* in particular startups with no or few employees
There’s been a fair amount of coverage of the government’s stimulus package in the small business press. It’s been a challenge for the journalists and accounting firms as the announcements have been coming thick and fast, with the finer details of the rules often not made explicit, and/or changing over time. Indeed some of the below may even be obsolete by the time you read it – but hopefully on the whole at least some of you get something useful out of it.
Rather than provide an overview of the measures (amply covered elsewhere), I wanted to drill down into a couple of the finer points and implications, in particular in relation to smaller startups. A big shout out to Amanda Kearney my tax partner at scale.partners, for doing most of the analysis on this to clarify these points.
The focus below is mainly on the cashflow boost, and to a lesser degree on the JobKeeper allowance. The latter is potentially more impactful for most businesses, but for micro startups with very few employees, both packages can carry equal weight.
And as a side note, the Government also announced an extra $49.8 million injection into the Export Market Development Grants (EMDG) program in the 2019–20 financial year. This means that if you are currently claiming EMDG you will likely see a larger refund come your way, assuming you otherwise had seen your refund capped.
A major plank in the government’s response so far to COVID19 is the cash flow boost (CFB), the second part was announced on 22 March 2020. The finer detail of how the CFB will work in practice is still unfolding. In summary, small and medium size businesses will receive a credit for the higher of $10,000 or their PAYG withholding amount for the March quarter, with further tranches to follow in future months:
· Any refund received is essentially tax-free.
· The first cash will most likely not be received before May.
· There is no need to “apply” for it: lodging the March BAS is the trigger for your first claim.
Is your business eligible?
First you need to satisfy BOTH of the following requirements:
· You held an ABN on 12 March 2020 (or be a not-for-profit that was on the ACNC register at some point in ‘the period’) AND
· You included business income on your 2018-19 tax return and the ATO were notified of it on or before 12 March (the filed tax return should satisfy this requirement), OR you made supplies for GST purposes between 1 July 2018 and 12 March 2020 and the ATO were aware of this on 12 March 2020 – for example because you were registered for GST and/or had filed your BAS.
Any wiggle room on the above criteria?
What if you had an ABN on 12 March but don't meet the second criteria? Notification to the ATO can be allowed after 12 March 2020 but that is at the ATO’s discretion - at this point there is no indication as to the circumstances for discretion to be applied. What seems clear is if you have made no supplies, nor had business income in the 2018/19 income year it looks like the CFB will not be available.
Startups with no employees, only co-founders – what stimulus payment can I get?
I’m aware of a large volume of startups in this bucket: there are no employees as such, only a founding team who are paying themselves through a variety of mechanisms, such as directors fees, contractor invoices, drawing cash from the business, etc, but who haven’t set up a proper payroll process, and so are not deducting PAYGW. Often these practices come about because they appear simpler to administer than worrying about things like payroll, single-touch-payroll and PAYG withholding.
There’s a discussion as to whether these mechanisms are compliant with existing requirements, for instance if the founders are invoicing fees to the business, chances are they should also be paying themselves super out of the business, and so may well be in breach of their superannuation obligations. But that is a different topic.
The question which has come up in a lot of these micro startups, is can we claim the CFB?
On the face of it, the answer is no.
But what if we switch from paying ourselves a fee, to paying ourselves a wage. Isn’t it the same thing?
Assuming other eligibility requirements are met by the business, the apparent obstacle will be that you weren’t registered for PAYG withholding as at 12 March. Certainly some accounting firms have taken the view that this prevents you being eligible. We’ve taken a closer look at it.
Could you theoretically have registered for PAYGW after 12 March (but before 31 March, in order to be eligible for the first quarter bonus), and immediately started paying all (or at least one of) the founders before 31 March as “proper payroll”, rather than just on receipt of an invoiced fee? This would have involved setting payroll up including Single Touch Payroll reporting, most likely you’re using Xero so pretty straightforward to do, generating the pay and deducting PAYGW in the process - so being in a position to now lodge an activity statement with PAYGW for the March quarter.
The challenge here is that you would risk triggering the ATO’s integrity rules, which would mean the CFB would not be available. In other words, if on the balance of the evidence it looks like you are trying to pull a fast one and put a scheme in place to exploit the CFB, you’d be risking the wrath of the ATO. Some startups may feel that, as a very small startup doing it tough in the current environment, this is a risk worth taking.
On the other hand, it is entirely possible that you have recently taken on your first employee(s) and the first wage paid to them occured after 12 March and before 31 March 2020.
Alternatively, it is also possible that as a business you independently made the decision to correct an existing employee’s relationship from a contractor-fee basis to wage-receiving employee.
In these cases, if you otherwise satisfy the requirements, then it appears that the CFB should be available. While not spelt out in the rules in this case you would be well advised to:
· have evidence of contractual arrangements (a signed and dated employment contract detailing payment arrangements);
· lodge the completed dated TFN declaration in relation to new starters if not already done so and within required deadlines;
· be aware of Work Cover insurance requirements and ATO data matching capabilities in this respect;
· be aware of your employer superannuation obligations and liabilities that arise;
· be prepared that the ATO will look to apply the integrity rules wherever they perceive businesses are seeking to take advantage of the measures. This might include if they see a sudden rise in payments being treated as subject to PAYG.
The integrity rules are intended to prevent the CFB being available where businesses switch or change their existing arrangements with owners, directors, employees and contractors such that they are able to qualify for the CFB.
It goes without saying that it is not a time for the start-up community to be out of step with wider community expectations and it’s possible that actions now may influence the longer term support for the sector.
What about the June 2020 quarter?
Good news: It looks like a CFB credit for the June quarter can arise for startups who otherwise weren't eligible in the previous quarter. As long as you meet all other requirements and become PAYGW registrants after 31 March 2020 and before 30 June 2020.
What about R&D employees – can I double-dip?
Say you are claiming the R&D tax incentive, and have employees who spent part or all of their time on claimable activities. Are you allowed to collect the cashflow boost in relation to PAYG withheld on their wages AND receive the full benefit of the R&D tax incentive in relation to those wages?
At this stage there is no indication that the ATO will be seeking to ‘claw back’ or reduce otherwise eligible R&D staff costs – but it is a moving feast at this time.
So if you can double-dip, what about triple-dipping, with the recently announced JobKeeper package?
You’ve likely heard and already read about the JobKeeper package, a fortnightly payment of $1,500 per employee, covering the next six months.
There’s been some initial confusion as to the eligibility of startups, mainly due to the requirement for the business to demonstrate a 30% year-on-year drop in income.
How do I demonstrate a drop in my business’ income if I have no income?
In a recent update, the treasury clarified that the ATO would have ‘discretion’ to consider additional information provided by the company in determining if it is eligible. For example, if the startup has only been established in the past 12 months, or didn’t have any revenue 12 months ago but does today, or revenue is irregular.
This is fantastic news for a lot of startups who likely fall into that category.
If you think you’re in a position to claim this benefit, register yourself with the ATO here.
What if I am a sole trader?
As a sole trader you can also be eligible for the JobKeeper package – for yourself, even if you have no employees. SmartCompany have put together a helpful Q&A for sole traders.
Can I triple-dip with CFB, R&D tax and JobKeeper?
Maybe. At the time of drafting, the interaction of the measures is still being worked through. Things are moving fast, with additional and what look like overlapping measures announced, so exactly how they will interact in practice isn’t yet clear to anyone.
So it could be the case that startups might be VERY strongly incentivised not to terminate any staff working on R&D activities, as you’d essentially be recovering more than you are paying them!
One note of caution on this. The Government may throw a brake on double or triple dipping (or other behaviour seen as egregious) in due course, including retrospectively. Presumably at some point the $200bn+ of stimulus measures have to be funded somehow.