October is here and it’s shaping up to be a busy month. Many of us are taking advantage of the October long weekend and school holidays for a much-needed staycation in our home states, while Melbourne has announced a further easing of restrictions. Next week, all eyes will be on Tuesday’s Federal Budget.
The scene is set for one of the most important Federal Budgets in living memory, after COVID-19 delayed the usual May delivery to October 6. In September it was confirmed that Australia is in recession. The economy contracted 7% in the June quarter following the 0.3% fall in the March quarter, taking the annual decline to 6.3%, the biggest since 1945. The pandemic has also hit the federal budget bottom line, with a budget deficit of $85.3 billion in the 2019/20 financial year. The biggest government stimulus program since WWII took net government debt to $491 billion, or 24.8% of GDP, with more spending on the cards.
Against this backdrop, there is mounting speculation that the Reserve Bank could cut the cash rate as early as next week, from its current record low of 0.25%, to help stimulate the economy. A rise in the Aussie dollar could tip the balance. The dollar ended September around US71.5c, down 2c over the month, after dipping as low as US70c.
On a positive note, the ANZ-Roy Morgan consumer confidence index rose for four weeks straight in September, to a 14-week high of 95 points (although still 19.7 points lower than a year ago). The NAB business confidence index also improved, from -14.2 points to -8.0 points in August. Unemployment is also headed in the right direction, down from a 22-year high of 7.5% to 6.8% in August.
Insolvencies go undetected, for now
As the Government begins to unwind special measures put in place to help businesses through the COVID-19 pandemic, business owners face some potential new challenges.
Your business could be financially exposed to ‘zombie’ companies that are relying on loan repayment deferrals, relaxed insolvency rules and extended payment times for survival.
Recent data from CreditorWatch shows the number of struggling businesses going into administration is 59 per cent lower than the average across 2019. Also, of the 105,000 loan deferrals granted to small and medium businesses on their bank loan, only 22 per cent have started making full repayments.
Normal penalties and obligations suspended
Companies in financial distress have been thrown a further lifeline by the government’s decision to extend its current moratorium on insolvency actions until 31 December.
Under the moratorium, the timeframe before creditors can commence bankruptcy proceedings increased from 21 days to six months and the debt threshold for a bankruptcy notice rose to $20,000.
Directors of insolvent companies are also enjoying temporary relief from their normal personal liability to pay compensation for unpaid debts and from civil penalties of up to $200,000 under the Corporations Act.
Although these safe harbour rules have been good for businesses battling the COVID-19 challenge, the extension means some insolvent companies may continue to trade and threaten the viability of otherwise healthy businesses.
Avoid infection by creditors
Even if your company is not struggling, a zombie creditor can be a major threat to its financial stability.
The latest statistics show businesses are now taking almost three times as long to pay their bills, with payment times blowing out to an average of 43 days – 291 per cent higher than in August 2019.
Cashflow is the key to financial survival, so prolonged payment times could put your otherwise healthy business under significant financial strain. You need to safeguard your business by regularly performing detailed financial health checks.
To ensure your business’s survival, closely monitor your credit situation. Regularly check your debt position, invoice promptly and follow up on any old debts.
It could also be time to review your credit policy and think about whether your credit conditions remain appropriate. Failing businesses often continue racking up debt, putting their suppliers at risk of collapse from unrecoverable debts when they are eventually wound up.
From 1 January 2020, the government plans to introduce a new streamlined insolvency framework featuring a ‘debtor in possession’ model, which will allow small businesses to keep trading under the control of their owners while a debt restructuring plan is developed.
When and if these plans are legislated, creditors will need to closely monitor their debtors to ensure they are forewarned of any potential problems.
Talk to your lenders
If you are experiencing financial difficulties, now is the time to get on the front foot.
The major banks have already begun contacting business customers who took advantage of the repayment deferral to discuss whether they will be granted an extension.
If your business has not been repaying its loan, you need a plan. This could include restructuring or extending the length of your loan, converting it to interest-only payments for a period, or consolidating your debt.
We can help you develop a strategy to work through your situation or help create a restructuring plan. The key is to talk to us early.
Facing up to insolvency
Even with a more flexible insolvency framework, it will be essential to regularly monitor your solvency, so you don’t accidentally trade while insolvent.
If you find yourself at risk of insolvency, it is vital to obtain professional advice quickly, as the penalties and personal liability could cost you both your business and your private assets.
While the proposed insolvency framework will give struggling small business owners a little more breathing room, it only provides a relatively short 20 business day period for a small business restructuring practitioner to develop a restructuring plan.
Creditors then have 15 business days to vote on the plan.
Failing to act straight away could harm your business, your creditors and your reputation, so talk to us early about your options.
Call us today if you would like help safeguarding your business and your personal assets.
Opportunities amidst the COVID-19 disruption
COVID-19 is resulting in significant disruption to well-established business paradigms, impacting businesses, sectors and stocks across the board.
However as Albert Einstein once said “in the middle of difficulty lies opportunity”. That certainly rings true in 2020 as analysists predict significant changes in the types of businesses that will prosper through the crisis and beyond, with certain sectors and types of businesses dominating others.
At a time where our movement has been constrained in an unprecedented way, sectors relating to the movement of goods, data and people are being heavily impacted by the crisis but are also well positioned to capitalise on the changes brought on by the pandemic.
Supply chain and logistics embrace technology
The pandemic has significantly impacted many bricks and mortar businesses, yet online shopping has boomed. Australia’s e-commerce industry had a growth of over 80% in the two months after the COVID-19 pandemic was declared by the World Health Organisation.i
Yet this boost to e-commerce has brought its own challenges. Back in April 2020, Australia Post was delivering an estimated 1.8 million parcels each day, which resulted in lengthy delays to delivery times.ii Meeting the demand for timely deliveries, avoiding supply chain disruption and bottle necks has called for innovation in logistics.
While demand may not remain at the heightened COVID-19 levels, experts are predicting long-term shifts, such as micro supply chains and decentralising of manufacturing capacity. Also critical to the creation of smart and nimble supply chains and effective logistics is the use of technology to drive efficiencies and manage significant fluctuations in demand.
Data movement and security a focus for business
It’s clear that where people’s physical mobility is limited, fast and secure movement of data is critical. 2020 has seen innovation being applied to find new ways to secure, verify and exchange business-critical information.
With many workers based at home, this shift to a hybrid workplace means a change in workflows as well as the immediate need for security measures to protect networks, as staff are no longer using their corporate networks. The increase of Zoom calls, for example, has meant becoming more aware and prepared for the potential of cyber hacks.iii
Businesses need to ensure their systems are robust and well-tested as we move to an increased reliance on technology. Expect a stronger emphasis on collaboration tools, workflow management and data protection.
Challenges and opportunities for travel
Suffice to say the travel industry has been one of the hardest hit during the COVID-19 pandemic. There’s no doubt travel will surge once restrictions loosen, although this industry is one that will see profound change as it adapts to the post-COVID landscape.
Airlines are struggling to navigate uncharted territory. The ones that survive this crisis will have to be strategically creative to find a way to prioritise public health and sustainability, all the while maintaining profitability.
With more rigorous sanitation requirements, the quick turnaround times budget airlines have relied on may not be possible, meaning fewer flights and at a higher cost – this will change the budget carrier landscape substantially and make travel less accessible for some.
Longer term trends emerging from the crisis will include greater automation driven by public health and budget constraints, and changing consumer preferences such as holidaying closer to home.
Public transport will also be impacted, as the need for distancing will restrict the number of passengers allowed to travel. Less congestion on our roads may be the silver lining to more flexible working arrangements, with some people continuing to work from home. This ability to work from anywhere will make it possible for an increasing number of Australians to relocate to regional areas.iv
The term ‘new normal’ has been expressed many times already and for good reason – lives have changed permanently. Only time will tell what life will look like post-pandemic, but there will be more changes as society emerges from the pandemic that will impact how we live, and these will drive innovation in the way businesses and industries operate.
Federal Budget 2020-21: Analysis from a tax perspective
Tax and business investment took centre stage in the Federal Budget this year, as the Morrison Government seeks to reboot growth and repair the damage wrought by COVID-19 on Australia’s economy and employment.
Treasurer Josh Frydenberg emphasised the Coalition’s focus on tax by bringing forward the start date for the next round of tax changes. Backdated to 1 July 2020, the measures will provide immediate tax relief for individuals and small businesses. They also represent a significant step in reshaping Australia’s current progressive tax system.
In addition, the reintroduction of measures allowing the carry-back of tax losses and a significant expansion of existing asset write-offs should help support medium and small businesses who have been facing some of the toughest trading conditions in living memory.
Early start to personal tax cuts
At the centre of the tax changes announced by the Treasurer is a new 1 July 2020 start date for the next stage of the government’s tax plan.
Under the Stage 2 changes:
- The existing low-income tax offset increases from $445 to $700,
- The upper limit of the 19 per cent tax bracket increases from $37,000 to $45,000, and
- The upper limit of the 32.5 per cent bracket increases from $90,000 to $120,000.
There is also a one-year extension of the low and middle-income tax offset (LMITO) during 2020-21 worth up to $1,080 for individuals and $2,160 for dual income couples.
Companies gain full asset write-off
For businesses, a major announcement was the introduction of a temporary tax incentive allowing the full cost of eligible depreciable assets to be written off in the year they are first used or installed ready for use. This will also apply to the cost of improvements.
From Budget night, companies with a turnover of up to $5 billion – over 99 per cent of businesses – can fully claim eligible depreciable assets as an expense until 30 June 2022. This will significantly reduce the cost of eligible assets by providing a cash flow benefit.
Temporary carry-back of tax losses
Companies with turnovers of up to $5 billion will also be able to generate a tax refund by offsetting tax losses against previous profits on which tax has been paid. Losses incurred in 2019-20, 2020-21 and 2021-22 can be carried back against profits made in or after 2018-19.
Under the new measure, eligible companies can elect to receive a tax refund when they lodge their 2020-21 and 2021-22 returns. This will help previously profitable companies who are making losses due to COVID-19 access a cash refund to keep their business running, or to take advantage of the new full write-off provision.
JobMaker hiring credit for young employees
Businesses will now be able to access a new JobMaker Hiring Credit if they hire additional employees working at least 20 hours a week.
From 7 October 2020, eligible employers will be able to claim $200 a week for each new employee they hire aged between 16 and 29, and $100 a week for additional hires aged 30 to 35 years old. New employees must have been unemployed or in education prior to hiring.
New jobs created until 6 October 2021 will attract the hiring credit for up to 12 months, with the credit claimed quarterly in arrears from the ATO.
More small business tax concessions
The Treasurer also made several announcements prior to the Budget providing valuable tax concessions for small businesses. From 1 July 2020, the annual turnover test for a range of business tax concessions will increase from $10 million to $50 million. This includes immediate deductions for eligible start-up expenses and prepaid expenditure.
In addition, from 1 April 2021, eligible businesses will be exempt from the 47% FBT on car parking and work-related portable devices such as phones and laptops provided to employees.
From 1 July 2021, eligible business will be able to access simplified trading stock rules, remit their PAYG instalments based on GDP adjusted notional tax, settle excise duty monthly and enjoy a two-year (instead of four-year) amendment period for income tax assessments.
If you would like to discuss how to make the most of these and other Budget announcements, please get in touch.
This Newsletter provides general information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. We have representatives that are authorised to provide personal financial advice. Please see our website www.evogroup.net.au or call 02 9098 5055 for more information on our available services.