Many companies and trusts have been kept afloat this year by receiving the governments cash flow boosts and JobKeeper payments. This blog post will unpack the subsequent tax treatment for companies and trusts to help you navigate its complexities.
Eligible businesses have been benefiting from the cash flow boost and JobKeeper payments since the stimulus payments launched in April 2020. However, it is important to note that these stimulus payments have differing tax treatments, which include:
– The cash flow boost is paid as credit and is non – assessable non exempt income which is also free from GST
– The JobKeeper payment is paid directly into the recipient’s bank account upon completion of monthly reporting responsibilities. Hence, JobKeeper is assessable income that is not subject to GST and is not included in activity statements.
Trust Distributions
Trust distributions must only take place after first referring to the trust deed to ascertain what constitutes trust income.
Many trust owners make the common mistake of concluding that the trust income available for distribution is equal to the taxable income of the trust. Though, this will only be true when the trust deed (or the trustee) defines trust income to equal taxable income. Accordingly, the accounting and tax treatment must be made in alignment with the trust deed.
Cashflow Boost
Payments received under the cashflow boost will not be distributable if the trust deed or the trustee determine that non – assessable non – exempt income is not part of trust income. Though, in cases where these restrictions are not present, or where the trust deed or trustee determine that non – assessable non – exempt income can be distributed, the cashflow boost might be available for distribution to beneficiaries.
Where the cashflow boost is distributed to beneficiaries it will retain its status as non – assessable non exempt income in the hands of the beneficiary.
JobKeeper Payments
JobKeeper payments will form part of the taxable income of the trust and would be expected to also be trust income as may be defined by the trust deed or the trustee.
JobKeeper payments are classified as part of the taxable income of the trust and are expected to also be trust income. When JobKeeper is dispersed to eligible employees, the amount paid to the employees, and therefore the associated expense/deduction must be equal to or more than the JobKeeper payment amount. As a result, no net trust or taxable income would arise. However, JobKeeper payments received for eligible business participants don’t need to be paid to the eligible business participant, as the wage condition does not apply. Consequently, the amounts are allowed to be retained within the trust and form part of the trust income distributed at year end.
Imputation Credits
Due to the cashflow boosts non – assessable non – exempt income status, no tax arises on these amounts and hence, no imputation credits will be created by these amounts. Whether or not the boost amounts can be paid out as imputation dividend by the recipient company will be dependent on the balance in the imputation account of the company involved and the amount of its accumulated profits.
Company Beneficiaries
A key mandate of the JobKeeper payment is that a minimum of $1500 per fortnight must be paid to eligible employees, which is later reimbursed to the employer at the end of the month.
Though, in the case that the recipient of an amount is an eligible business participant, there is no requirement for the amount to be paid to that individual. Rather, it can be retained in the company or trust. If a trust does retain the amount, it will become part of the trust law income to be distributed by the trust to any beneficiary at the year – end.
In the case that a trust receives JobKeeper payments and distributes these amounts to a company beneficiary, consequences (as to whether that beneficiary qualifies as a base rate entity for the purposes of qualifying for the lower company tax rate) may arise. In order to qualify as a base rate entity, a company must not only have an aggregated turnover of less than $50 million, but no more than 80% of its assessable income can be base rate entity passive income. This type of income includes the following:
– Corporate distributions and imputation credits
– Rent and royalties
– Interest income (some exceptions apply)
– Gains on qualifying shares
– Net capital gains
– An amount included in the assessable income of a partner in a partnership or beneficiary of a trust, to the extent that it is traceable to an amount that is base rate entity income under the above categories
Any trust distributions received by corporate beneficiaries must be dissected into their base rate entity component, and their non – base rate entity component. The cash flow boost, for example, would not count as assessable income in any case and therefore would be disregarded for the purposes of the 80% test. Conversely, JobKeeper is assessable income, but not passive income for the purposes of the 80% test. Hence, the JobKeeper component of trust distributions to a company will likely improve the changes of the company meeting the 80% test as it will be assessable income, not base rate entity passive income. Coherently, this will qualify the company as a base rate entity for the purposes of accessing the lower 27.5% corporate tax rate.
JobKeeper Extension
The JobKeeper payment is continuously being changed and updated, so it’s important to keep on top of it. The most recent update to the JobKeeper program is that businesses will need to meet one of the decline in turnover tests for the September 2020 quarter alone (rather than for both the June and September quarters as announced in July) to be eligible for JobKeeper for the period 28 September 2020 to 3 January 2021. After that period, businesses will have to prove they meet the decline in turnover tests for the December 2020 quarter to be eligible for JobKeeper for the period 4 January to 28 March 2021.
With regards to the eligible employee test, the reference date for assessing which employees are eligible for JobKeeper is now 1 July 2020 (previously 1 March) with effect from fortnight 10 (3 August 2020). The reference period for employees regarding their hours worked to generate their tier of payment will be the two fortnightly pay periods prior to 1 March 2020 or 1 July 2020.
Claiming Previous Year Tax Losses
In the case that your business has made tax losses in years preceding the current one, but you haven’t yet offset these losses, you are still able to carry these forward and claim a deduction for them in a later year – so long as you meet all the tax law requirements.
Your business structure will affect how you can claim business tax losses from the current or previous years if you meet the following criteria:
– A sole trader or an individual partner in a partnership, you can generally offset your current or prior year business losses against other income in the same income year (subject to any non – commercial business loss rules that may prevent you from offsetting)
– Operating your business through a trust, losses must be carried forward by the trust indefinitely until they are offset against future trust income (cannot be distributed to beneficiaries) and consider the strict requirements that need to be met for the trust to be able to use the losses
– Conducting business through a company, and meet the fairly onerous “continuity of ownership” tests or the “same business” tests in order to be able to claim current and / or prior year losses
It is essential to keep in mind that the ATO expects taxpayers to consider each tax loss separately if you are looking at more than one tax loss across multiple years.
If you are carrying forward a prior year business loss to the current or future year, you must ensure you have correctly applied your past business losses before lodging a tax return. Make sure to check that you have accurately reconciled carried forward losses from a prior year to a later year and you haven’t mis – characterised expenses like capital expenditure and CGT losses as normal business expenses- for example, CGT losses can only be offset against CGT gains.
If you have further questions about the tax treatment of companies and trusts that have received Coronavirus stimulus payments, contact Michael Hamilton at Blue Dragon Business Services.
Blue Dragon Business Services are tax agents located in Cooroy, in the heart of Noosa Hinterland. We service all areas of the Sunshine Coast and South-East Queensland including Brisbane, Gympie, Ipswich and Logan for tax, BAS and bookkeeping. We also practice as virtual CFOs, take on interim CFO engagements as well as financial management, reengineering and restructures including business turnarounds, transformations and expert financial modelling.
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E: michael@bluedragongroup.com.au
P: 07 5412 7111
