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Re: Cash flow boost paid as salary from a company and tax loss issues

Newbie

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If the cash flow boost is paid out as salary, it creates a tax loss in a company.  How is this treated in the tax return as the cash flow boost is not classified as exempt income (it is non-assessable, non-exempt income)?  Tax losses carried forward are reduced by exempt income but not non-assessable, non-exempt income.  It has been suggested to me by one professional body the cash flow boost should be paid out as a dividend rather than salary, as Part IVA may apply for creating a tax benefit (a carry forward tax loss).  It was further suggested the ATO may apply s109 excess remuneration if it is paid out as salary to a PSI company deeming the payment as a dividend.  This seems ludicrous.  I am unaware of any guidelines preventing payment of the cash flow boost as salary for PSI or a PSB (or any other entity). Clarification that a loss created is available to be carried forward (or not) are required from the ATO.  The tax implication guidelines for the the cash flow boost from the ATO does not address the tax loss issue.  This issue impacts the PAYG summary, June BAS and tax return if the cash flow boost should not have been paid as salary.  The lodgement dates are imminent.  Pre 30 June 2020 was bad, but post 1 July 2020 is even more painful! Please help!

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Most helpful response

Initiate

Replies 1

Hi MEDeano3,

 

I agree with you that in all scenarios I have tested, the Cash Flow Boost (CFB) Payment does result in generating a loss, or an equivalent expense to the business which becomes a loss if you were at break even/loss point in your PNL forecast before the CFB was presented.

 

The reason is that the CFB generated an expense that is unplanned, which either tips forecasted profits or compounds forecasted losses, with subsequently the question becoming, whether the loss can be rolled over to futire years. I have trawled a number of forums and professional bodies and believe there is no right or wrong answer at this point in time given the fluidity of the terms of the CFB component of the Covid-19 Grant.

 

(i.e.

The payment is confirmed as NANE,

It is not like the bushfire grant and therefore has no precedent example;

Its purpose, when created by Treasury, was to create a cash injection into the economy;

By providing the cash flow to businesses that would facilitiate the most prudent economic injection;

Using what the business determines to be the most effective/efficient form of injection;

(i.e. a utility expenses/create assets/retain employees - the biggest impact to keep the business afloat).

 

So that being said, I have tested the following rules for the CFB and Job Keeper, which seems to have the largest consensus from those I have touched base with in the ATO, Finance and Treasury - all recognising that the basis to this problem is that the cash flow boost economic injection has a side effect in that it will generate a loss/cost as an unplanned expense to most businesses - but provide the best vehicle for injecting cash back into the economy.

 

At Item 6Q - Enter the JobKeeper payments received;

At Item 6R - Enter the Cash Flow Boost amount "other income" so as not to double the loss it generates;

At Item 7Q - Enter the Cash Flow Boost amount; and

At Item 13.U - Roll Over the Loss.

 

The other view was to leave the CFB off the company tax form as the ATO did not seek to make visible the unique nature of the payment on the 2020 Company Tax Return and left the tax instruction up to interpretation, but that was a minority group.

 

As to whether the CFB generates a loss to be rolled over, it may be possible to recover the loss in the year it was generated by an offset in profit, or roll the loss over in future years. As to whether any benefit can be derived by payments to shareholders through dividends or employees through salaries/wages, it will not, as it can only be paid out to affiliated bodies as non-franked dividends or salary/wages, meaning, converting the CFB payment into shareholder/employee incomes streams results in tax being paid out by the shareholder as a non-franked dividend or by an employee in PAYG tax on salary/wages.

 

The approach I have outlined does not require, nor do you need to make specifically visible, how the CFB was used. If you choose to pay it out as a non-franked dividend, a salary/wage expense or a business expense (i.e. utility cost to business to the equivalent value of the CFB) it will present itself in those areas of the Company Tax Return where those payments are made visible. It cannot be paid out in a way that it disadvantages the ATO. It cannot gererate a franked dividend as the CFB is non assessable, but as the payment is non-exempt, it will become an unplanned cost and it will generate a loss (i.e. the reason why it is called a NANE). 

 

The reasoning model - use the CFB Dollars as a pooled fund to draw down business utility expenses and derive your salary expenses from your normal gross income pool. Should there be insufficient funds in you normal gross income pool to cover salary/wages, then you will drive the shortfall into the equivalent in losses that you have already highlighed, which you can roll over to future years.

 

This reasoning is in accordance with TR2006-003c3 (i.e. The Tax Office Ruling that appears to be driving the discussion).

 

So now we take a breath...

 

Cheers - KnowledGenX

 

 

10 REPLIES 10

Devotee

Replies 1

@MEDeano3  Check out the information in this article. The question what tax consequences you need to be aware of - it may simplify it for you.

https://community.ato.gov.au/t5/Tax/COVID-19-support-cash-boost-for-employers/ta-p/40272

Newbie

Replies 0

Thank you @mrsquiggle however as I mentioned in my original post, the guide you referred me to does not answer my specific questions.  It is a shame nobody has been able to assist.  Perhaps I raised too may issues in one post.

I'm new

Replies 3

Did you ever receive an answer on this question.

Newbie

Replies 2

Hi darren1, 

I never received an answer.  I had one comment referring to the ATO Covid-19 guide which may assist me, however I had already mentioned in my post that it didn't address this issue.  

Kind regards,

MEDeano3

Most helpful response

Initiate

Replies 1

Hi MEDeano3,

 

I agree with you that in all scenarios I have tested, the Cash Flow Boost (CFB) Payment does result in generating a loss, or an equivalent expense to the business which becomes a loss if you were at break even/loss point in your PNL forecast before the CFB was presented.

 

The reason is that the CFB generated an expense that is unplanned, which either tips forecasted profits or compounds forecasted losses, with subsequently the question becoming, whether the loss can be rolled over to futire years. I have trawled a number of forums and professional bodies and believe there is no right or wrong answer at this point in time given the fluidity of the terms of the CFB component of the Covid-19 Grant.

 

(i.e.

The payment is confirmed as NANE,

It is not like the bushfire grant and therefore has no precedent example;

Its purpose, when created by Treasury, was to create a cash injection into the economy;

By providing the cash flow to businesses that would facilitiate the most prudent economic injection;

Using what the business determines to be the most effective/efficient form of injection;

(i.e. a utility expenses/create assets/retain employees - the biggest impact to keep the business afloat).

 

So that being said, I have tested the following rules for the CFB and Job Keeper, which seems to have the largest consensus from those I have touched base with in the ATO, Finance and Treasury - all recognising that the basis to this problem is that the cash flow boost economic injection has a side effect in that it will generate a loss/cost as an unplanned expense to most businesses - but provide the best vehicle for injecting cash back into the economy.

 

At Item 6Q - Enter the JobKeeper payments received;

At Item 6R - Enter the Cash Flow Boost amount "other income" so as not to double the loss it generates;

At Item 7Q - Enter the Cash Flow Boost amount; and

At Item 13.U - Roll Over the Loss.

 

The other view was to leave the CFB off the company tax form as the ATO did not seek to make visible the unique nature of the payment on the 2020 Company Tax Return and left the tax instruction up to interpretation, but that was a minority group.

 

As to whether the CFB generates a loss to be rolled over, it may be possible to recover the loss in the year it was generated by an offset in profit, or roll the loss over in future years. As to whether any benefit can be derived by payments to shareholders through dividends or employees through salaries/wages, it will not, as it can only be paid out to affiliated bodies as non-franked dividends or salary/wages, meaning, converting the CFB payment into shareholder/employee incomes streams results in tax being paid out by the shareholder as a non-franked dividend or by an employee in PAYG tax on salary/wages.

 

The approach I have outlined does not require, nor do you need to make specifically visible, how the CFB was used. If you choose to pay it out as a non-franked dividend, a salary/wage expense or a business expense (i.e. utility cost to business to the equivalent value of the CFB) it will present itself in those areas of the Company Tax Return where those payments are made visible. It cannot be paid out in a way that it disadvantages the ATO. It cannot gererate a franked dividend as the CFB is non assessable, but as the payment is non-exempt, it will become an unplanned cost and it will generate a loss (i.e. the reason why it is called a NANE). 

 

The reasoning model - use the CFB Dollars as a pooled fund to draw down business utility expenses and derive your salary expenses from your normal gross income pool. Should there be insufficient funds in you normal gross income pool to cover salary/wages, then you will drive the shortfall into the equivalent in losses that you have already highlighed, which you can roll over to future years.

 

This reasoning is in accordance with TR2006-003c3 (i.e. The Tax Office Ruling that appears to be driving the discussion).

 

So now we take a breath...

 

Cheers - KnowledGenX

 

 

Newbie

Replies 0

Thank you @KnowledGenX for a comprehensive answer. I appreciate the background rationale for CFB being NANE income.  @darren1 Yes I have an answer now.  Thank you for prompting me to follow this up.  Accountancy and tax is certainly not dull at the moment!

 

Kind regards,

MEDeano3

Dynamo

Replies 3

Hi @MEDeano3 ,

 

Did you ever receive an answer to this?

 

Can a company receiving PSI pay it out as additional salary / wages? If so how would attributable PSI be calculated, as on the face of it the additional slaray / wages will generate an net PSI loss to be claimed by the individual. This is contrary to what the ATO is saying in that it should be assessable to the individual when paid from a company, but interestiningly is equitable when companred to a trust or sole trader that avoids being taxed personally on these CFB.

 

Thanks.

Initiate

Replies 2

Hi Dante_941,

 

In regard to the CFB and a company receiving PSI, the CFB is excluded from the PSI calculation as its a payment made with no attached service, in other words, no service is delivered to receive the CFB, as per its NANE classification, a payment made for no service.

 

Therefore, it is not entered into the PSI calculation as it is not a servicable income payment of any type.

 

You can pay it out as wage/salary, you will need to ensure you add the appropriate taxable component (PAYG) (i.e. rate depending on the target annual wage you anticipate for the receipient), that then must be declared by the recipient (i.e. like normal wages) at the EOFY on their personal tax return.

 

If your running a company, you have the option of paying out the CFB as an unfranked dividend, where the recipient will need to contribute to the tax shortfall that it generates in the personal income at EOFY.

 

Interestingly, the CFB will generate a loss, whether used in the PSI calculation or not, as it only covers the cash flow on the taxable component (PAYG) of the wages being paid. Also remember the ATO discrete comment on the CFB, if you have a shortfall in PAYG component of those wages, that shortfall may need to be paid back to the ATO (i.e. your received 20K CFB yet your PAYG payments at EOFY for employees only tallied to 18K, then you may have to pay the 2K difference back to the ATO to balance out the ATO account where the CFB was originally disbursed, as you may have been overpaid the CFB..

 

I'll use FDT syntax to describe it:

 

CFB = 20000;

Co.Tax.Return (6.Income.A-I) = Revenue / Interest et.al;

Co.Tax.Return (6.Income.Q) = JobKeeper;

Co.Tax.Return (6.Income.R) = CFB;

Co.Tax.Return (6.Expenses.A-Z) = Expenses;

Co.Tax.Return (6.Expenses.S) = Normal.Wages.Salaries + JobKeeper;

Co.Tax.Return (7.Less.Q) = CFB.NANE;

 

Emp.Wages(EOFY) =  Net.Yearly.Wage + EOFY.Tax(PAYG);

All.Emp.Wages.EOFY = No.Employees * Emp.Wages(EOFY);

 

If All.Emp.Wages.EOFY (EOFY.Tax(PAYG)) < CFB

   Credit (CFB - EOFY.Tax(PAYG))

   to ATO.CFB.Dispersement.A/C

EndIf

 

EOFY.Co.Tax.Return.CPNL =

      + Co.Tax.Return (6.Income.A-I) = Revenue / Interest et.al

      + Co.Tax.Return (6.Income.Q) = JobKeeper;

      + Co.Tax.Return (6.Income.R) = CFB;

      - Co.Tax.Return (6.Expenses.A-Z) = Expenses;

      - Co.Tax.Return (6.Expenses.S) = Normal.Wages.Salaries + JobKeeper;

 

Reconcilliation.EOFY.Co.Tax.Return.CPNL =

      + EOFY.Co.Tax.Return.CPNL

      - Co.Tax.Return (7.Less.Q)

 

The basic issue being that the CFB NANE payment will likely show up as a negative effect on the EOFY PNL (i.e. as a loss when reconciling the PNL), which can be carried over as a loss in future years at 13.U of the Annual Company Tax Return.

 

That being said, there are a few nuances when income is classified as NANE, (i.e. whether its company, trust et.al.) that you should always seek professional tax advice on, but in general, the result from the CFB (NANE) when it is paid out from a company to an individual, trust or sole trader, is that it will be assessable income when paid to an individual, sole trader or excised through a trust, however, it is not treated as assessable income when held in the company. Either way, when the CFB is dispersed from the company, it will utlimately end up as a payment that is taxable to an individual (i.e. whether employee, trust recipient, sole trader or shareholder).

 

So in summary, as far as I can tell through the research I have conducted on ATO publications in evidence, is that the CFB is excluded from attributable PSI (i.e. does not need to be calculated as it is not a payment for a service). The net effect maybe that the payment, when dispersed, may generate a loss, but that loss can always be claimed or rolled over to future years by an individual or company.

 

Regards

 

KnowledgGenX

Dynamo

Replies 1

Hi @KnowledGenX,

 

Thansk for your response, although I am not 100% sure I follow. Perhaps if I give an example it may be easier to understand.

 

Let's say a company has the following:

 

PSI income  $80k

CFB             $20k

 

Business deductions $5k

Gross wages  $85k

Super $10k

 

If the CFB is not taken into consideration in the PSI attribution calculation, the net PSI loss to attribute would be $20k, so the individual would be assessed personally on $65k (the $80k wage less the $20k PSI loss). Does this seem correct?

 

Interestiningly this would put them in the same taxable situation as a beneficiary of a trust or sole trader that received the same CFB (i.e. as if the CFB wasn't assessable to them)!