supplies include the acquisition of financial supplies in accordance with the GST Regulations – A New Tax System (Goods and Services Tax) Regulations 1999 (the GST regulations);
- Financial supplies can importantly (and, says IGTO, somewhat counter-intuitively) include:
- opening an account with a bank (authorised deposit-taking institution);
- borrowing money (from a financial supply provider);
- entering a mortgage over real property; and
- buying or selling shares or other securities – including incorporation of a shelf company or acquiring an interest in a managed investment scheme (a type of trust).
Consideration in these cases is not always financial and is not always reported through a BAS. Accordingly, says the ombudsman, a new small business entity does not need to have reported sales in their BAS to be eligible.
Provided the business entity was carrying on an enterprise when making a taxable supply (as modified for JobKeeper and the Boosting Cash Flow purposes), and provided notice of that supply to the Commissioner (in any form) before 12 March 2020 or further time allowed by the Commissioner, they may be eligible;
In summary, the IGTO says an entity does not need to have received consideration in the same tax period for a taxable supply to satisfy the integrity rules – it only needs to have made the taxable supply for consideration; and a “taxable supply” can be made in a tax period where the taxpayer acquires a financial supply – for example opening a bank account, entering a bank loan, providing a guarantee or mortgaging real property (all examples of input-taxed financial supplies).
Accordingly, where a new business has “acquired” one or more of these financial supplies as part of the steps undertaken to commence an enterprise, and did so in tax periods that ended on or before 12 March 2020, then a business may be eligible (where the Commissioner exercises discretion pursuant to PS LA 2020/1 and the other eligibility criteria are met).
The IGOT says this clarification means that many new entities that were in the process of setting up and establishing their business may have made taxable supplies in tax periods ending before 12 March 2020 (and may be eligible) even though they made their first sale after December 2019.
The ATO has agreed to revisit the cases raised by the IGTO’s investigations. The ATO has also separately identified or undertaken to review other cases that may have been deemed ineligible by virtue of not reporting a sale or supply (by way of BAS lodgement) on or before 12 March 2020.
The IGTO is also developing a report of this investigation to more fully set out our findings and any recommendations. Tax & Super Australia will make this available as it comes to hand.