27 April 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.

Advisers should consider (or reconsider) whether clients with service entities may be eligible. While the ATO has allowed until 31 May 2020 for businesses to enrol, payments have to be made to employees by 30 April 2020 to meet the ‘wage condition’.

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.

The critical point to watch here is what is meant by ‘combined GST turnovers of the related entities’. There will be a difference if the Rules are amended to introduce:

  1. the aggregate of the turnovers of the business and service entity – in Haibo’s case, this would be $800,000 for April 2020 compared to $1.2 million for April 2019; or
  2. the aggregate of the turnovers of the business and service entity excluding the related party transaction – in Haibo’s case, this would be $600,000 for April 2020 compared to $1 million for April 2019 as the Service Trust has no other turnover except its revenue from Haibo.

This may result in a different decline in turnover percentage.

We will update this article once we see a copy of the text that introduces the new test.

In the meantime, businesses with service trusts should consider whether they may now be eligible for JobKeeper payments.

Please contact a member of our team if you would like to discuss.


This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.