Updated on 5 May 2020. On 24 April 2020, the Treasurer announced that new rules will be introduced for the 'decline in turnover' test. The effect of one of these rules is that service entities, which may not suffer the necessary decline in turnover in their own right, may now become eligible for JobKeeper payments.

The JobKeeper rules have been amended with effect from 1 May 2020 to allow particular service entities to calculate their decline in turnover under modified rules. However, the modified rules only apply to a service entity that is a member of one of the following:

  • a consolidated group
  • a consolidatable group
  • a GST group.

Advisers should consider (or reconsider) whether clients with service entities may be eligible. The ATO has allowed until 31 May 2020 for businesses to enrol. The ATO is also now saying payments have to be made to employees by 8 May 2020 to meet the 'wage condition'. This is an extension from the original deadline of 30 April 2020.

What is a service entity?

In this context, a service entity is a separate entity, often a trust, that provides services to a related entity that carries on the operating business.

Service entities allow for important assets of the business like premises, plant and equipment and staff to be kept separate from the risks of the entity that is carrying on the business.

What is the current problem for service entities claiming JobKeeper payments?

To comply with ATO guidance, service entities often charge a service fee that is based on the costs they incur, plus a mark-up.

For example, a service entity that supplies premises, equipment and staff to an operating entity will often charge its service fee based on the cost of its lease, equipment and wages, plus a mark-up within the ATO's suggested ranges.

The effect of this is that, while the operating entity's revenue may drop due to a lack of sales, the service entity's revenue does not decrease unless its costs decrease.

How does this work in practice?

Haibo Pty Ltd (Haibo) provides engineering services.

Haibo engages a related services trust (Service Trust) to provide it with premises, equipment and staff. Haibo and the Service Trust agreed that the service fee would be based on the ATO's guidelines: the Service Trust's costs plus a mark up within the ATO's suggested ranges.

Haibo's business has suffered a 40% decline in turnover. In April 2020, its projected GST turnover is $600,000. In April 2019, its current GST turnover was $1 million.

The Service Trust's costs have not decreased. Its projected GST turnover for April 2020 is $200,000. Its current GST turnover for April 2019 was also $200,000.

Without the new rules, the Service Trust, which employs most of the team working in Haibo's business, will not be eligible for JobKeeper payments.

What has the Treasurer said?

The Treasurer's media release of 24 April 2020 says:

Employees employed through a special purpose entity, rather than an operating entity: Changes will address the circumstances where business structures use a special purpose entity to employ staff rather than staff being directly employed by an operating entity. The Government will provide an alternate decline in turnover test for the eligibility of special purpose service entities that provide employee labour to group members and that have not met the basic test for decline in turnover. This alternate test will apply where an entity provides the services of its employees to one or more related entities, where those related entities carry on a business deriving revenue from unrelated third parties. The alternate test will be by reference to the combined GST turnovers of the related entities using the services of the employer entity.

This is good news for businesses using service entities.

However, many professional practices will miss out if their service entity is not a member of a consolidated group, consolidatable group or GST group.

The modified rules also only apply to a service entity that supplies employee labour services to members of its own group – they will not apply if the service entity supplies employee labour services outside the group.

Assuming the service entity is allowed to apply the modifed rules, then rather than using its own turnover, it will use:

  • for the relevant test period in 2020 – the sum of the projected GST turnovers for each test member
  • for the relevant comparison period in 2019 – the sum of the current GST turnovers for each test member.

In the example above, assuming Haibo and the Service Trust are grouped for GST purposes, the Service Trust will use Haibo's project GST turnover and current GST turnover to calculate its own decline in turnover. The effect is that the Service Trust's decline in turnover will mirror Haibo's decline in turnover.

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