Some small business owners are wondering if it is worth going back on the books as an employee to take advantage of the latest tranche of government stimulus being the PAYG Concession of up to $100,000 for eligible businesses based on the tax withheld on employee wages, called the Boosting Cash Flow for Employers measure.
Keep in mind this is only in circumstances where the individual genuinely works in the business, needs income from that business and could legitimately be paid as an employee but has not been, usually to improve cash flow.
This genuine work would be unlikely be considered engaging in a tax scheme which is a real risk with some of the more dubious schemes out there!
Consider the following potential scenario and associated cash flow pattern focusing only on the current financial year:
- The business owner is put on a salary $120,000 + super, paid monthly
- Tax is then withheld of $3,449 per month on the $10,000 gross wage assuming no HECS debt and No Tax-Free Threshold
- Assuming a monthly BAS the business would then withhold and pay $13,796 in PAYG over the March to June BAS/IAS
- The business would be entitled to a rebate of 100% of the tax withheld for April to June and 300% for March (as they are withholding monthly) being $20,694 paid as the March to June BAS are lodged
- Then a secondary payment of another $20,694 being split into four payment via their June to September 2020 BAS providing they continue to be an active entity.
- So the total payment to the business is $41,388
The additional costs for the business will be:
- Super of $950 per month (9.5% of $10,000 gross) * 4 months = $3,800
- Return to Work SA (or equivalent interstate) of between 0.5% and 5% depending on the industry (may be higher depending on unique business history and industry) will mean between $219 to $2,190 of additional cost
- Assuming the business is not liable for payroll tax (watch out for grouping provisions and contractors pushing businesses over the threshold) then it won’t be liable for another $2,190 in payroll tax on the owner’s wage
So, what is the likely outcome?
- Taking a middle range of Return to Work SA and no Payroll Tax the net cash flow benefit to the business will be $36,508 over four months.
- This ignores the cash flow costs of paying tax on the owner’s wages in the March to June 2020 BAS which in some cases could have been delayed till after May 2021 after the tax return was lodged
- This also doesn’t compare against using pre-existing franking credits for dividend payments as an alternative
- Keep in mind the payments will only be available to active eligible employers established prior to 12th March 2020
- Also keep in mind this example and the idea generally assumes the business is profitable! If not, then you could create a loss in the business and a profit for the owner which would be an incredibly unhelpful result
In short, it’s important to really crunch the numbers and get the maths right, incorporating all of the businesses and business owners’ personal circumstances before making changes!
If you need assistance understanding this, or any of the other government measures, then reach out for a free consult.