ATO urged to clarify tax deductibility of returned JobKeeper payments

JobKeeper amounts received by a company are assessable income and considered to be “ordinary income” by the ATO. 

However, Tax & Super Australia (TSA) noted that the JobKeeper rules and the tax law do not specify if JobKeeper amounts voluntarily repaid to the ATO are tax-deductible.

The question comes after Toyota returned over $18 million worth of JobKeeper payments to the ATO, followed by Super Retail Group giving $1.7 million of JobKeeper back to the federal government, after both reported financial results better than they were expecting in 2020.

TSA senior tax counsel John Jeffreys said that under the provision that businesses obtain most of their tax deductions (Section 8-1 of the Income Tax Assessment Act 1997), a business can obtain a deduction for: 

1. Amounts incurred in gaining or producing assessable income (“the first limb”); or
2. Amounts necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (“the second limb”).

“The first limb will likely not apply because a voluntary payment/donation to the ATO will not produce any assessable income for the business,” Mr Jeffreys said.

“The issue is whether the ATO considers that the second limb applies. The debate will concern whether the JobKeeper amounts refunded to the ATO are ‘necessarily incurred’ and, if so, whether the amounts are ‘in carrying on a business’.

“Will the ATO adopt the view that voluntary payments to the ATO are not ‘necessarily incurred’ and thereby be not tax-deductible?”

Further, Mr Jeffreys said that if the JobKeeper funds held by the company are in excess of needs (which it is assumed they are), the payment by the company to the ATO of the excess JobKeeper amounts may be a “loss or outgoing of capital”.

If that is the case, he said one of the “negative limbs” of the general deduction provision will deny the tax deduction.

Alternatively, Mr Jeffreys suggested the ATO could adopt an approach whereby the repayments are a reduction of an amount that was previously assessable to the company, but added there are technical difficulties with that approach.

“It would be grossly unfair for companies that have been assessed on JobKeeper receipts to not be allowed a tax deduction for voluntarily refunding these amounts to the ATO,” he said.

“The ATO or the Treasurer should urgently clarify that such amounts are fully tax-deductible — this would be in keeping with the good spirit in which the repayments have been made.”