By Associate Professor Brett Freudenberg
Law Futures Centre Risk & Innovation Program Leader
The Future of Small and Medium Enterprises (SMEs) in Australia Symposium was hosted by Griffith University on 10 November 2017 and was attended by eighty attendees from industry, government bodies and academician. The Future of Growth, Future of Disruption, Future of Tax and Future of Advice were the four key themes of discussion.
Future of Growth
The first panel consider what the future of growth could look like for SMEs, this consider export opportunities, entrepreneurial incentives, as well as how the Australian Tax Office (ATO) is undertaking a program to assist small business advisors to better equip their clients to manage their cash flow.
The first speaker was Anne Nalder, founder and CEO of The Small Business Association of Australia, who explored the Export Opportunities of the Future. There is opposition to globalisation as some believe they have received few if any benefits from Free Trade Agreements as evidenced by the recent USA election and Brexit existing Europe. Trade is essential to our modern economy as it gives us greater access to a wider range of goods and services, it stimulates competition, and it allows us to focus on areas of competitive advantage. Whilst the future for trade is exciting and rather than slowing down, it will grow with the services and technology sectors, the challenges are enormous for Australian small business owners. If Australia is indeed to remain the Lucky Country, it needs to access a first class and reliable internet service, access to finance, have a reliable and economical energy supply, be supported by a more aggressive international marketing and branding campaign, and, face less constraints through rigid and often draconian compliance rules regulations.
Senior tax manager at BDO, Wendy Houghton then looked at some of the key entrepreneurial tax incentives, including the newly introduced Early Stage Innovation Company reliefs, the Start Up scheme for employee share ownership and other incentives assisting SME’s more generally. She shared her views and insights about whether these incentives are achieving their intended aims, walk through the ‘sister’ UK schemes on which these were moulded and comment on whether the reliefs are properly targeted and sufficiently accessible to the SME audience. Are these incentives bold enough to achieve their intended aims?
Karen Anstis, the Assistant Commissioner Small Business– Small Business Education – ATO discussed how the ATO data indicates that there are approximately 62,000 new businesses registrations each month. These new business owners start out with a high degree of enthusiasm and are optimistic about their future. However, ATO research shows that within 12 months, 50% of businesses are under financial pressure. More than 60 percent cease operating in less than 3 years. Gaps in financial and business management acumen contribute significantly to financial distress. At the present time two thirds of the $21 billion ATO collectable debt is owed by small business (ATO 30 September 2017). The ATO is committed to helping SMEs to be successful and viable. The ATO have done significant research and analysis to understand how we can go about supporting SMEs to thrive. The ATO understand that working with SMEs and their business and accounting advisors is very important. By assisting and engaging early with SMEs, the ATO is aiming to prevent problems from arising and supporting businesses to be successful. Research shows accountants have an important role in helping business owners understand what they need to know to meet their obligations. The ATO is working with accountants, bookkeepers and business advisors to co-design and develop education, coaching and support services that they can deliver to their clients. One successful example of this is the Cash Flow Coaching Kit.
Future of Disruption
In the second panel session speakers address the issue of environmental regulations will disrupt SME business practices, as well as how the sharing economy has added tension to the distinguishing between employees and contractors.
Dr Anna Mortimore of Griffith University spoke about how the Ministerial Forum, appointed by the Australian Government, is about to announce the preferred fuel efficiency standards for new light vehicles, which are expected to reduce CO2 emissions in Australia’s new light vehicles. The standard to be phased in from 2020, will require an improvement in the national average CO2 emissions of 6% per annum. This will be challenging when improvements to the average CO2 emissions stalled at 1% in 2016. All buyers of new vehicles will be required to support importers of new cars to meet such standards by choosing fuel efficient light vehicles. Future disruption maybe in the form of additional charges for choosing a high CO2 emitting vehicles rather than choosing vehicles that are “best in the class.”
Associate Director in the Tax division of BDO, Judy White discussed how we currently have a tax system in Australia that requires SMEs to review the terms of every person engaged, to determine if they are obligated to employment taxes. That is, SMEs need to determine whether persons being engaged are genuine contractors, or in fact employees that are subject to employment taxes such as PAYG withholding, Superannuation Guarantee and Fringe Benefits Tax. This can be a time-consuming and expensive exercise, but it also is a complex system that creates uncertainties for SMEs. Do we need a new definition of employee in Australia?
Future of Tax
The third panel discussed what the future of tax reform could mean for Australian SMEs, both in terms of the issues they face as they expand, but also whether the taxation of trusts is likely to dramatically change, and how self-managed superannuation is critical for SMEs to starting planning now for.
Paul Banister, partner at Grant Thornton described how in 2015 Joe Hockey asked, “How do we design tax laws where money is more mobile, goods are able to be delivered by drone from Google and there are disruptive technologies developed every day?” Since then, not only have we seen the business impact of technology continue to heighten, tax has emerged as what one may describe as one of the “great moral issues of our time”. Politicians and lobbyists readily grab front pages with demands that companies pay their “fair share” and legislators keep raising the bar under the guise of transparency. While BEPS initiatives are largely considered as “big end of town”, the challenges to tax culture posed by events like #LuxLeaks and #PanamaPapers highlights an underlying societal shift has occurred. SMEs are doing their best to cope with this and better technology means their activities have never been subject to greater scrutiny. And while legislative reform and greater transparency constantly increases the burden of tax compliance, proposals from at least one major political party suggest that all that SMEs and their advisers do is think about minimising tax! Viewed through the lens of greater societal expectations and the forever changing world of technology, this session will examine selected legislative and administrative reforms of recent decades and consider what future tax reforms are needed so that SMEs can focus what they are renowned for, to stimulate entrepreneurship and innovation.
Tom Tulley, partner at Ernest & Young discussed how the future taxation of trusts is one of the great unknowns. There have been many reform processes tried and failed in the past 20 years whilst new proposals create more uncertainty. This session will recap on these while discussing the impact of related tax measures on the suitability of trusts as a business vehicle, including reinvestment of profits and repayment of debt.
Peter Vilaysack, Director Law Private Client Services at Ernest & Young detailed how many SME owners often have no retirement plan in place beyond the sale of their own business at which time SME owners generally look to make contributions into superannuation to fund their retirement. It is estimated that one third of surveyed SME owners are not contributing to their superannuation let alone regularly and over half of Australian SME owners under 50 years have not planned at all for retirement. With the Government continuing to place greater emphasis on retirees to take control of their own funding for retirement instead of relying on the Government’s aged pension, the future for SME owners to take control of their retirement plans cannot be ignored. One way SME owners can plan for their retirement and take control is through the use of self-managed super funds (SMSFs). However, with the recent super changes limiting contributions into super including the transfer balance cap of $1.6m to commence a pension coupled with the uncertainty surrounding any future changes to the Australian superannuation system, the potential future for SME owners to fund their retirement via SMSFs has never been more important. This session will consider the potential future of SMEs using SMSFs as part of their retirement planning.
Future of Advice
The fourth session reflected on what the future may hold for professional advisory firms such as lawyers and accountants. This insight is critical as the advisory profession is itself under pressure with artificial intelligence and the greater access to information via the internet.
John Ioannou, partner at McCullough Robertson revealed how the advent of technology is a perceived threat to professional service firms as the information gatekeeper role continues to be eroded and time based billing practices become archaic, if not redundant. The complexity of our laws and regulations however continue to grow as do the client circumstances to which they are required to be applied, so professional advice continues to be required. How then should professional advisers establish their practices to ensure there is an environment where junior practitioners are inspired, senior practitioners are inspiring, the practice is enjoyable, competitive and profitable and the client experience stellar. It is possible to achieve all of it.
Steve Healey, National Head of Private Advisory & Tax at Grant Thornton noted that there is no doubt we find ourselves in a period of historic change and it is not so much change that is impacting us but the rate of change. Advances in technology are impacting many facets of our lives and creating new opportunities as well as disrupting many traditional paradigms. The tax profession is not isolated from this change. His session explored the changes confronting the profession and discuss a potential new model for those operating in a professional services environment. Steve explored why it is critical to challenge the status quo and to actively seek opportunities for reinvention both of ourselves and our businesses.
The Matrix Ahead
To conclude the symposium, Associate Professor of Griffith University Brett Freudenberg discussed how in working out what the future of SMEs may hold it is important to reflect on what research tells us about SMEs, and consider how these characteristics could influence the sector going forward. For SMEs there can be a great reliance on the principal individual(s), this includes not only for finance, but also for operational decisions and compliance issues – some of which can be self-inflicted due to a desire to retain control. Data demonstrates that the use of discretionary trusts can lead to higher compliance cost, and be acknowledged as too complex for the operations. The use of trusts in Australia has appeared to stunt reforms to introduce alternative structures such as S Corporations. Compliance with GST and employment related taxes can account for a large portion of tax compliance cost for SMEs, and can be particularly regressive for smaller operations. In seeking advice, small businesses can have a high reliance on informal networks (such as from family and the internet), and if professional advice is to be sought it is likely to be initially from an accountant (even if the issue is a legal one). While the tax literacy of small businesses appears higher than the general population, there is concern whether it is sufficient for the complicated nature of running a business, and to what extent it remains up-to-date. There appears to be little realisation of managerial benefits from tax records, which may be attributable to low financial statement literacy and/or the delayed nature of tax reporting. The timing of tax payments can adversely impact on the cash flow of small businesses, especially for those non-retail businesses using the accrual method, and with large employee numbers.
Overall, Brett concluded that apps won’t change the fundamentals of what is needed to conduct a business, and that knowledge is critical. There will continue the need to have greater access to ‘good’ advice, as well as greater ability to ‘use’ information; and there should be greater alignment with ‘regulatory’ information into ‘business’ (management) information. Also, advice is central – this includes advice between professionals and their clients, but also between different advisors themselves: as this human interface (and logic) is critical to the future of SMEs in Australia.