2019 Federal Budget: What it means for Small and Medium Business

From NAB Business Research and Insights 3rd Apr 2019.
Small business won tax cuts, an increase to the instant asset write-off, increased infrastructure spending and investment in apprenticeships.
By NAB Group Economics

Our Group Economics View

Alan Oster, Group Chief Economist, NAB

This Budget needs to be seen in its political context. It is more like an election manifesto than a traditional Budget and big questions remain around what parts, if any, will actually be implemented.

Firstly, the fact that the Budget is projected to return to surplus is unquestionably a good start. That has largely occurred on the back of expenditure constraint, bracket creep and higher commodity prices (especially iron ore, where the difference between the current and the previous forecast price is – on our estimates – around $7bn per annum). Also, the economic forecasts are unlikely to fundamentally change.

The Budget itself included a lot of headlines about personal income taxes. In the near term the low to medium income tax offset has doubled to a maximum of $1,080 per annum and the second tax threshold (of 32.5%) has been raised from $87k to $90k. However, the significant tax adjustments don’t come until 2022/2023. The near-term cost to the Budget is only $700m per annum, whereas $4.5bn of the total spend of $6.7bn will come in the final year (in 2023). Also, a lot more money is given to the tax office to improve integrity but again is mainly spent in the out years.

The infrastructure package has been boosted by around $25bn to around $100bn in the long-run. However, in the next four years the additional spend is around $4.5bn with the big-ticket items including the Urban Congestion Fund, Victorian fast train (Melbourne to Geelong) and the Road Safety Program. To alleviate the impact of high energy prices the Government is also making a one-off tax-free payment to about 3.9 million welfare recipients (singles receive $75 and couples $125). SMEs also get a tax cut to 25% (phased in over three years) while the instant asset write-off rises to $30k per investment (and $50m of turnover).

It will be interesting to see how Labor responds to the personal tax changes. Labor may keep the near-term adjustments but aim to produce bigger and nearer cuts at the bottom end (their current stance is to concentrate tax cuts below the $125k).

It is clear that the Budget has been constrained to keep the surplus. The Government has retained the tax to GDP limit of 23.9% of GDP but the surplus doesn’t go much above 0.7% in the next four years. That means that the Budget over the next few years adds little by way of fiscal restraint in the out years. Most of the improvement in revenue continues to rely on income taxes (bracket creep) till 2022/2023. The outlays continue to shrink as a percent of GDP (a better performance than in recent years – which may have benefited from NDIS underspend).

In our view, the Budget is not as stimulatory as is seems to be – or is being promoted as. It does not change our view on the economic outlook or how consumers will see their expenditure decisions. Nor would the outlook of the RBA be much affected.

Small business groups’ agenda for reform

Small business is the backbone of our economy and our communities – there are over 2 million small businesses in Australia employing more than 4.7 million people.

NAB’s latest Quarterly SME Business Survey (Q4 2018), showed SME business conditions continued to decline, though remain just above average (after reaching high levels earlier in the year). Confidence also weakened and is below average. Conditions remain most favourable on the east coast, with Victoria still recording well above average conditions, while WA and SA continue to lag the other states. The major constraints on output identified by SMEs continued to be sales and orders (i.e. demand) and the difficulty in finding suitable labour.

In this environment, businesses set out a wish list of potential reforms and changes as part of their pre-budget submissions. This year, the list of recommendations included a range of ideas.

Extension of instant asset write-off: In January 2019, the Government announced the $20,000 instant asset write-off scheme for businesses turning over less than $10m will be extended to 2020. The scheme will also be extended to cover assets up to $25,000. While many business groups welcomed the announcement, many have also called for the instant asset write-off to be permanent for small business, with some groups even urging Government to explore further investment allowances for asset purchases above $25,000.

Tax cuts: Currently, companies with an aggregated turnover of less than $25m, and have no more than 80% of their assessable income as base rate entity passive income have a tax rate of 27.5%. In October 2018, the Government introduced the Treasury Laws Amendment to accelerate future reductions in the corporate tax rate for small businesses to 26% for the 2020/2021 and 25% in 2021/2022 and subsequent income years. This move has been strongly supported by small business groups.
But given many small businesses rely on sales and services contracts with larger businesses, industry groups such the Australian Chamber of Commerce have also called for a single company tax rate of 25% for all businesses (small, medium or large) by 2024/2025 to encourage larger business to invest, with flow on benefits for small businesses.

Training, Education & Employment: The Council of Small Business of Australia (COSBOA) has urged Government to focus on the skills needs of employees and businesses (rather than the training sector) and to move skills training back to the Department of Industry. They also want funding of welfare and community-based training to be separated from skills-based training, as COSBOA is of the view employers should not be asked to take the place of welfare and social workers. COSBOA is urging the Government to provide greater support for group training of apprentices into small businesses. NAB’s latest Quarterly SME Survey (Q4 2018) also indicates that finding suitable labour continues to be a key constraint to output and it remains at a relatively high level.

Business simplification: According to NAB Bankers (NAB Business Banker Survey January 2019), Government policy and regulation is the most influential factor influencing the business conditions of their customers. Business groups are also calling for the removal of unnecessary red tape or poorly designed compliance processes. For example, COSBOA believes employers need to be removed from managing paid parental leave (PPL) payments on behalf of the Government. Master Builders Australia believes the burden of regulation and bureaucracy is particularly onerous on the building sector and recommended the Federal Budget take account of this situation.

Access to finance: Tighter lending requirements in the wake of the Banking Royal Commission have been particularly problematic for small business looking to access funds. Indeed, NAB’s latest Commercial Property Surveys found accessing finance for developers was harder than at any time since the Survey began in 2010. Consequently, industry groups have called for a review of prudential regulations and capital requirements that increase the cost of capital for small businesses.

Other: There were a range of other ideas including: relief from high energy prices; and reducing company registration fees charged by ASIC as a tangible measure to support Australian small businesses.

What the budget actually delivered for SMEs

While not meeting their entire “wish list”, small business is a winner from the Budget, with the Government describing it as “the engine room of the economy”. The most significant benefits for small business include tax cuts, an increase to the instant asset write-off, increased infrastructure spending and investment in apprenticeships. Personal tax cuts and increased infrastructure spending should also flow through to SMEs. While the Government announced plans to hand out one-off payments for consumer electricity bill relief, missing was any relief for small business.

The instant asset write-off, which allows businesses to write-off assets (such as tools or equipment) against their taxable income,has been extended and expanded. It will now cover purchases under $30,000, up from $25,000, and can be used by businesses with an annual turnover of under $50m, up from a $10m limit previously. Medium sized businesses will welcome this new access to the scheme. The threshold applies on a per asset basis so businesses will be able to instantly write off multiple assets. Around 22,000 additional businesses employing approximately 1.7 million people will now be eligible for the tax write-off with the changes projected to cost the budget $400m over four years. These changes will apply from April 2019 to 30 June 2020 – it isn’t a permanent scheme like the industry had hoped for. In total, these changes will benefit around 3.4 million businesses employing around 7.7 million workers. The Government’s decision to increase and extend the instant asset write-off should help to alleviate cash flow pressures for SMEs and help them with their expansion plans.

The Government also announced that the corporate tax rate for companies with annual turnover of less than $50m will fall from 27.5% to 26% next year and 25% starting in 2021/2022. This five years earlier than previously planned and is expected to benefit roughly 970,000 companies. The Government will also increase the unincorporated small business (up to $1,000) tax discount rate from 8% in 2019/2020 to 13% in 2020/2021 and 16% in 2021/2022.

In recognition of SME concerns around skill shortages(a key constraint to their output), the Budget contained a $525m investment in vocational education and training directed towards “areas of future high demand” – albeit only $54.2m is new money over five years and the majority ($463m) in part from reallocating Skilling Australians Fund money unspent because Queensland and Victoria did not sign up to the scheme.

Vocational education and apprenticeship numbers have suffered in recent years, with funding cited by businesses as a significant factor. Incentive payments to employers will double to $8,000. Employers will receive $4,000 ($2,000 after the first 12 months of an apprenticeship and $2,000 at its completion) on top of an existing $4,000 employer incentive. There is also a total payment of $2,000 for the apprentices themselves ($1,000 after 12 months and $1,000 at the end of their apprenticeship). The Government says these measures (at a cost of $156.3m), will support up to 80,000 new apprenticeships over five years and the list of eligible occupations will be reviewed annually to reflect skills shortages.

An additional $48.3m will be put into establishing a National Skills Commission. The package is in response to an as-yet unpublished review by former New Zealand tertiary education minister Steven Joyce. A national careers institute and careers ambassador will also be introduced to help promote vocational education.

The Budget also proposes 10 “training hubs” across Australia at a cost of $50.6m over four years, focusing on training in industries that have a local skills shortage. It is designed to target youth unemployment in regional areas.

The Government will also provide $60m over three years from 2019/2020 to top up the Export Market Development Grants (EMDG) scheme (along with a further $1m in 2019/2020 for promoting Australian industry overseas). The EMDG scheme is aimed at helping SMEs to develop export markets and is a popular support program for tech companies and start-ups. The Export Market Development Grants (EMDG) program provides reimbursement for export promotion expenses for businesses with an annual turnover of less than $50m. Eligible activities include attending trade shows overseas, digital advertising, marketing consultant fees and visa fees. The scheme reimburses up to 50 per cent of eligible expenses above $5,000, with a total grant on offer of $150,000.

While this new money will be welcomed by SMEs, the Budget did not address concerns that Government grant programs are inaccessible and onerous for SMEs to apply for. Moreover, the Budget papers did not provide detail in regards to how Australian industries would be promoted overseas.

How did business react?

Australian Small Business and Family Enterprise Ombudsman, Kate Carnell said they were “pleased the instant asset write-off has been increased to $30,000 and expanded to businesses with a turnover of up to $50m, but had hoped the threshold was higher to capture capital intensive businesses, such as primary producers”. Ms Carnell also noted that “personal tax cuts to more than 10 million taxpayers means more money in people’s pockets which means more capacity to spend in their local small businesses” and that “an increase in infrastructure spending – $100bn over 10 years – is a positive for all Australians and particularly for small to medium enterprises (SMEs)”.

The Australian Chamber of Commerce and Industry welcomed the support for small business and skills. CEO, James Pearson, said: “The Government has heard our calls for greater investment in the skills needed by industry. Both job seekers and business will benefit, including from the extra support directly to apprentices and the businesses that employ them….This investment in skills, combined with the increase in investment in infrastructure in both cities and regional communities, should deliver a meaningful and positive impact on productivity….Making it easier for people to get to and from their place of work, speeding up the transport of goods and delivery of services, and encouraging growth in regional communities makes sense”.

Business Council of Australia’s chief executive, Jennifer Westacott said, described the Budget as “strong and responsible” as it delivers “a surplus, lowers personal income taxes and invests in jobs, health, education and infrastructure…Returning to a serious and credible surplus matters enormously to meeting the cost of the future such as the $100bn earmarked for much needed infrastructure and sustaining high living standards.” And, the increase in the instant asset write-off for small and medium business and expanding the eligibility to claim “will help drive activity in the business community”.

To find out more, read our 2019 Federal Budget