Explained: Is your startup eligible for the COVID-19 wage subsidies?

Budget

StartupAus chief executive Alex McCauley.

The government has clarified some of the eligibility criteria for its $130 billion wage subsidy scheme, suggesting startups will indeed be able to claim the support.

On Monday, the federal government outlined its $130 billion JobKeeper scheme, aimed at alleviating salary costs for businesses affected by the COVID-19 outbreak and keeping people employed for the next six months.

The package is expansive. Employers will be able to claim payments of $1,500 per eligible employee, including full-time and part-time employees, and some casual workers. It also applies to sole traders and self-employed people, a sector that had previously been somewhat left behind.

You can read more about the scheme and the eligibility criteria here.

It’s a particularly attractive package for startups, many of which see their staff as their most important asset; good people are often hard to come by, and costly to recruit.

But inevitably, there was confusion, and for a while it looked like many startups wouldn’t fall under the eligibility criteria.

Now, we’ve straightened a few things out.

What was the issue?

The JobKeeper package provided something of a lifeline for most businesses, but left questions unanswered for startups.

The subsidy of $1,500 per eligible employee is available to businesses that have seen a decrease in revenue of 30% or more.

But the sticking point for startups was the time period relating to that.

The statement issued by the Prime Minister said the subsidy is for businesses that have seen a reduction of revenue since March 1, 2020.

Information from the Treasury, however, said eligibility hinges on a revenue reduction of more than 30% “relative to a comparable period a year ago”.

That is, the one-month or three-month period that would cover March last year, depending on the business’ activity reporting period.

The information was contradictory. And if the Treasury’s version was correct (which it has transpired to be), it posed a threat to startups that are less than 12 months old, and therefore don’t have revenue figures for this time last year.

Even for those that are a bit older, a year is a long time for startups. A business could have seen revenues tank in the past month, but still be turning over more than they were a year ago.

Of course, their current employee numbers will be relevant to where the business is now, not where it was last year.

Speaking to SmartCompany, Alex McCauley, chief executive of StartupAus, says comparing revenues to a period 12 months ago is a sensible way to do it, for most businesses.

“I think they’re trying to walk a line,” he says.

“The standard way of operating for the ATO on something like this is to do a prior-year comparable period, because lots of businesses are seasonal, and the only way to compare March this year is to compare it with March last year.

“For lots of businesses, December can’t be compared with March. There will be a cyclical revenue cycle for those businesses.”

But, startups are not most businesses, and for many, comparing revenue on an annual basis doesn’t make sense.

“Not just startups, but lots of growing businesses across the economy would have been left out if that had remained the only way of assessing for this scheme,” says McCauley.

What’s changed?

Following confused outcries from the startup sector, and some rather effective haranguing from McCauley himself, the Treasury has since issued an updated JobKeeper fact sheet.

Now, it specifies that to establish a 30% fall in turnover “most businesses” will have to show revenue has fallen relative to a year earlier.

But, there will be exceptions.

“Where a business was not in operation a year earlier, or where their turnover a year earlier was not representative of their usual or average turnover, (e.g. because there was a large interim acquisition, they were newly established or their turnover is typically highly variable) the Tax Commissioner will have discretion to consider additional information that the business can provide to establish that they have been adversely affected by the impacts of the coronavirus,” the Treasury says.

In layman’s terms, this means if your business wasn’t established 12 months ago, or if you’ve been through a high-growth phase that’s significantly slowed, you don’t have to be judged by a year-on-year decline.

You will still have to prove the impact the coronavirus has had on your business, although we don’t know exactly how.

The tax commissioner will also be able to set alternative eligibility criteria in specific circumstances, the Treasury says.

And if a business estimates in good faith that it will have a decline of 30% or more, but actually the decline is a little less than 30%, “there will be some tolerance”.

What does it mean for high-growth startups?

This update means startups are much more likely to be eligible for the scheme. It offers flexibility for businesses to choose what their best revenue comparison period should be.

“If March to March isn’t a good comparison for your business because you’ve got highly variable revenue, or because you’re a relatively newly-formed company, then you can pick another comparison period,” McCauley explains.

And, as is stands, it appears that high-growth revenue counts as ‘highly variable’ revenue.

“On the plain reading of the words, ‘highly variable’ isn’t just up and down. Up and up is also highly variable,” McCauley says.

“What they mean is not a flat line across a page when you graph it over a year,” he adds.

“I think it’s pretty clear that if your revenue is 40% different from month-to-month, that’s highly variable, whether that’s 40% more each month or something else.”

The clarification also throws a bone to newly-formed startups, whether they’re less than 12 months old or not, that are not seeing the revenue they expected.

“In the context of the broader economy, ‘recently formed’ might be anything under 10 years, but there’s no clear guidance in the advice,” McCauley explains.

“A lot of companies that think of themselves as startups will probably serve to satisfy that test, even on the ‘recently formed’ criteria.”

Should you be worried about the ‘commissioner’s discretion’?

The update allows the tax commissioner to consider alternative tests to establish negative effects of COVID-19 on businesses, at his discretion.

On the one hand, looking at startups on a case-by-case basis doesn’t seem like a practical way of doing things. Like everyone else, many of them need financial support as soon as possible.

But, at the same time, this offers a safety net. If you don’t meet the specific criteria, but you do feel you’ve been affected, it’s reassurance that there’s wiggle-room. You probably won’t be left out in the cold.

“When it comes down to it, eligibility for this measure is self-assessed,” McCauley notes.

“I think the commissioner’s discretion will come into it further down the track when they’re reviewing all these arrangements and going over the books,” he says.

Discretionary allowances were likely added to cover cases where a business has clearly been affected, but might still not meet the specific criteria.

Rather than becoming something time-consuming, it’s a safety net for those that might otherwise have slipped through the cracks, McCauley suggests.

“Clearly, that was there to make companies comfortable that if they can show with evidence that COVID has negatively impacted their business … then they will be eligible for this payment,” he says.

“I suspect that will be a mechanism used by the ATO to basically bring common sense to a test that can’t, by definition, always apply in every circumstance.”

What should startups do?

If you’re a startup and you’ve stood people down, or laid people off, because you’ve been affected by the COVID-19 outbreak, but you’re still not sure if you qualify for the JobKeeper payments, McCauley’s advice is to apply regardless.

“This isn’t a payment to support business, it’s a payment to support people,” he says.

“If your business has people who, because of COVID have been laid off or stood down, you should be looking at every option to help those people manage through the crisis,” he advises.

“That’s what the government wants too.”

It’s worth noting here that currently this applies to employees, not contractors. But, as sole-traders, contractors will be able to apply for the subsidy themselves.

All in all, while it’s taken a couple of days to iron out the details, McCauley says broadly, this is good news for startups.

“It was already a genuinely good and helpful measure more broadly,” he says.

“The risk was that, because of the way the thing was set up, companies in this space would be left out.

“I think we’ve been heard on that and now they’re pretty clearly included,” he adds.

“That’s brilliant, and I think it will be a great relief for lots of founders and lots of employees in startups and growth companies.”

NOW READ: Startup sector calls on government for “urgent and critical” support during COVID-19 crisis

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