Ever since the Australian Government announced the JobKeeper measures, many startups have been eagerly awaiting details of the “alternative test”.
Since startups can scale rapidly, many of them are unable to rely on the “basic test” demonstrating a 30% decline in turnover in a particular month or quarter this year to the same month or quarter last year. A year-on-year comparison just doesn’t make sense for many startups.
Thankfully, last week the Australian Taxation Office finally released details of the alternative test (there are actually 7 separate alternative tests) and this article provides our insight into how the alternative test will apply to startups.
Alternative test – how it helps startups
The alternative test provides businesses with a different “comparison period” to test whether there has been a decline in turnover. So, unlike the basic test which requires the business to compare the turnover of like-for-like periods – say April 2020 and April 2019 – the alternative test could allow businesses to compare, for example, April 2020 turnover to the average turnover of several months that are more recent than a year ago.
There are multiple potential “turnover test periods” that a business can use to calculate a decline in turnover, but for the purposes of this article we will use April 2020 as the turnover test period for our hypothetical future unicorn!
To pass the alternative test and qualify for JobKeeper, the business must be able to demonstrate a decline in turnover (30% for most startups) between April 2020 and the relevant comparison period allowed under the alternative test.
Entities with a substantial increase in turnover
This is the test that we expect will be most relevant to startups.
To be able to use this test, the business must demonstrate an increase in turnover of:
- 50% or more in the 12 months from March 2019 to March 2020; or
- 25% or more in the 6 months from October 2019 to March 2020; or
- 12.5% or more in the 3 months from January 2020 to March 2020.
The business only needs to satisfy one of the above tests.
If the above is satisfied, the startup tests whether there has been at least a 30% decline in turnover in April 2020 compared to the average turnover of January, February and March 2020. Clearly, this is much more favourable to a fast-growing startup whose turnover a year ago is significantly lower than in March 2020.
Lastly, there seems to be some ambiguity surrounding the interpretation of the above three time periods. For example, some claimants are interpreting the rules to be a comparison of the 12 months ended March 2019 to the 12 months ended March 2020.
Preliminary feedback received from the ATO suggests that this interpretation may be acceptable, provided that it is “reasonable” in the business’s individual circumstances.
Interestingly, the outcome of this interpretation of the rules could well be quite different to the first interpretation – we suggest startups to tread carefully should they seek to rely on this second interpretation.
Entities with an irregular turnover
Many startups will have irregular or “lumpy” turnover throughout the year due to large projects or multi-year subscription payments. This is the test that would be most applicable to these types of businesses.
To be able to use this alternative test the business must first compare the turnover of the four quarters from April 2019 to March 2020. If the turnover with the lowest quarter is no more than 50% of the turnover with the highest turnover, then the business is deemed to have “irregular” turnover and can apply the alternative test.
The business then determines whether there has been the relevant 30% decline in turnover in April 2020 compared to the average turnover of the 12 months from April 2019 – March 2020.
Note that this test is not available to startups whose turnover is irregular because they are a cyclical business (e.g. such as farmers or other seasonal businesses).
Entities not trading 12 months ago
Where a business did not start trading until only recently, then naturally it doesn’t have a corresponding period in 2019 to test any decline in turnover.
For businesses that commenced trading after 1 March 2019, they test the turnover of April 2020 to the average turnover of the months from business commencement date until February 2020.
Businesses that started trading between 1 March 2019 and 30 November 2019 can also choose to test the turnover of April 2020 to the average monthly turnover of December 2019, January 2020 and February 2020.
We note that accompanying examples to the rules provided by ATO actually contradict the rules themselves in some respects (to do with which months to test), thereby causing confusion amongst startups. Whilst we’re waiting on further clarification from the ATO, the rules should take precedence.
Entities that restructured, acquired or disposed their business
This alternative test applies to entities that had a change in turnover because they either:
- Restructured their business; or
- Acquired a business; or
- Disposed part of their business.
For these entities, the alternative test allows them to compare the turnover of April 2020 to the turnover of the month immediately following the relevant business restructure, acquisition or disposal.
Examples of restructures include the merging or separating of different business operations or service lines.
Based on the ATO examples accompanying the rules, it appears that this test applies to transactions done at the business level, not the company shareholding level. For example, a company acquiring the shares of another company is not the kind of restructure contemplated by this test.
Other classes of entities
The alternative test is available to other classes of entities as well, but these will be of little relevance to most startups. They include sole traders and partnerships with sick or injured practitioners, as well as businesses operating from one of the bushfire impacted postcodes.
Tips and traps
Like the rest of the JobKeeper measures, the alternative test is complex and there are strict deadlines and rules in place that applicants must adhere to, so startups should seek professional advice if they are intending to apply.
In no particular order, the following are some of our tips and commonly-seen traps that startups should be aware of when it comes to the JobKeeper program.
This list has been compiled from the technical analysis we have undertaken and the many queries received from the tech sector over the last few weeks:
- Businesses must pay employees first before receiving the JobKeeper payment sometime the following month. This represents a very serious cash flow hurdle to accessing the JobKeeper for many businesses.
- Also, should a business pay its staff and then later discover that it is for some reason ineligible for JobKeeper, its solvency could come under question. This feature of JobKeeper was specifically discussed with the Government, whose response was that businesses should seek to borrow from banks – not a realistic option for many startups and scaleups.
- Pre-revenue companies are not eligible for JobKeeper as they will not be able to demonstrate a decline in turnover under any circumstance.
- A business only needs to satisfy the decline in turnover test once to be eligible for JobKeeper.
- Businesses should keep detailed records of how they calculated an actual or anticipated decline in turnover. The ATO will be conducting audits and the audit outcome could turn on the quality of written records kept to support eligibility.
- Decline in turnover is usually calculated on a standalone entity basis, not group basis. However, we note that the Treasury has just announced that for “service entities” that employ staff and do not have external revenue the group will be considered as a whole.
- The reason for the decline in turnover does not need to directly relate to COVID-19.
- Xero and other accounting software programs require various payroll categories be setup for each employee throughout the JobKeeper program.
The comments in this column are general in nature and should not be considered as tax advice.
Startups should consult a professional tax advisor for application of the alternative test to their individual circumstances. You can contact Jack and Alex at William Buck on 02 8263 4000.