The two cash flow boosts provided by the federal government to help businesses deal with the COVID-19 emergency have largely been overshadowed by the JobKeeper program, but they could provide valuable financial support to organisations that qualify.
Some businesses may have already noticed refund payments or tax credits appear in their tax account as a cash flow boost from ATO.
With the Australian Taxation Office (ATO) warning it will be watching carefully for businesses trying to take advantage of the support measures, it’s worth understanding how the scheme works and what assistance you may be entitled to receive.
Enhancing your cash flow
The Boosting Cash Flow for Employers scheme is a temporary cash flow support measure for small and medium-sized employers and not-for-profit (NFP) organisations.
Financial support is being delivered in the form of tax and GST-free credits totalling between $20,000 and $100,000 to eligible businesses.
It’s important to note that for most businesses, the cash flow boosts do not come in the form of tax refunds, but rather credits against your tax liabilities.
Employers do not need to apply; the tax credits are automatically applied to your business account when you lodge your business activity statement (BAS).
Eligibility for the tax credits
Your business may qualify for the cash flow boost regardless of whether it’s a small or medium entity, NFP, sole trader, partnership, company or trust.
To be eligible, your business must have held an Australian Business Number on 12 March 2020. Small and medium entities and NFPs must have an aggregated annual turnover under $50 million.
In addition, your business must have withheld tax from salary and wages; director fees; and eligible retirement, termination, and compensation payments; or undertaken voluntary withholding for contractors.
The final criteria are that the entity must have earned business income in 2018-19 and lodged its 2019 tax return on or before 12 March 2020.
Alternatively, you must have made GST taxable, GST-free or input-taxed sales in a tax period since 1 July 2018 and lodged the relevant BAS on or before 12 March 2020.
Receiving your cash flow boosts
If you qualify, your business will receive its first tax credit through the BAS system from 28 April 2020.
Eligible businesses with a deferred BAS lodgment date due to the recent natural disasters won’t miss out, as the ATO will apply your tax credit when you eventually lodge your activity statement.
Businesses qualifying for the initial cash flow boost will generally receive a second tax credit for the period July to September 2020.
How much you will receive
Your cash flow boost is generally the amount you withhold from salary and wages each monthly or quarterly period. In 2019-20, eligible businesses will receive a credit equal to 100 per cent of the tax withheld, up to a maximum of $50,000.
The minimum credit for a business is $10,000, even if the tax required to be withheld is zero. In this situation, you will be ineligible for subsequent boosts until your withholding exceeds $10,000 for a relevant period.
If your business lodges activity statements in 2020-21, your second payment will be based on the value of your initial cash flow boost (up to a maximum of $50,000).
Boost amounts are automatically applied to your business’s tax account and are used to reduce your BAS tax liabilities.
You will only receive a refund from the ATO if the credit amounts exceed your business’s other tax liabilities or you overpay your activity statement.
The tax man is watching
Although the tax credits will provide valuable financial support for businesses under pressure due to COVID-19, the ATO is warning it is paying close attention to the scheme.
The regulator is aware some businesses are trying to artificially create or inflate an entitlement to the support measures.
Business restructures or changes to the way employees are paid will definitely come under the tax man’s microscope. Splitting your business to get below the $50 million turnover threshold, or increasing the wages paid in a particular month to maximise your cash flow boost will also be red flags.
You are also likely to attract the tax man’s interest if you make sudden changes to the way you characterise worker payments, plus it could raise questions about whether you are meeting your Superannuation Guarantee and FBT obligations.
The ATO also intends to utilise the employee data it now has available through the Single Touch Payroll system to identify employers doing the wrong thing.
If you would like help managing your cash flow during this challenging period, contact our office today.
Case study – Sarah’s construction business
Sarah owns and runs a building business and employs eight construction workers on average full-time weekly earnings. Each one earns $89,730 a year.
In March, April, May and June 2020, Sarah reports tax withholding of $15,008 for her employees on her BAS. For March 2020, Sarah’s initial cash flow boost was three times her withholding, or $45,024 (3 x $15,008). 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 again, but there is only $4,976 of her cash flow boost left before she reaches the $50,000 limit. This means she receives a further cash flow boost of only $4,976 for her April payments.
Sarah will not receive any further cash flow boost in 2019-20 as she has reached the $50,000 limit, but she may receive a second boost during 2020 21.
Source: Treasury’s Boosting Cash Flow for Employers – Fact Sheet