Covid-19 Payments
It has been difficult to determine the tax treatment of payments made to businesses and individuals in relation to COVID-19 over the last couple of years, especially because some payments are subject to specific rules that guarantee that they are tax-free.
Payments to Business Entities
When it comes to cash grants paid to businesses, the ATO has confirmed that these payments (both ongoing payments and lump sums) should be included in the business entity’s assessable income. TR 2006/3 also delivers thorough guidance on the government payments tax treatment to industry, which can help businesses continue, start, or stop operating.
Payments related to ongoing business activities are usually assessable as ordinary income or under the rules governing bounties and subsidies. Payments made in connection with starting or stopping a business may still have tax implications.
However, the tax consequences of specific payments related to COVID-19 may differ. This is due to a bill that was passed by Parliament late in 2020, allowing certain state government payments received in the 2021 income year to be treated as the recipient’s NANE income.
The amendments permit the Treasurer the authority to declare that defined grants are NANE income. Only businesses with an annual turnover of less than $50 million are eligible for this treatment.
In general terms, if certain conditions are met, the Treasurer can decide that payments are NANE income.
- The programme was first made public on or after September 13, 2020.
- The programme is in response to COVID-19’s economic consequences; and
- The payment is made in the fiscal year 2021 or 2022.
The Treasurer has issued a number of legislative instruments that allow certain grants paid by state and territory governments to be classified as recipients’ NANE income. The most recent instrument was issued on April 5, 2022, shortly after the government announced in the Federal Budget for the fiscal year 2022-23 that some additional grants would be tax-free.
The payments that can qualify as NANE income at the time of writing if the basic conditions outlined above are met are as follows:
ACT State Grants
- COVID-19 Business Support Grant
NSW State Grants
- 2022 Small Business Support Program
- Commercial Landlord Hardship Grant
- NSW Performing Arts Relaunch Package
- 2021 COVID-19 business Grant
- 2021 COVID-19 JobSaver Payment
- 2021 COVID-19 Micro-Business Grant
- NSW Accommodation Support Grant
- NSW Festival Relaunch Package
- NSW Performing Arts COVID Support Package
QLD State Grants
- 2021 COVID-19 Business Support Grants
SA State Grants
- COVID-19 Additional Business Support Grant
- COVID-19 Business Hardship Grant
- COVID-19 Business Support Grant – July 2021
- COVID-19 Tourism and Hospitality Support Grant
VIC State Grants
- Alpine Business Fund
- Alpine Resorts Support Program (Streams 1, 2, and 3)
- Business Continuity Fund
- Business Costs Assistance Program Round Two
- Business Costs Assistance Program Round Two – July Extension
- Business Support Fund 3
- Impacted Public Events Support Program
- Independent Cinema Support Program
- Licensed Hospitality Venue Fund
- Licensed Hospitality Venue Fund 2021
- Licensed Hospitality Venue Fund 2021 – July Extension
- Live Performance Support Program
- Melbourne City Recovery Fund – Small Business Reactivation Grants
- Outdoor Eating and Entertainment Package
- Small Business COVID Hardship Fund
- Sole Trader Support Fund
- Sustainable Event Business Program
Extracting Tax-Free Amounts from a Company
While cash flow boost amounts and other specific COVID-19 payments can be treated as NANE income by the entity receiving the funds, this does not mean that the funds can be paid out tax-free.
If these funds are paid out of the business, the tax treatment will be determined by the method of payment.
If the money is paid as a salary, bonus, wage, or director’s fee, it should be taxed in the recipient’s hands and trigger PAYGW and SG obligations for the business. If the amount is paid to someone who is engaged in the company’s business activities, and is not being paid for work on a capital project, the company should be able to deduct it.
If the money is distributed as a dividend, the shareholders will be taxed on it. While franking credits may be attached to the dividend, it is usually an unfranked dividend because the company has not paid any tax on the amount. In most cases, the company would not be able to deduct the dividend.
If the funds are lent to a related party who is a company shareholder or an associate of a shareholder, Division 7A issues must be addressed to avoid a deemed unfranked dividend for tax purposes. FBT issues must be considered if the loan is made to an employee (or their associate) who is not a shareholder or an associate of a shareholder.
If the organisation has earlier borrowed money from someone, it may be able to repay part or all of that debt. This is unlikely to cause any immediate tax issues.
Section 47 ITAA 1936 permits certain amounts to be paid out as capital returns to shareholders if the company is wound up, but only if the amounts are not classified as the company’s income (i.e., not assessable income and not ordinary income). In most cases, these amounts are taxed as dividends.
While cash flow boosts amounts and other COVID-19 grants may not be assessable income, if they are received in connection with the organisation’s business activities, they may be treated as ordinary income.
We brought this up with the ATO last year, and we were told that they were working on a public ruling to address the problem. However, we have recently been informed that the ATO will no longer be issuing a ruling on this matter. Informally, the ATO has suggested that these amounts are still income under ordinary concepts and would most likely be taxed as a dividend when paid out to shareholders upon the company’s dissolution, but taxpayers can seek their own private ruling if they want more clarity on this point.