Business measures in this year’s Federal Budget focused on jobs recovery, tax breaks and the expansion of the instant asset write-off.
Small Business Group’s Agenda for Reform
The importance of small and medium enterprises (SMEs) to a healthy Australian economy cannot be overstated. They make up 99% of the economy and employ two in every three Australian workers. As they grow, so too does the economy, employment and access to new and diverse marketplaces. Their survival, success and continued growth is critical to every one of us.
With almost every industry affected by COVID-19, many of our SMEs have been tested as never before. The virus and subsequent containment measures have driven significant changes in the attitudes and behaviours of customers, employees and businesses alike. While some have continued to operate as normal (and even thrive), others have been heavily impacted with pressure on profitability and cashflow and temporary or permanent business closures.
NAB recently surveyed over 750 businesses across the country to hear their key concerns & wish lists prior to the Budget (Special 2020 Federal Budget SME Insight Series). While all industries have clearly been hit by the pandemic, the toll has clearly been greatest on the hospitality sector, along with parts of transport and retail. COVID-19 has hit Victoria particularly hard, but all states and territories have been impacted.
Business confidence has been improving in recent months but is still negative. Not surprisingly, business sees less disruption from COVID-19 as key to restoring confidence, along with improvements in consumer spending and demand, government policy and regulation changes, and reduced business compliance costs.
Around 3 in 10 Australian businesses expect to have to restructure their service or product offerings to meet changing needs in the next 12 months. Almost 1 in 10 businesses believe they will have to close permanently. Cost reduction will also be key to moving forward, along with cutting staff and wages.
It is against this background that various business organisations set out their wish lists of potential reforms and changes as part of their 2020 pre-budget submissions. This year, the list of recommendations included some usual suspects, but also a range of innovative ideas to address COVID-19 pressures. For many SMEs this will be the most important Federal Budget in their lifetime.
Revenue-contingent loans: SMEs have benefitted from support measures through the crisis such as loan and rent deferrals. However, there has been limited uptake of the Government’s current unsecured loan scheme to SMEs. The Small Business Ombudsman and COSBOA called for a revenue-contingent loan scheme, wherein payments are contingent upon COVID-19 revenue recovery (similar to the HECS loan system for university students), providing businesses with flexibility to get back on track before repayments are due. Payment deferrals on loans has also been raised. In short, small businesses want greater loan support to help with the rebuild phase.
Industrial relations: COSBOA also called for a differentiated industrial relations system for smaller employers, similar to Small Business Ombudsman Kate Carnell’s suggested small business award, arguing that the system needed to be simplified to encourage employment. COSBOA wanted the Government to make it easier for small business to employ people having described the current measures as complex and cumbersome, putting SMEs at a clear disadvantage. More specifically, there were calls for specification of a single all-hours rate, greater flexibility in employment, stand-down provisions and a change to redundancy and unfair dismissal provisions.
Investment allowances: Small business groups have also called for an investment allowance to bolster investment spending. Investment allowances, put simply, are asset write-off schemes that allow companies to bring forward tax deductions on assets at a faster than traditional depreciation schedule. The Ombudsmen also proposed that the instant asset write-off threshold of $150,000 become a permanent fixture. While the Tax Institute believed small businesses would benefit from an investment allowance, they argued a corporate tax cut would ultimately be more beneficial to businesses as it would not only be of benefit for capital intensive industries, but would also encourage investment and jobs across more of the economy.
Deferral of superannuation guarantee increases & taxes: The Ombudsmen also proposed a two-year deferral on legislated superannuation guarantee increases, while also cutting the 15% tax on compulsory employer superannuation guarantee contributions to 7.5% during that time. In addition, there were calls for the abolition of the fringe benefits tax (FBT) for at least two years.
Viability subsidies & professional advice: CPA Australia, Chartered Accountants Australia and New Zealand (CAANZ), Institute of Public Accountants (IPA), Institute of Certified Bookkeepers (ICB), Council of Small Business Australia (COSBOA) and the Ombudsman called for a government funded subsidy to ensure small businesses could access professional advice on their viability. Under the jointly proposed program, small businesses with up to $10 million in annual turnover would be eligible to obtain a subsidy valued up to $5,000 to access a tailored 15-month plan from an accredited professional on how and whether to turn around their business or exit. Small Business Ombudsman Kate Carnell noted that while many Australian small businesses were no longer eligible for JobKeeper, they may still be experiencing a significant reduction in turnover and that up to 500,000 Australian small businesses could take up the viability subsidy costing the budget approximately $1.5 billion. The Government had already announced plans to overhaul insolvency laws to give small businesses a chance to trade through the coming months.
Mental health initiatives: A number of small business bodies called on the federal government to bolster mental health measures, amid concern the pandemic had created unprecedented personal and financial stress for SMEs across the country. Pre-pandemic, mental health was already a critical issue. While acknowledging there were excellent providers of mental health services, industry groups believed a centralised support portal was urgently needed.
Cuts to the SME tax rate: The SME tax rate is scheduled to decline from the current 27.5% to 25% in 2022-23. Businesses have called for this to be brought forward, similar to the situation with personal tax cuts. Such a measure it was argued would enhance SME after-tax income, and incentivise them to spend and invest more.
Alcohol excise reductions: Independent brewers and distillers have been severely impacted with the problems in the hospitality sector. The Independent Brewers Association have been lobbying the federal government throughout the COVID-19 pandemic to ease up on alcohol excises for beer and spirit manufacturers. Currently, distilleries pay upwards of $85 in excise per litre of pure alcohol, while full-strength beer is taxed at $50.70 a litre. Brewers want a similar arrangement to the wine industry, which pays 29% of wholesale prices under the wine equalisation tax.
What did the Budget deliver?
Temporary full expensing: From 6 October 2020 to 30 June 2022, businesses with annual turnover up to $5 billion will be able to write off the full cost of eligible assets of any value in the year they are installed, provided they are used by 30 June 2022. The will also extend to the cost of improvements to existing eligible depreciable assets made in this period. SMEs with a turnover between $50-500 million will also be able to instantly deduct the full cost of second-hand assets that cost less than $150 million. These assets however must be purchased by 31 December 2020 and be used or installed by 30 June 2021. For small businesses (aggregated turnover less than $10 million) they can deduct the balance of their simplified depreciation pool at the end of the income year, while full expensing applies.
Extending the instant asset write-off: Government is extending the instant asset write off that had already been expanded as part of its COVID-19 response. Businesses with turnover of up to $500 million can instantly write-off multiple assets worth up to $150,000 each.
Loss carry back: In an effort to help boost business cash flows, government will allow businesses with turnover of up to $5 billion offset losses incurred up to 2021-22 against previous profits made in or after 2018 19. Eligible companies may elect to receive a tax refund when they lodge their 2020 21 and 2021 22 tax returns.
R&D incentives: The government is providing an additional $2 billion through the R&D Tax Incentive. Under the new package, the proposed $4 million cap on annual cash refunds will not proceed, instead small companies (with aggregated annual turnover of less than $20 million) will see the refundable R&D tax offset set at 18.5% above the claimant’s company tax rate.
Infrastructure spending: The federal government will “draw on local businesses to stimulate local economies” as part of its $7.5 billion new investment towards transport infrastructure projects.
National Digitisation Plan: Overall, the Government is investing a further $419 million to create a national directory. This means small businesses will be able to register for an ABN, ACN or licence in just one place. It will also invest $256 million in the expansion of its Digital Identity system over the next two years. Around $52 million is earmarked for cyber-security and digital capability program that will help small business.
JobMaker Hiring Credit (wage subsidy scheme): Provide businesses with incentive to hire young people. Businesses who hire eligible young people will receive $200 a week if they hire a person aged 16 to 29 years, or $100 a week if they hire an eligible young person aged 30 to 35.
Small business tax concessions: Tax concessions currently available to small business with annual turnover up to $10 million have been extended to businesses with turnover up to $50 million. These firms will have access to up to 10 small business tax concessions, including deductions of certain start-up and prepaid expenses, exemptions from the 47% FBT tax on car parking and multiple work-related portable electronic devices, such as phones or laptops
Mental health aid for small business owners: Government will provide $6.5 million in 2020-21 to support mental health and wellbeing of small businesses impacted by COVID-19. This includes a $4.3 million budget commitment to expand current mental health program for small business owners which will provide small business owners with access to free one-on-one telehealth sessions with specially trained mental health coaches.
Bringing forward personal income tax cuts: Tax cuts scheduled to start in July 2022, are being brought forward and backdated to July 2020. This will deliver an immediate boost to household budgets and expected to result in future spending increases on goods and services across all businesses, including SMEs.
Modern Manufacturing Strategy: Investment of $1.5 billion over five years to improve competitiveness, scale and resilience in Australian manufacturing. The strategy will focus on six areas: resources technology and critical minerals processing, food and beverages; medical products, recycling and clean energy, defence and space. The strategy includes: $1.3 billion to establish the Modern Manufacturing Initiative; $107.2 million for supply chain vulnerabilities; $52.8 million for manufacturing modernisation; $30 million to improve competitiveness; and $20 million to Industry Growth Centres.
Insolvency reforms: Commitment made to changes bankruptcy and insolvency laws that put the small business owner in control of insolvency actions – effectively giving them a lifeline to trade their way out of insolvency. Where that is not possible, a simplified liquidation process will ensure greater returns to creditors and employees.
Changes to responsible lending laws: Reforms will make the credit application process easier for consumers and allow eligible borrowers to obtain credit faster, improve competition by making it easier for consumers to switch lenders and enhance access to credit for small business. This is expected to improve small business access to affordable bank loans to fund business recovery and growth activity in a post COVID-19 environment.
By NAM Economics