The ATO have provided further guidance on their Covid-19 cash flow support for small to medium business and not-for-profit organisations that employ staff.
Support will be provided through two sets of cash flow boosts with the initial boost being delivered from the 28 April 2020 (based on March 2020 BAS) to support employers to retain employees.
As per our previous newsletter, the ATO will provide tax-free cash flow boosts of between $20,000 and $100,000 to eligible businesses, delivered through credits in the activity statement system, when eligible businesses lodge their activity statements.
If you are eligible, you do not need to separately apply for this boost as upon lodgement of your activity statement your initial boost amount will automatically be credited to your ATO Integrated Client Account but no earlier than 28 April 2020.
You must lodge your activity statement to receive the cash flow boost.
Eligibility
You will be eligible to receive the cash flow boost if you are a small or medium business entity, including not-for-profit organisations, sole traders, partnership, company or trust that:
- held an ABN on 12 March 2020 and continues to be active
- has an aggregated annual turnover under $50 million (generally based on prior year turnover)
- made eligible payments you are required to withhold from (even if the amount you need to withhold is zero).
Eligible payments include:
- salary and wages
- director fees
- eligible retirement or termination payments
- compensation payments
- voluntary withholding from payments to contractors.
In addition, you must also have either:
- derived business income in the 2018–19 income year and lodged your 2019 tax return on or before 12 March 2020, or;
- made GST taxable, GST-free or input-taxed sales in a previous tax period (since 1 July 2018) and lodged the relevant activity statement on or before 12 March 2020.
The ATO will generally determine whether you are a small or medium business entity based on your most recent income tax assessment for a prior year. However, where you do not have any income tax assessments for prior years, you may still be eligible if they are satisfied, based on other information they hold, that you are in business and would have an aggregated annual turnover under $50 million.
The ATO may also give you further time to provide us notice that business income or supplies were made. This will generally be the case where you have a lodgement deferral in place. If you did not have a lodgement deferral in place, you will not become eligible if you lodge or amend returns for those periods now.
Timing
Initial cash flow boost
The initial cash flow boosts will be delivered as credits in the activity statement system from the Government’s announced date of 28 April 2020. If you lodge early, you will not receive the cash flow boost before this date.
If you lodge:
- quarterly, you will be eligible to receive the credit for
- quarter 3, March 2020 (lodgement due date 28 April 2020)
- quarter 4, June 2020 (lodgement due date 28 July 2020).
- monthly, you will be eligible to receive the credit for the lodgement periods of
- March 2020 (lodgement due date 21 April 2020)
- April 2020 (lodgement due date 21 May 2020)
- May 2020 (lodgement due date 21 June 2020)
- June 2020 (lodgement due date 21 July 2020).
Additional cash flow boost
Eligible entities who received initial cash flow boosts will receive additional cash flow boosts, for the periods June to September 2020, equal to the total amount of initial cash flow boosts received. This will be delivered in either two or four instalments depending on your reporting period.
Initial cash flow boost
Your initial cash flow boost is based on the amount of your PAYG withholding.
Eligible businesses that withhold tax on their employees’ salary and wages will receive a credit equal to 100% of the amount withheld, up to a maximum of $50,000. The minimum credit will be $10,000, even if the amount required to be withheld is zero. However you will not be eligible to receive any more cash flow boosts until your PAYG withholding exceeds $10,000 over the relevant periods
Monthly lodgers will receive a credit that is calculated at three times the rate (300 per cent) in the March 2020 activity statement, to align with quarterly lodgers.
The total of all initial cash flow boosts across all of the relevant periods cannot exceed the maximum limit of $50,000.
The ATO provide 2 examples on their website which may help in better understanding how this works
Example – PAYG Withholding is less than $10,000 in first period
Tim owns and runs a small paper delivery business in Melbourne, and employs two casual employees who each earn $10,000 per year. In the March 2020 quarterly activity statement, Tim reports wages paid at W1 and $0 at W2 for his employees as they are under the tax-free threshold.
The March 2020 quarter is the first period Tim is eligible for an initial cash flow boost. His withholding of $0 is less than $10,000 so Tim’s initial cash flow boost will be the minimum amount $10,000.
Tim will not receive any further initial cash flow boosts unless his withholding in the June 2020 quarter is greater than $10,000.
Example – Total cash flow boosts reaches maximum limit of $50,000
Sarah owns and runs a building business in South Australia and employs 8 construction workers on average full-time weekly earnings who each earn $89,730 per year. In the months of March, April, May and June for the 2019–20 income year, Sarah reports wages paid at W1 and withholding of $15,008 for her employees at W2 on each activity statement.
For March 2020, Sarah’s initial cash flow boost is three times her withholding (W2). This equates to $45,024 ($15,008 x 3). As this amount is greater than $10,000, Sarah will receive a cash flow boost of $45,024.
For April 2020, Sarah’s withholding is $15,008, however there is only $4,976 of initial cash flow boosts remaining before she reaches the $50,000 limit. She will receive a further initial cash flow boost of $4,976.
Sarah will not receive any further initial cash flow boosts after she has reached the $50,000 limit.
Additional cash flow boost
The amount of additional cash flow boosts you are entitled to is based on the value of initial cash flow boosts you received.
If you lodge quarterly business activity statements you will receive 50% of your total initial cash flow boosts for each activity statement.
If you lodge monthly business activity statements you will receive 25% of your total initial cash flow boosts for each activity statement.
Example – quarterly activity statement
Tim received initial cash flow boosts of $10,000. When Tim lodges his June and September 2020 quarterly business activity statements he will receive additional cash flow boosts as follows:
- $5,000 for quarter ended June 2020,
- $5,000 for quarter ended September 2020
Example – monthly activity statement
Sarah received the maximum initial cash flow boosts of $50,000. When Sarah lodges her June to September 2020 business activity statements she will receive additional cash flow boots as follows:
- June 2020, $12,500
- July 2020, $12,500
- August 2020, $12,500
- September 2020, $12,500
Accessing the cash flow boost
You do not need to apply for the cash flow boosts. If you are eligible, the cash flow boosts will be automatically applied to your account when you lodge your activity statement for the relevant periods.
To access the cash flow boost, you must lodge your activity statement. If you do not need to lodge an activity statement in respect of your PAYG withholding the ATO is working through a solution and will update their website with more information on what you need to do.
The cash flow boosts will be applied to reduce liabilities arising from the same activity statement. This will result in eligible entities being required to pay less to the ATO.
Generally where a credit exceeds your other tax liabilities, the ATO will provide you with a refund of the excess amount. Where a credit exceeds your other tax liabilities, they will provide you with a refund of the excess amount.
You may also receive a refund if you overpay your activity statement because your system was unable to take the cash flow boost into consideration when working out how much was payable.
If you are placed in a refund position, the ATO will generally deliver the refund within 14 days.
Tax consequences
All cash flow boosts are tax free (non-assessable non-exempt income) and are not required to be paid back when your cash flow improves. However, if you have been paid more cash flow boosts than you are entitled to, you will be required to repay the excess.
The boost is not subject to GST as you are not making or agreeing to make a supply for the payment.
You will still be entitled to a deduction for PAYG withholding paid.
There is no effect on tax paid by employees in respect of their salary and wages.
Schemes
You will not be eligible for cash flow boosts if you (or a representative) have entered into or carried out a scheme for the purpose of:
- becoming entitled to cash flow boosts when you would otherwise not be entitled, or
- increasing the amount of the cash flow boosts.
This may include restructuring your business or the way you usually pay your workers to fall within the eligibility criteria, as well as increasing wages paid in a particular month to maximise the cash flow boost amount.
Any sudden changes to the characterisation of payments made may cause the ATO to investigate whether the payments are in fact wages. If the payments are wages, they may consider the characterisation of past payments, including whether they should have been subject to PAYGW and whether super guarantee contributions should have been made. You may also have FBT obligations that have not yet been met.
