Written on the 1 February 2011

JUNE 2010

June always means ‘tax time’ for Brisbane SMEs, but end of FY10 has a different flavour about it. Accountants may be bracing for their busiest period but with no major changes to the same yearly taxation processes, Brisbane’s business owners are looking forward at how the proposed Federal Government tax reforms will affect them come next year and beyond.

ASIDE from the political football that is the Resources Super Profits Tax, the pre-Budget recommendations put forward by Dr Ken Henry and his panel of finance big guns generated talk within SMEs on two topics – company tax and superannuation.

The implementation of a reduced company tax rate and an increase in the asset depreciation allowance are positives for small business, but Retirewell Financial Planning associate director Alan Baker is sceptical.

“It’s all very well making the announcements but they are very far from definite at this stage,” he says.

“The centrepiece of the budget was to bring the economy back into surplus in 2012/13, three years earlier than the initial forecast, but much of that relies on a resources tax which is being very heavily debated and opposed by the federal opposition.

“The other big reforms in company tax and superannuation won’t be implemented if the resources tax doesn’t pass in parliament, because that’s how they are going to fund these.”

HLB Mann Judd tax consulting partner James Henderson, agrees that at ‘first glance’ some positives can be taken, but he describes the government’s decision to only implement four of 138 recommendations put forward as ‘underwhelming’.

“Any reduction in tax rates is an incentive for any entity to do something with that saving and other initiatives like the immediate write-off for costs valued at under $5000 are positive. But we in the profession were expecting a lot more, and were given very little,” says Henderson.

“The number of recommendations that came out of it indicates that they spent a lot of time and money looking at a large number of issues, but there has been no real earth shattering tax reforms.”

Super problems for small business

The proposal to increase superannuation guarantee payments to 12 per cent by 2019/2020 may be an important initiative for Australia’s ageing population, but without additional tax breaks it’s unwelcome with Brisbane SMEs which are faced with extra costs.

HLB Mann Judd superannuation and financial planning partner Andrew Buchan, says the reduction in company tax will only apply to a small number of businesses and alone isn’t enough to offset the increased superannuation costs.

“Fundamentally the increase of super payments to 12 per cent has to happen, but the question is whether it should be at the expense of businesses,” he says.

“It’s very important to realise that not every small business is structured as a company, and will not benefit from the reduction in tax but are still burdened by the increase in super payments.

“Many SMEs in Australia are structured as a sole trader or partnership and therefore their tax flows through as personal tax. All businesses are affected by the increase in superannuation payments, so it would make sense to implement a tax cut across the board.”

Baker points out that at some point small business owners will want to withdraw their company profits and will end up paying 30 per cent tax anyway.

With the average life expectancy and cost of living ever increasing, he says super payments do need to rise.

“There is one school of thought that the current 9 per cent superannuation rate is too low. If someone only contributed 9 per cent over their lifetime they would not have enough funds for retirement,” says Baker.

“From our point of view the super reforms are good for the nation’s long term well-being, but perhaps there should be a compulsory contribution from the employee as well – to make up that extra 3 per cent.

“It is necessary for superannuation payments to go up, some even say to 15 per cent. But business shouldn’t have to wear the cost of that.

“SMEs will have to make decisions as to whether they will balance this cost out elsewhere, for instance if they are already paying above the award wage, stopping salary increases.”

Don’t play favourites with investment

The GFC taught many hard learnt lessons, but one positive that’s come from the global downturn is that both business and individuals have a wider awareness of investment risk.

The consensus among Brisbane’s finance professionals is to diversify.

“People are most definitely now more aware of their financial futures and investment risks. It’s now a case of not putting all your eggs in one basket,” says Buchan.

“Clients may come in playing favourites with property for instance, and we’ll say ‘it’s great that you have a particular interest in property, but let’s just spread that investment risk across equity/shares and cash funds.

“The volatility in the market has brought a clearer perspective of risk – that there is a huge difference in risk between a cash deposit that is guaranteed by the government, and a share investment in potentially the same bank.”

Baker says even those with the most diverse portfolio couldn’t escape the ‘once in a generation’ downturn, and it will take some time to restore confidence.

“For most investors they are back to square one and particularly with superannuation are behind where they were in 2007. Most are still skittish with what we’ve seen come from debt problems in Europe and the implications of tax reforms,” he says.

“We’ve always diversified investment risk but in the GFC no one was shielded from it. The traditional diversified portfolios also went down significantly.”

The only way forward it seems is to continue with tried and true investment methods.

“We are making some adjustments and while the percentage of investments are still 80 per cent growth and 20 per cent defensive, the mixture is different,” says Baker.

“There is a close relationship between risk and return, so we’re setting up investments for our clients with the balance of risk that they feel comfortable with.”

Keep focus on ‘the bigger picture’

The end of financial year rigmarole often sees business owners exploring every tax advantage available, but the financial services sector warns not to lose sight of the bigger picture.

While the Henry Tax Review is the hot topic in the financial world, the end of 2009’s government stimulus package means there aren’t many current government taxation concessions for SMEs to take advantage of.

Buchan says businesses need to always look forward to the end goals and not be distracted with taxation changes. He sees SMEs now look for a holistic approach to business advising that doesn’t dwell on either specific service.

“I wholeheartedly believe that there is too much emphasis on June 30. The real emphasis should always remain with how best to grow the business in the long term,” he says.

“Holistic is an easy word to throw around but the truth is that accountants are looking back at last year’s figures and financial planners are looking way into the future – what SMEs are looking for now in business advisers is the ability to take all these factors and work forward towards extracting from your business what you want to extract.”

Baker agrees with the importance of long- term goals, but says businesses still need to pay attention to detail to achieve the best growth.

“Business owners need to have a medium to long term business plan but setting interim goals along the way is an important part of the bigger picture and you certainly need to do as much tax planning as possible before the end of the financial year,” he says.

“Towards the end of each financial year you need to look at the benefits you qualify for to minimise the tax you are paying and to set the business up to achieve the goals you’ve set in the long term.”

The talk may remain on proposed reforms coming into the federal election, but it seems impacts on ground level SME will be measured in the long term and any benefits within the next two years will be minimal.

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