Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)Chapter 3 - Tax-free treatment of payments from COVID-19 business support programs
Outline of chapter
3.1 Schedule 3 to the Bill makes amendments to the income tax law to make payments received by eligible businesses under certain COVID-19 business support programs administered by the Commonwealth non-assessable non-exempt income, so that the payments are not subject to income tax.
Context of amendments
3.2 On 13 July 2021, the Prime Minster, the Hon Scott Morrison MP announced the expansion of the COVID-19 Disaster Payment and the establishment of the COVID-19 business support program. Following this on 15 July 2021, the Prime Minister announced that the Commonwealth would facilitate administering COVID-19 business support payments for States and Territories.
3.3 Under the income tax law, business support payments of this nature are generally considered to be taxable income and subject to income tax by the Commonwealth.
3.4 Extending non-assessable non-exempt income status to business support payments ensures these payments are not subject to income tax by the Commonwealth. This concessional treatment will provide an additional cashflow boost to eligible businesses and further support their economic recovery.
Summary of new law
3.5 Schedule 3 to the Bill makes amendments to the income tax law to make payments received by eligible businesses under certain COVID-19 business support programs administered by the Commonwealth (or a Commonwealth authority), non assessable non-exempt income.
3.6 To obtain concessional treatment, among other things, the payment must be made under a program that is declared by the Minister. Schedule 3 to the Bill gives the Minister power to declare programs.
Detailed explanation of new law
3.7 Schedule 3 to the Bill amends the income tax law to make payments received by eligible businesses non-assessable non-exempt income. The effect of this is that the payments will not be subject to income tax.
3.8 An entity is eligible for the concessional tax treatment if:
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- the payment was made under a program administered by the Commonwealth (or a Commonwealth authority) that has been declared eligible by the Minister;
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- the payment was received by the entity in the 2021-22 financial year; and
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- the entity carries on a business and has an aggregated turnover of less than $50 million.
[Schedule 3, item 2, section 59-98(1) of the ITAA 1997]
3.9 The Minister may, by legislative instrument, declare a program to be an eligible program if the Minister is satisfied that, in effect:
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- the program is responding to the economic impacts of COVID-19; and
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- the program is directed at supporting businesses whose operations have been significantly disrupted because of a public health directive.
[Schedule 3, item 2, section 59-98(2) of the ITAA 1997]
3.10 The concessional tax treatment is targeted at payments received by businesses with an aggregated turnover of less than $50 million. These are businesses that have generally had significant disruption to their business operations because of COVID-19 health directives.
3.11 For a program to meet the eligibility criteria regarding purpose and effect, the program does not need to explicitly address the criteria. The Minister must only be satisfied of these circumstances. The eligibility criteria also ensures that only payments made under programs that are directed at supporting businesses will obtain concessional tax treatment.
3.12 The term 'business' is defined in subsection 995-1(1) of the ITAA 1997 as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee. In working out whether a particular program is directed at supporting businesses, the Minister must have regard to the overall purpose and characteristics of the program.
3.13 A support program that is directed at supporting other entities or activities (such as individuals as employees or in a private capacity) would not be able to be the subject of a declaration. However, a program that applies to different types of entities could still be characterised as being directed at businesses if it substantially relates to supporting business entities. For example, a program that primarily relates to businesses but also applies to not-for-profits that are not also characterised as businesses could be a program that is directed at supporting businesses.
3.14 Authorising the Minister to declare the programs that are eligible for information sharing is appropriate as it ensures the Government can respond quickly to changes in circumstances because of the unpredictable nature of COVID-19 outbreaks. It also ensures that payments made under programs are not automatically provided concessional tax treatment in respect of any new program that is developed by the Commonwealth. Rather, any new program must be actively considered and declared by the Minister as being eligible.
3.15 The concessional tax treatment will provide an additional cash flow boost to eligible businesses, further supporting their economic recovery.
3.16 The list of non-assessable non-exempt income provisions of the ITAA 1997 has also been updated to include this new provision. [Schedule 3, item 1, section 11-55 of the ITAA 1997]
Application and transitional provisions
3.17 The amendments commence on the day after the Bill receives Royal Assent. [Clause 2]
3.18 The amendments apply assessments for income years ending on or after 1 July 2021. This application of amendments ensures that entities can treat eligible payments as non-assessable non-exempt income in the income year in which the entity receives the payment.