The AAT ruled that a taxpayer company involved in property development was entitled to the increased cash flow (CFB) claimed for one quarter but not another, after it was unable to discharge its burden of proving that the schedule, quantum and circular manner in which wages were paid during the last quarter was not a scheme whose primary purpose was to obtain or increase the amount of the CFB.
The taxpayer was a company active in the real estate development sector. Mr. Cahill was the taxpayer’s sole director. He and his wife were equal shareholders. The taxpayer had not paid a salary to Mr. or Mrs. Cahill (or any other employee) since 2014. He had paid dividends in the 2015 to 2017 income years, but not in 2018 or 2019.
After the announcement of the CFB measure (one of the federal government’s COVID-19/Coronavirus relief measures) on March 12, 2020, the taxpayer disclosed salaries paid to Mr. and Mrs. Cahill totaling $130,000 for the March 2020 quarter (paid in installments, beginning January 20, 2020) and $54,000 for the June 2020 quarter ($27,000 each paid June 10, 2020) and deducted and paid PAYGW. Subsequently, the model of the company paying no wages resumed.
The commissioner was of the opinion that no wages had been paid by the taxpayer during these tax periods or, alternatively, that the taxpayer was deprived of the right to the CFB because he had participated in a scheme for the sole or primary purpose of obtaining or increasing CFB pursuant to section 5(1)(g) of the Cash Flow Stimulation for Employers (Coronavirus Economic Response Package) Act 2020. objection.
At issue was whether wages in the amounts disclosed were paid to Mr. and Mrs. Cahill as employees and whether the taxpayer (or Mr. Cahill) entered into or carried out a scheme for the sole or primary purpose of entitle him to a CFB or to increase his entitlement. The question of whether Mr. and Mrs. Cahill were employees of the taxpayer was implicit in the first question, which the commissioner disputed.
The taxpayer’s evidence was that due to the long-term nature of his development projects, typically spanning 3 years or more, he had “erratic and erratic cash flow”. Thus, she did not pay regular amounts to Mr. and Mrs. Cahill even though they worked an average of at least 30 hours a week each in the business. Instead, as sole administrator, Mr Cahill said he determines the amounts to be paid out as salaries or dividends from time to time based on available funds and the couple’s financial needs, the dividends being preferred if the company was able to pay franked dividends. .
The commissioner argued that the taxpayer was not entitled to the CFB, noting that he had not put in evidence his financial statements to verify the periods when the company had funds available to pay wages or franked dividends , nor other contemporaneous employee records, including salary expense account, to verify the record of payments. The commissioner also argued that a circular flow of funds between Mr. and Mrs. Cahill, the taxpayer and other companies associated with them on June 10, 2020 constituted a “round robin”.
The AAT found that the taxpayer was entitled to CFB for the March 2020 quarter. It said Mr. Cahill’s evidence that the company had not resolved to pay the disputed amounts as dividends was consistent. with its evidence that the company had no retained earnings that would have allowed the payment of dividends in fiscal year 2020 and should be accepted. After weighing all the evidence (including dates of payslips, recording of payments in the company’s payroll expense account, and consistent treatment by Mr. and Mrs. Cahill in their statements) , the AAT said it had to be accepted that the payments were wages, although this is a borderline case.
Given this conclusion, the AAT then considered that it had to be accepted that the taxpayer had not entered into a scheme whose sole or main objective was to obtain or increase a right to the CFB. Salary payments began and the bulk of payments, both in number and quantity, were made long before the announcement of the CFB eligibility requirements. Therefore, paragraph 5(1)(g) did not apply to the March 2020 quarter.
However, the circumstances surrounding the June 2020 quarter payments were more opaque, particularly with respect to the timing and quantum of payments and the cash flow that put the taxpayer in a position to make them. No financial information was presented to support the decision to make the payments, except that “funds became available unexpectedly”. The AAT noted that while the source of funds for a payment may be unrelated to the nature of the payment, when that payment involves circular transactions, those circumstances may be relevant in determining whether the payment was part of a scheme. aimed at obtaining or increasing the CFB. On the evidence, the taxpayer had failed to meet the burden of proving that the payments were not part of a scheme whose primary purpose was to obtain or increase an entitlement to BFC . Article 5(1)(g) therefore applied with respect to the June 2020 quarter.
Source: Twin Rivers Developments Pty Ltd v FC of T 2022 ATC ¶10-628;  AATA 887, April 28, 2022.