Unpacking the tax implications of the cashflow boost for SMEs

Small- and medium-sized businesses across Australia are starting to lodge their March Business Activity Statements. And after that, the Tax Office will soon pay the government’s cashflow boost to those SMEs. 

A trading business lodging monthly wage figures to the Tax Office will be paid three times the March Pay-As-You-Go Tax Withheld as a cashflow boost.  This amount is capped at $50,000. So, a business withholding $20k in March PAYG withholding tax for its staff will be paid $50k by the ATO from 28 April. This will be then followed up by four payments of $12,500 in July, August, September and October. So, the total stimulus by the government to that employer will be $100k over the seven-month period.

If the SME does not reach the $50k threshold in March it still has the opportunity to be credited for the further PAYG withholding made in April, May and June at the rate of 1 times the tax paid. That payment will then be matched by a further payment of the same amount spread over July to October.

Importantly the cashflow boost payment is tax-free. So, the value of the payment to small- and medium-sized businesses is actually higher than it might otherwise seem. If the $100k cashflow boost was taxable a small company employer would only have $72,500 of after-tax profit to invest in the business. That company would incur $27,500 in tax if the boost was taxable. So, the $100k boost tax-free is effectively worth $137,931 of profit.  A small company generating $137,931 of taxable profit will incur $37,931 in tax with $100k left over to invest in the business.

However, the question remains – is the cash boost always tax-free?  And the answer is that it depends.  The cashflow boost, when taken personally out of the business, can become taxable.

Many business operators will use the cashflow boost to fund operations.  However, some businesses are unaffected by COVID.  And some businesses are actually experiencing higher demand. Those businesses might want to access the cashflow boost money outside of the business – either now or later on. 

If the government cashflow boost is withdrawn from a company the payment will ultimately come out as an unfranked dividend. So, the $100k dividend could potentially incur $47,000 in tax. This tax treatment is not universal. The same payment to business operating through a discretionary trust, a sole trader or a family partnership will generate a different tax outcome to a company structure. The cashflow boost when paid to a trading discretionary trust, family partnership or an individual will retain its’ tax-free nature when the stimulus payment is used personally.

The significantly different tax outcome for the cashflow boost for a company compared to a discretionary trust is confusing.  However, many tax incentives, like the R&D grant, are only available to companies because the tax benefit ultimately becomes unwound through an unfranked dividend.

The stimulus payment when withdrawn might suffer a lower tax liability if the company has excess franking credits. So, the highest rate of tax on the stimulus payment might fall from $47,000 to $26,896.

Even if a business owner defers taking the cashflow for many years: the ultimate tax treatment does not change. When the trading company eventually generates profits; the cashflow boost will flow out of the business as a dividend. 

If you are contemplating how to spend the cashflow boost you should be keenly aware of the tax treatment to the boost payment both in and out of the business. To this end, business owners using companies should make sure that they are accurately recording the level of franking credits in their tax return. 

Ross Forrester, Director, Westcourt Family Business Accountants

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