In response to the economic downturn associated with COVID-19, the Australian Government has legislated several stimulus packages. These packages are designed to support small and medium sized businesses and not-for-profit organisations that employ staff. They will enable businesses to manage cashflow challenges and help retain employees. The first measure, which this article covers, is called Boosting Cash Flow for Employers.
Summary:
Eligible businesses that employ people will be entitled to receive a minimum cash flow boost of $20,000, up to a maximum of $100,000. These payments will be delivered through credits in the activity statement system, following lodgment of activity statements.
There is no application form for the cash flow boost. The initial cash flow boost will be processed after 28 April 2020 and upon lodgment of the March quarter activity statement. The credit, which is calculated based on the amount of a business’ PAYG withholding, will automatically be processed to the business’ integrated client account.
Additional cash flow boosts will then apply for the periods June to September 2020, equal to the total amount of the initial cash flow boost received. The additional cash flow boosts will be delivered in either two or four instalments, depending on the business’ activity statement reporting period.
Ultimately, the cash flow boost aims to reduce liabilities arising from the lodgment of the activity statement. This will in less tax being paid to the ATO. Alternatively, if the calculated cash flow boost exceeds the actual liability reported on the activity statement, then the excess will be refunded to the business, generally within 14 days. Early lodgment of the activity statement will not result in early processing of the initial credit.
The tax consequences of the cash flow boosts are that they are:
- tax free payments
- not subject to GST
- will not affect the entitlement to a deduction for PAYG withholding paid
- there is no effect on tax paid by employees in respect of their salary and wages
Eligibility:
To be eligible for the cash flow boost you must be a small or medium sized business. This includes not-for-profit organisations, sole traders, partnerships, companies and trusts, which have:
- held an ABN on 12 March 2020 and continue to be active;
- have an aggregated annual turnover under $50 million (this is generally based on prior year turnover as reported in the previous year’s tax return); and
- made eligible payments you are required to withhold from (even if the amount you need to withhold is zero). Eligible payments are defined to include:
- salary and wages
- directors fees
- eligible retirement or termination payments
- compensation payments
- voluntary withholding from payments to contractors
In addition, the business must have:
- derived business income in the 2018-19 income year and lodged the 2019 income 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.
For a not-for-profit organisation (excluding charities) to be eligible, it must have:
- held an active ABN on 12 March 2020;
- have an aggregate annual turnover of less than $50 million; and
- made payments to employees.
For a charity to be eligible, its only requirement is registration with the Australian Charities and Not-for-profit Commission. This is regardless of when the charity was registered.
Timing and Calculation – Initial cash flow boost:
The initial cash flow boost is based on the amount of a business’ PAYG withholding. Payment credits will commence after 28 April 2020.
For quarterly activity statement lodgers, eligible businesses that withhold tax on the employees’ salary and wages will receive a credit equal to 100% of the amount withheld. The minimum credit for the initial cash flow boost will be $10,000, even if the amount required to be withheld was less than $10,000. However, further cash flow boosts will not apply unless the PAYG withholding exceeds $10,000 over the relevant periods.
For monthly activity statement lodgers, the credit received will be calculated based on three times the rate (300 per cent) of the PAYG withholding reported in the March 2020 activity statement. The reasoning behind the use of 300 per cent is to align the credit with quarterly lodgers.
Regardless of whether the business lodges its activity statement on a quarterly or monthly basis, the total of the initial cash flow boost cannot exceed the maximum allowable limit of $50,000.
Timing and Calculation – Additional cash flow boosts:
The timing and calculation of the additional cash flow boosts will depend on whether the business lodges its activity statements on a quarterly or monthly basis.
For a business lodging on a quarterly basis it will receive 50% of its total initial cash flow boost for each activity statement. That is:
- April to June 2020 activity statement which is due on 28 July 2020, will be paid at 50% of the initial cash flow boost.
- July to September 2020 activity statement which is due on 28 October 2020, will be paid at 50% of the initial cash flow boost.
For a business lodging on a monthly basis it will receive 25% of its total initial cash flow boost for each activity statement. That is:
- June 2020 activity statement will be paid at 25% of the initial cash flow boost.
- July 2020 activity statement will be paid at 25% of the initial cash flow boost.
- August 2020 activity statement will be paid at 25% of the initial cash flow boost.
- September 2020 activity statement will be paid at 25% of the initial cash flow boost
Entering into schemes:
A business will not be eligible for cash flow boosts if it (or a representative of the business) has entered into or carried out a scheme for the purpose of:
- becoming entitled to cash flow boosts when it would otherwise not be entitled; or
- increasing the amount of the cash flow boosts.
Entering into schemes may include restructuring the business or the way workers are paid to fall within the eligibility criteria, as well as increasing wages paid in a particular month in order to maximise the cash flow boost amount.
Given the recent implementation of the Single Touch Payroll system, the ATO will easily be able to investigate sudden changes to the amount of salary and wage payments.
Examples of the timing and calculation of the cash flow boost:
Tim’s Courier run – 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 withholding of $0 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 of $10,000.
Tim will not receive any further cash flow boosts unless his withholding in the June 2020 quarter is greater than $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 the quarter ended June 2020
- $5,000 for the quarter ended September 2020
Sarah’s Construction Business – 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. Sarah is a monthly activity statement lodger. In the months of March, April, May and June for the 2019-20 income year, Sarah reports withholding of $15,008 for her employees on each activity statement.
For March 2020, Sarah’s initial cash flow boost is three times her withholding. 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.
When Sarah lodges her June to September 2020 business activity statements she will receive additional cash flow boosts as follows:
- June 2020, $12,500
- July 2020, $12,500
- August 2020, $12,500
- September 2020, $12,500
Further Information:
For further information relating to the Cash flow Boost Payments for Employers as part of the Economic Response to COVID-19 (Coronavirus) Federal Government Stimulus Package, visit the links below:
- Boosting cash flow for employers – ATO Resources
- Treasury Fact Sheet “Boosting Cash Flow for Employers”
- Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Bill 2020
Disclaimer: Paragon Business Services does not provide financial or tax advice. All information provided is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your circumstances.