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Australian Government Corona Virus ( COVID-19 ) Economic Stimulus Method 3 | Cash payments to employers

What is the Tax Benefit?

The Federal Government has announced cash payments to employers to assist with the cost of salary and wages. Eligible businesses are those that employ staff and have a turnover of less than $50 million. It is not clear how the Australian Taxation Office (ATO) will be able to assess whether the employer meets the $50 million turnover test. Such businesses, whether companies, trusts, partnerships or sole traders can receive payments between $2,000 and a maximum of $100,000. The receipt of the amount will be tax-free to the employer.

The amount of the payment is said to be 50 per cent of the PAYG withheld from salary and wages as reported on the employer’s Business Activity Statement (BAS) or Instalment Activity Statement (IAS) over the 6-month period from 1 January 2020 to 30 June 2020. Smaller employers who may withhold minor amounts or none at all (e.g. employs staff who earn below the tax-free threshold) could still potentially receive the minimum $2,000 payment.

The payments to eligible employees are stated to be made within 14 days of lodgement of the 28 April 2020 BAS or IAS (i.e. for the period ending 31 March 2020). It is not clear how this will apply to those who lodge a monthly BAS for January and February 2020. Presumably, the PAYG withheld for these months would also be considered with no further payments to be made once the $100,000 cap is reached.

How could this potentially impact cash flow?

The announcement only refers to employers and does not refer to grouping rules. Therefore, it is possible that this measure may apply to multiple employers within the same group (e.g. where each of those entities are registered for payroll and make relevant payments). However, if the group has formed a GST group then this may prevent multiple entities in the group benefitting (e.g. if the measure is based on the BAS and only one is lodged for the entire group).

Contractors and business owners who operate through companies or trusts may consider paying themselves a salary or bonus rather than taking a dividend or trust distribution in order to take advantage of this measure. In doing so, employers should consider the on-costs including payroll tax, WorkCover and the superannuation guarantee.

Employers should also beware of integrity measures relating to private companies, whereby remuneration for services of a person associated with the company that is excessive of a reasonable amount may not be deductible to the company.

Furthermore, a trust employer may have the additional benefit of receiving a tax-free amount that it may be able to on-distribute tax-free, to its beneficiaries, as compared to a company which may be required to pay an unfranked dividend.

Note, partners of partnerships may not be able to take advantage of these measures given that partners are not considered employees of the partnership, with payments to them representing drawings or an advance of future profits rather than salary and wages.

What are the next steps?

The time period in which entities can access the stimulus package is limited and therefore action should be taken immediately. It is therefore critical to consider your position, whether you can qualify for the measures and the potential impact of the measures and how the rules apply. Many of these measures could assist clients in accessing much needed cash in the short term.

Contact your accountant to review your situation and determine what action is required.

Take a detailed read of the official government website which explains further details click here. There are some very good practical examples at the end of the page when going to the above link, so please read the whole article.

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