If the entity is able to pass the basic decline in turnover test then there is no need for it to pass one of the alternative tests. However, if the entity cannot pass the basic test then there are a number of alternative decline in turnover tests that might be available and are aimed at situations where the entity does not have a relevant comparison period. The Commissioner can only determine a test for a class of entities, and cannot make discretionary decisions for individual entities.

These alternative tests are:

• New businesses
• The entity acquired or disposed of part of the business
• The entity restructured
• The entity’s turnover substantially increased
• The entity was affected by drought or other declared natural disaster
• The entity has a large irregular variance in their turnover
• The entity is a sole trader or small partnership where sickness, injury or leave have impacted an individual’s ability to work, and more recently

In all cases, if the entity:

• Qualified for the ATO’s Bushfires 2019–2020 lodgment and payment deferrals, then exclude the calendar months covered by the Bushfires 2019–2020 lodgment and payment deferrals from the calculation, or
• Received Drought Help concessions, then exclude the months covered by the Drought Help concessions from the calculation.

A modified test applies to service entities (special purpose entities).

The average monthly current GST turnover is:

For example, if a business commenced on 20 October 2019, for an April 2020 comparison period, the average monthly current GST turnover is the sum of GST turnover from 1 November 2019 to 29 February 2020, divided by 4. The business would then compare the average monthly current GST turnover with the projected GST turnover for April 2020.

For a June 2020 quarterly comparison period, the average monthly current GST turnover is the sum of GST turnover from 1 November 2019 to 29 February 2020, divided by 4, then multiplied by 3. The business would then compare the average monthly current GST turnover with the projected GST turnover for April 2020.

Test 2

Test 2 is only available if the entity has been in operation for at least 3 months prior to 1 March 2020.

Disposals, acquisitions and restructures

The alternative tests apply if there was:

• An acquisition or disposal of part of the business or a restructure of the business after the relevant comparison period and before the text period, where
• The acquisition or disposal changed the entity’s turnover.

Where there are a series of changes (sequential for restructures), use the month immediately after the (whole) month in which the last acquisition, disposal or restructure occurred.

If there is not a whole month after the last acquisition, disposal or restructure, use the month immediately prior to the turnover test period.

Substantial increase in turnover

This test can be used if turnover increased by:

• 50% or more in the 12 months immediately before the turnover test period, or
• 25% or more in the 6 months immediately before the turnover test period, or
• 12.5% or more in the 3 months immediately before the turnover test period

Then use the current comparison period as:

Calculating the increase in turnover

The ATO has clarified that the increase in turnover is calculated by comparing the current GST turnover for the month immediately prior to the turnover test period with current GST turnover for the month immediately before the start of the twelve (or six or three) months.

For example, if the entity’s applicable turnover test period is April 2020 and the entity’s current GST turnover for the month of March 2020 is at least 25% higher than the current GST turnover for the month of September 2019, then the substantial increase in turnover test can be applied.

Drought and natural disaster

This test applies to entity’s where:

• The business (or some of the business) is a declared drought zone, or declared natural disaster zone, during the relevant comparison period, and
• The drought or natural disaster changed the entity’s income

In this case:

Irregular turnover

The irregular turnover test intends to smooth the turnover across 12 months. This test applies to entities where:

• For the quarters in the 12 months immediately before the test period, the entity’s lowest turnover quarter is no more than 50% of the highest turnover quarter, and
• The entity’s turnover is not cyclical.

Sole trader or small partnership with sickness, injury or leave

The basic turnover test requires the entity to compare their projected GST turnover with the same period in the previous financial year (comparison period). If a sole trader or a partner in a small partnership (four or fewer individual partners) was sick, injured or on leave, during the comparison period, then the alternative test might apply.

This test applies where:

• The entity is a sole trader or small partnership that has no employees; and
• The sole trader or at least one of the partners did not work for all or part of the relevant comparison period due to sickness, injury or leave; and
• The turnover of the sole trader or partnership was affected by the sole trader or partner not working for all or part of that period.

The comparison period for the alternative test is:

For example, where a sole trader is using the June 2020 quarter as their test period but was on leave for April 2019, then the GST turnover for May 2019 x 3 would be used to create the comparison period.

Service entities

It may be possible for a service entity to pass the basic test based on a reduction in service fees paid from the operating entity to the service entity where the demand of the operating entity for labour is reduced as a result of its reduced trade. Where a service entity is relying on the basic test, the reason for the reduction in service fees should be justifiable and well documented.

Where the service entity makes JobKeeper payments to employees, it should be considered how the service entity will fund such payments. Where service fees have been reduced and the level of service fees is insufficient to meet wage payments plus any top up for the JobKeeper payment, any additional amount paid to the service entity from a related entity by way of loan should also be well documented.  It would be prudent to transfer the cash relating to any such loan separately to the service fee.

In some instances, the basic test may not be passed for example:

• Employees are retained; or
• Service fees have been paid in advance.

The modified test

The modified test applies where the service entity is unable to pass the basic test in its own right.

To be eligible:

• Employer entity:
  • The employer entity is a member of a consolidated or consolidatable group, or a GST group; and
  • The employer entity’s principal activity is supplying other members of the group with employee labour services (work performed by individuals the employer entity employs). The principal activity is the main or predominant activity that the employer entity carries out; and
  • The employer entity may provide other services to the group, but that employer entity must not be an operating entity of the group and must provide no more than incidental services to third parties; and
  • The Commissioner has not determined that the modified decline in turnover test does not apply to the employer entity.
• Group members:
  • The principal activity of the group members (test member/s) is making supplies to entities other than group members (operational entities).

If the eligibility conditions are met, for the decline in turnover test:

That is, the decline in turnover tests look at the decline in total GST turnover for the test member/s excluding the employer entity.

For the monthly JobKeeper reporting requirements, each test member will need to report their current and projected turnover each month.

Integrity rules

The Commissioner may determine that the modified test does not apply, where:

• The modified test is unsuitable in the circumstances of the group, for measuring the extent to which employees within the group are performing work in operations that have suffered a relevant decline in turnover. This might include, for example, where significant restructuring that affects turnover in 2020 results in the modified test being inappropriate to determine entitlement to the JobKeeper payment; or
• Applying the modified test to the entity may, in the circumstances of the group (including the group’s history of compliance with its obligations under taxation laws), risk the integrity of the Commissioner’s administration of the JobKeeper scheme.

What is a consolidatable group?

If the entity is not part of a consolidated group for income tax purposes or a GST group, it must be a member of a consolidatable group. A consolidatable group consists of two or more entities that could choose to form a consolidated group for income tax purposes (s703-10 ITAA 97). In very broad terms, a group of entities can elect to form a tax consolidated group where there is a resident parent company (i.e., head company) and at least one resident wholly owned subsidiary, which could include companies, trusts or partnerships.

The conditions that need to be met for a head company are:

• The entity must be a company (there are some exceptions for certain corporate unit trusts and public trading trusts);
• The company must be subject to the general corporate tax rate on at least some of its taxable income;
• The company is an Australian resident for tax purposes and is not a prescribed dual resident;
• The company is not precluded from being a member of a consolidated group (e.g., tax exempt entities, certain credit unions, PDFs, film licensed investment companies); and
• The company is not a wholly owned subsidiary of an entity that satisfies all of the conditions above.

The fact that two or more entities might be controlled by the same person / entity is not sufficient on its own to give rise to a consolidatable group. A consolidatable group will generally only exist where there is a company which holds all of the equity interests (eg, shares or units) in one or more other entities. Unfortunately this is likely to mean that some service entity arrangements will still fall outside the scope of the JobKeeper rules unless a GST group has been formed

Paul Simeoni & Team