Demystifying the substantial increase in turnover test

The legislative instrument and associated guidelines around the alternative decline in turnover tests that can be applied by an entity in order to qualify for the JobKeeper scheme have recently been released.

There are seven alternative tests that the Commissioner has set out and an entity is required to self-assess its own eligibility by applying one of those alternative tests.

One such test is the Substantial Increase in Turnover Test and there are differing views on how the test may be applied. Interpretation is key as it may mean missing out on much needed cashflow that is critical to the survival of a business.

Importantly, the rules state that an entity can apply the substantial Increase in turnover test if the entity had an increase in turnover of:

• 50% or more in the 12 months immediately before the applicable turnover test period, or

• 25% or more in the 6 months immediately before the applicable turnover test period, or

• 12.5% or more in the 3 months immediately before the applicable turnover test period.

The alternative test is:

• if the relevant comparison period is a calendar month, the entity divides the 3 months’ current GST turnover by 3; or
• if the relevant comparison period is a quarter, the entity uses the 3 months' current GST turnover and there are differing views in terms of how to calculate both the time period (the 12, 6 or 3 months) and the percentage increase in turnover.

The question is whether ascertaining the relevant substantial increase in turnover is determined by comparing the month at the commencement of that period with the month at the end of that period or by comparing the relevant period in the prior year with that in the current year.

In the context of the 12 month period ending on 30 March, is it relevant to compare:

• (A) The month of March 2020 with the month of April 2020;
• (B) The month of March 2020 with the month of March 2019;
• (C) The average turnover of the 12 months ended 31 March 2019 with the average turnover of the 12 months ended 31 March 2020; or
• (D) Some other answer?

In our view, the correct treatment here in ascertaining whether there has been a substantial increase in turnover would be (B).

This is because we are comparing the results of the month of March 2020 with the results of March 2019 (12 months prior to the test period). Moreover, the ATO has also provided guidance confirming that using the March 2019 current GST turnover as the baseline means any increase in April 2019 is included because an increase in April is in the twelve months before the start of April 2020. Calculate the JobKeeper payment by checking your decline in turnover under the basic test here.

The following example is relevant in this regard:

Example facts:

XYZ Tech is a technology company that began carrying on a business on 1 June 2018 selling its product to a range of businesses. It won a new contract in January 2020 and had a substantial increase in turnover between January 2020 and March 2020, until COVID-19 impacted the business. Its aggregated turnover is less than $1bn and, therefore, it needs to evidence a decline in turnover of at least 30%.

It assesses its eligibility for JobKeeper payments on 15 April 2020 based on a projected GST turnover for April 2020 of $780,000

Key information relating to the GST turnover of the company (XYZ TECH) are summarised in the table below:

Basic Test:

• XYZ Tech does not satisfy the basic test as its turnover in April 2020 increased by $80,000 compared to the comparison period of April 2019.

Alternative decline in turnover test:

• XYZ Tech applies the Substantial Increase in Turnover Test to check its eligibility, using 12 months as the relevant time period. Note, there has to be an increase of 50% or more.

Pre-condition (Period):

• XYZ Tech compares the turnover of March 2020 with the turnover for March 2019.  Since the increase is 53.33%, XYZ Tech meets the pre-condition.

Application:

• The average current GST turnover for the period January to March 2020 is $1,133,333.

When this figure is compared to the turnover for April 2020 of $780,000, there is a decline of 31.17% as demonstrated in the table below:

Conclusion: 

As the decline of 31.17% exceeds the specified percentage of 30%, the alternative decline in turnover test is satisfied. XYZ Tech will be eligible for the JobKeeper payment. Regardless of the alternative test chosen, entities will need to ensure they have the calculations on file in the event there is an audit by the ATO in the future.

How can RSM help?

If you have any COVID-19 related questions or require assistance please contact your local RSM adviser today.