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Varying PAYG Installments

You can vary your PAYG installments so the amount you prepay is closer to your expected tax for the year.

If you pay PAYG instalments using the instalment amount (option 1 on your activity statement), you may want to vary if there has been a significant change in your instalment income this year.

If you calculate your PAYG instalments using the instalment rate (option 2 on your activity statement):

  • you do not need to vary simply because your income has changed – the payment you calculate will go up and down in line with your income;
  • you would usually only vary if the taxable proportion of your income has changed – for example, if your income has fallen significantly but your deductions for running costs have stayed the same.

You make your variation when you lodge your activity statement or instalment notice. You must lodge:

  • on or before the day your PAYG instalment is due; and
  • before you lodge your tax return for the year.

Your varied amount or rate will apply for the remaining instalments for the income year, or until you make another variation.

Underestimating installment amount or rate

When you vary your PAYG instalments, it is important to not underestimate your instalment amount or rate. If you underestimate, you could be left with a substantial tax bill when you lodge your tax return at the end of the year.

Also, when your tax return is lodged, the ATO compares your actual instalments to the total tax payable on your instalment income for the income year.

If your varied instalments are less than 85% of your total tax payable, you may have to pay interest (the general interest charge) on the difference, in addition to paying the shortfall. Depending on the circumstances there may also be penalties.

If you are not sure, it is best to not vary your instalments. Any overpaid instalments will be refunded to you after you lodge your tax return.

Varying your installments due to flood and other disasters

You may need to vary your PAYG instalments due to the impact of the 2022 floods or other disasters.

The ATO has said that it will not apply penalties or charge interest on variations if you have taken reasonable care to estimate your end of year tax liability. This means making a reasonable and genuine attempt to determine your liability. When considering if a genuine attempt has been made, the ATO considers what a reasonable person would have done in your circumstances.

Want to find out more?

Talk to us about whether you should vary your PAYG instalments. We can also talk to the ATO on your behalf if you are unable to pay an instalment amount.

Period of Review Changes Coming for SMEs

At the start of the COVID-19 pandemic in 2020, the previous government passed a measure to increase the small business threshold from $10m to $50m for the purposes of most of the small business exemptions. This was part of a Bill to implement various Budget measures for economic recovery.

Among other things, this legislation meant that the Commissioner was only able to amend an income tax assessment of “medium businesses” (those with a turnover between $10m and less than $50m) for a limited period of 2 years. The Commissioner was still able to amend an assessment at any time if fraud or evasion was expected or to give effect to an objection made by the taxpayer or a decision on review or appeal.

While the current government is not seeking to disturb a majority of the measures contained in the legislation, it has recently introduced a proposal to exclude certain small and medium entities (SMEs) from the shorter 2-year amendment period and revert those entities back to the standard 4-year period.

Draft Regulations have been released to exclude certain entities with particularly complex tax affairs or significant international tax dealings from the shorter period of review, which according to the government is in line with the original intentions of the 2020-21 Budget announcement.

Entities which would be subject to a longer period of review should the Draft Regulation be registered include:

  • those with related-party dealings in relation to assets or non-cash benefits with a market value of at least $50,000.
  • entities that derive an assessable income of at least $200,000 from any source that is not an Australian source. To prevent structuring arrangements being undertaken to avoid this, the $200,000 threshold is assessed as a combined threshold including the assessable income from the relevant assessed entity and any entity affiliated with or connected with the entity.
  • foreign controlled Australian entities (including Australian companies, trusts and partnerships) and non-resident entities at any time during the income year.
  • any entities that engage in schemes captured by either the Diverted Profits Tax (DPT) or Multinational Anti-avoidance Law (MAAL).
  • certain entities with at least 10 other entities connected with or affiliated with the entity at any time during the assessment year.
  • entities that may be entitled to the R&D tax offset or certain related deductions, recoupments and adjustments, and
  • entities that claim the following CGT relief:
    • restructure rollover relief
    • demerger relief
    • rollovers relating to CGT asset transfers between 2 companies or the creation of a CGT asset between companies within the same wholly owned group, where one company is a non-resident, and
    • entities subject to Div. 855 (where a foreign resident can disregard a capital gain or loss in certain circumstances).

The Draft Regulations also seek to remove the current requirement that a 4-year period of review only applies where at least one of the related parties already has a 4-year period of review in relation to related party dealings. This means that even if all related parties have a 2-year assessment period, if all other conditions are satisfied, a 4-year period of review may apply to a relevant assessed entity. The above amendments will apply to assessments made after the Regulations commence for income years starting on or after 1 July 2021.

What does this mean for your business?

With these potential changes on the horizon, will your business be affected? We can help you get ready or make a submission on your behalf in relation to these changes. Contact us today for expert help and advice.

Top tips for managing payroll as an employer

We’ve just entered a new financial year, so chances are you might be forward planning for 2022/23, and have identified that there’s capacity to grow your team.

One of the most common challenges small-business owners face with expanding your team is navigating employer obligations when it comes to payroll. Here are some tips to help managing payroll as a small-business owner/employer.

Explore your employment types and your options

Before hiring, it is important to consider what your business needs to succeed, and what it can afford. Look at historical data, as well as your budget and forecast to determine what is feasible. If you are about to enter a busy period and predict it will quieten down and return to normal again, a casual or contract role might suit you better. On the other hand, if your data shows you that the work and sales are consistent and you are struggling to find time in the day to do it all, then a full-time role may be good for you.

Knowing your employment types and the obligations associated with them, such as award rates (which vary by sector, experience and whether the employee is taking an apprenticeship or other scheme), sick leave and holiday pay, is essential before you start the hiring process.

Look to cloud-based tools to streamline your payroll

Apart from ensuring you’re paying award rates at a minimum and submitting employees’ payments on time, there are a number of elements to consider when it comes to your tax obligations with the ATO. For example, PAYG withholding is where your employer automatically withholds a portion of your gross wage or salary for tax purposes. PAYG withholding must be done for all employees. Furthermore, it needs to be reported to the ATO with every pay cycle, and year end data has to be submitted with each financial year (the cut-off date being 14th July), so that employees can lodge their personal tax returns.

The government introduced single touch payroll (STP) in 2019, which is where payment details are lodged via digital means. It is advantageous to employers as it frees up a lot of the manual data entry that was once required.

Most affordable accounting and bookkeeping service providers (e.g. QuickBooks, Xero, and MYOB) provide payroll functionalities, and are also integrated with STP. Your cloud-based payroll platform can be connected to the ATO portal, which means you can generate and send reports while preparing employees’ payments, saving you a lot of time in the process.

Take time to understand and comply with superannuation requirements

Superannuation is compulsory and paid in addition to employees’ wages and salaries. The super guarantee (minimum amount you need to pay) increased from 10% to 10.5% on 1 July 2022. If you haven’t already done so, your payroll software must be updated in order to account for the change.

Cloud-based providers are useful here as you can configure your payroll and STP so that superannuation is automatically included. Make sure you provide new employees with a superannuation standard choice form, where they provide their chosen fund’s details.

You also need to select a default super fund for the business, where you pay employees if they don’t have a preferred fund, or a stapled super fund.

Super needs to be paid quarterly – by 28 October (Q1), 28 January (Q2), 28 April (Q3) and 28 July (Q4) each year. If not, you will need to pay a super guarantee charge.

Need help with managing your payroll?

Hiring and then managing payroll and its associated legalities can be a little daunting, however, a tech-based solution is ideal for small-business owners navigating this process. It’s both user-friendly and affordable, meaning you can get more hours in your day for other business processes. If you require assistance with payroll management and compliance to legalities, contact us today.

The importance of record keeping

You are legally required to keep records of all transactions relating to your tax and superannuation affairs as you start, run, sell, change or close your business, specifically:

  • any documents related to your business’s income and expenses;
  • any documents containing details of any election, choice, estimate, determination or calculation you make for your business’s tax and super affairs, including how any estimate, determination or calculation was made.

You should make sure that you understand what records are needed for your business and make accurate and complete record-keeping practices a part of your daily business activities. Talk to your tax advisor about what records your business needs to keep and for how long.

What is a record?

A record explains the tax and super-related transactions conducted by your business.

The record needs to contain enough information for the ATO to determine the essential features or purpose of the transactions.

The minimum information that needs to be on the record is generally:

  • the date, amount, and character (for example, sale, purchase, wages, rental) and the relevant GST information for the transaction;
  • the purpose of the transaction; and
  • any relevant relationships between the parties to the transaction.

Five rules for record keeping

The ATO has 5 record-keeping rules, which are based on law and the ATO’s views.

  1. You need to keep all records related to starting, running, changing, and selling or closing your business that are relevant to your tax and super affairs – if your expenses relate to business use and personal use, make sure you have clear documents to show the business portion.
  2. The relevant information in your records must not be changed (for example, by using electronic sales suppression tools) and must be stored in a way that protects the information from being changed or the record from being damaged – you need to be able to reconstruct your original data if your record-keeping system changes over time.
  3. You need to keep most records for 5 years – generally, the 5-year retention period for each record starts from when you prepared or obtained the record, or completed the transactions or acts those records relate to, whichever is later. However, in some situations, the start of the 5-year retention period is different. For example, for super contributions for employees, the 5 years starts from the date of the contribution. You need to keep all information about any routine procedures you have for destroying digital records.
  4. You need to be able to show the ATO your records if they ask for them. The ATO will also need to be able to check that your record-keeping system meets the record-keeping requirements – if you store your data and records digitally using an encryption system, you will need to provide encryption keys and information about how to access the data when asked. You also need to ensure the ATO can extract and convert your data into a standard data format (e.g. Excel or CSV).
  5. Your records must be in English or able to be easily converted to English.

Need help with record keeping?

Keeping correct records is very important. Failing to do so could have financial consequences. We can help you with your records. Contact us today for more information.

What changes are coming to superannuation for 2022-23?

In line with existing legislation, a number of superannuation changes are coming into effect that will apply to both employees and employers.

Two specific changes that will affect employees most are:

  • The rate of super guarantee contributions from employers will increase to 10.5%.
  • The $450 eligibility threshold for super will be removed.

What does this mean for your future retirement savings?

Super guarantee lifts to 10.5%

From the new financial year, the super guarantee (SG) rate will increase from 10% to 10.5% for employees.

For employees on award wages or enterprise agreements, superannuation is paid on top of their wage. If an employee who is paid $90,000 plus super received $9,000 into their super contributions, under the new rate rise they will be paid $9,450.

However, for employees on contracts who receive super as part of their salary, the 0.5% will be take from their salary. This means their annual wage will decrease.

The Australian Retirement Trust Education Manager, Josh van Gestel, explains the importance of considering how your employer will fund this new rate increase:

“Some employers may pay this additional amount on top of the other salary increases or bonuses they may provide to you, while some other employers may instead pay you for this increase in SG by reducing your current salary or any future salary increases or bonuses they would have otherwise paid to you.”

“If you’re also making personal pre-tax contributions to your super, including salary sacrifice contributions or amounts you claim as a tax deduction, just make sure the increase in what your employer pays doesn’t tip you over the annual concession limit of $27,500 that applies to how much you can contribute each year.”

This isn’t the last expected SG rate rise we will see as the Federal Government has mandated a 0.5% rate increase every financial year until it reaches 12% in 2025.

More employees eligible for super as the $450 threshold is ditched

The $450 threshold for super is also going to be scrapped.

For the first time from 1 July, it is estimated more than 300,000 Australians (mostly young) will be eligible to receive SG payments. this means many low-income workers with part-time or casual jobs will now be entitled to the same benefits as their higher-earning counterparts.

Under the new changes, anyone earning less than $450 per month before tax will receive the new 10.5% contribution regardless of how little they earn. The one exception is if the employee is under the age of 18 – they must work for at least 30 hours per week to be eligible for super payments.

How to get started if you’ve never received super before

Those who are new to superannuation are recommended to do some research and find a super fund that best suits their needs now and in the long run. After all, you want to ensure that the fund you entrust with your savings ticks all the relevant boxes.

There are three key things to weigh up when selecting the right fund for you:

  1. Take a look at the tangible numbers such as fees and costs – make sure to compare fees and costs, remembering that these are deducted from your account balance and can deplete your savings over time. There is also the matter of insurance, make sure you are getting the cover you need at a reasonable cost that you can justify.
  2. Consider the services and benefits on offer – you want to make the most of your membership. See what you can access and the functionality you get, what rewards and discounts a membership can let you access, and the support you can receive.
  3. Think about what type of fund you’re after – consider if the fund you’re with or looking to join is a profit-for-members fund, a retail fund that may be offered through a bank or other financial institutions, or if you consider doing it all yourself through a self-managed super fund.

Work test requirements for older Australians scrapped

Older Australians aged between 67-74 will be able to top up their super without having to undergo a work test, provided their super balance is less than $1.7 million in July 2022.

This change allows older super members to continue to build their retirement balances.

Cut off age for non-concessional contributions rises

Older super members who wish to make non-concessional contributions into their super account has increased from 67 to 75 years of age.

This means that people aged up to 74 can make a considerable contribution into their account – $110,000 per year or $330,000 over three years. One important thing to remember is that this only qualifies for those members who have less than $1.48 million in their super.

Buying your first home with super

If you’re thinking about using your super savings to buy your first home, there are important changes that have occurred from 1 July 2022.

An individual can make personal contributions of up to $15,000 a year into their super, and up to an overall maximum of $50,000 that they can later withdraw to put towards the purchase of their first home. This is an increase from an overall maximum of $30,000 which applied prior to 30 June 2022.

By saving through super, you can actually save on tax which you can put towards your dream home.

New financial year resolutions to make

As we head into the new financial year, it’s time to do a quick check on your super to see how it’s tracking and whether any relevant changes need to be made.

Mr. van Gestel recommends doing the following tasks:

  • Engage with your fund – get your online access sorted.
  • Consider whether you should bring your super funds together (if you have more than one).
  • Check your investments – your super is an investment so make sure it’s performing as it should be.
  • Consider adding personal contributions if you can.
  • Make sure your insurance and beneficiary nominations are correct.
  • Reach out to your super fund if you ever need assistance or guidance.\

For more information on super funds and self-managed super funds, contact us today.

Professional Firm Profit Allocations: ATO View

If you run a professional services firm there are many tax issues to consider in the allocation of profits. The ATO is particularly concerned about individual professionals with an ownership interest who redirect their income to an associated entity, such as a trust, with the effect of significantly reducing their tax liability – raising the prospect that anti-avoidance provisions could apply. From 1 July 2022, new guidelines explaining the ATO’s compliance approach to profit allocations will commence. These guidelines assist taxpayers to identify their particular risk level and understand whether their profit allocation arrangement may attract attention from the ATO.

The new guidelines (PCG 2021/4) are significantly different to previous ATO guidance. Importantly, the ATO acknowledges that some arrangements that were previously considered “low risk” may now have a higher risk rating.

Before speaking to your advisor, it may help you to understand the new two-step process for identifying your risk.

Step 1: Pass the “gateways”

For the guidelines to apply to your profit allocation arrangement, you must satisfy two “gateway” tests.

Firstly, does the arrangement have a sound and genuine commercial rationale? The ATO suggests that a change in tax performance, absent any other non-tax related practical changes, strongly indicates a lack of commercial rationale.

Secondly, are you satisfied that the arrangement has no “high risk” features? This includes anything flagged in a Taxpayer Alert, as well as the following:

  • Financing arrangements related to non-arm’s length transactions. For example, where an associated entity borrows to acquire the individual’s ownership interest and claims deductions for interest expenses.
  • Exploiting artificial differences between taxable income and accounting income.
  • Where a non-equity partner assigns their fixed-draw income to their associated entity.
  • Multiple classes of shares and units held by non-equity holders.

If you don’t meet these two tests, the guidelines don’t apply and you should seek professional advice.

Step 2: Identify your risk

If you pass the gateways, the next step is to consider three risk assessment factors (or two, if the third is impractical) and use the tables in the ATO’s guidelines to identify your “score” for each factor. The total of your scores – adjusted for whether you apply two or three factors – will determine which risk “zone” the arrangement falls into: low, moderate or high risk.

The three factors are:

  1. Proportion of the income entitlement assessed in the hands of the individual professional (as opposed to their associated entities) – the greater this proportion, the lower your risk score.
  2. Total effective tax rate for income received from the firm by the individual and associated entities – the higher the effective tax rate, the lower the risk score.
  3. Remuneration assessed in the hands of the individual as a percentage of a commercial “benchmark” for the services provided to the firm (optional) – higher percentages yield a lower risk score.

Your advisor can help you perform these calculations.

If your arrangement is in the “low risk” zone, you can have confidence that the ATO will generally not dedicate compliance resources to testing your arrangement. If it rates as “moderate” or higher, the ATO is likely to analyse your situation further. Arrangements that were previously “low risk” but now have a higher rating may qualify for a transitional period until 30 June 2024 in which to apply the ATO’s previous guidance.

Now is the time to take action

The ATO says taxpayers should self-assess their risk annually, document the assessment and be able to provide supporting evidence in the event the ATO fact-checks the assessment. Contact our office for expert assistance in assessing and managing your risk.

2022 NSW Budget: What’s in it for you?

The 2022-23 NSW Budget has been handed down and as the final Budget before the State election, it is perhaps no surprise that the government is spending lavishly in a bid to shore up votes. Prominent measures targeting families and first home buyers have been announced. The current Budget deficit for NSW sits around $11.3bn and is projected to decrease to around $2.5bn in 2023-24.

While the NSW Treasurer has an optimistic economic outlook, with the State on track to return to a Budget surplus by the 2024-25 financial year, there remain significant economic and fiscal pressures, such as inflation and interest rate increases, which will increase the State’s cost of borrowing.

Families

The government has announced a new Back to School Program, which is set to provide $150 to every NSW school child to be used towards to the cost of school supplies in 2023, including uniforms, shoes, bags, learning resources, and other stationery.

Other continuing programs for school-aged children include Active Kids, and Creative Kids, which provide vouchers to families to get children involved in physical and creative/cultural activities. Also making a return appearance is the First Lap voucher specifically for swimming and water safety.

For families with pre-school aged children, the government has committed to expand the Affordable Preschool program, which will provide families with $2,000 per child per year for preschool in long day care settings, and up to $4,000 per child per year in community and mobile preschools. The projected cost of this measure will be $1.3bn.

In addition to the fee relief, the government has also committed another $5.8bn in the Budget over 10 years as an investment to make pre-kindergarten available to all children in the year before school by 2030.

First home buyers

The NSW government has committed $780.4m to a 2-year trial of a shared equity scheme for up to 6,000 eligible participants purchase a home. Those eligible include a single parent of child/children under 18 years of age, a single person 50 years of age or above, or first home buyer key workers who are nurses, teachers, or police. The gross income of the household must not be more than $90,000 for singles and $120,000 for couples, and a minimum deposit of 2% is required for purchasers.

Under the scheme, the NSW government will contribute up to 40% of the purchase price of a new dwelling or up to 30% of the purchase price of an existing dwelling. No repayments will be required on the equity contribution and no rent or interest will be charged while the purchaser remains eligible. However, voluntary payments can be made in order to progress to full ownership of the property.

The property price must be less than $950,000 in Sydney and major regional centres such as Newcastle, or less than $600,000 in other  regional areas. Those wishing to participate in the scheme should be aware that an annual review is required each year to ensure continued eligibility. Those that no longer meet the eligibility criteria may be required to begin repayment of the government equity contribution, although no details on the form and method of repayment are available at the present time.

Participants are also required to maintain their property and keep things in good working order. In addition, the government must approve certain modifications/renovations so that the value changes can be factored into the eventual sale price of the property.  

In addition to the shared equity scheme, the government will also set aside $728.6m in order to introduce an option for first home buyers purchasing a home for up to $1.5m to pay an annual property tax instead of upfront stamp duty. The annual property tax payments will be based on the land value of the purchased property and the proposed rates for 2022-23 will be $400 plus 0.3% of land value for principle places of residence or $1,500 plus 1.1% of land value for investment properties.  

Want to find out more?

If you would like to know about how to benefit from the NSW Budget or fully understand other measures relating to infrastructure or business, we have the expertise to go beyond the headlines and explain how these measures will affect you. Contact us today.

Single Touch Payroll: Phase 2

Single touch payroll (STP) has now entered into Phase 2, although most employers may not yet be reporting under this phase as many digital service providers (DSP) have obtained deferrals to help get their software ready and help their customers transition. Essentially, STP works by sending tax and super information from an STP-enabled payroll or accounting solution directly to the ATO when the payroll is run.

Entering Phase 2 means that additional information which may not be currently stored in some employers’ payroll systems will need to be reported through the payroll software. A salient example is the start date of employees. While many newer businesses may have that handy, older businesses may have trouble finding an exact start date, particularly for long serving employees. In those instances, the ATO notes that a default commencement date of 01/01/1800 can be reported for STP Phase 2 purposes.

Employers will also be required to report either a TFN or an ABN for each payee included in STP Phase 2 reports. Where a TFN is not available for an employee, a TFN exemption code must be used. If a payee is a contractor and employee within the same financial year, both their ABN and TFN must be reported.

In addition to reporting TFNs and commencement dates for employees, employers are now also required to report the basis of employment according to work type. That is, whether an individual is Full-time, part-time, Casual, Labour hire, voluntary agreement (contractor with own ABN but in a voluntary agreement with business to bring payments into the PAYG system), death beneficiary, or non-employee (i.e., not in the scope of STP but included for voluntary reporting of super liabilities).

The report generated from STP Phase 2 will also include a 6-character tax treatment code for each employee, which is a shortened way of indicating to the ATO how much should be withheld from payments to employees. Most STP solutions will automatically report these codes, but employers should still understand what the codes are to ensure that they are correct. For example, RTSXXX refers to regular (R) employees with a tax-free threshold (T), who have study and training support loans (S), who have not asked for a variation of amount withheld due to Medicare levy surcharge (X) or Medicare levy exemption (X), or Medicare levy reduction (X).

The income and allowance details attributed to employees will also be further drilled down in Phase 2. For example, instead of reporting a single gross amount of income, employers need to separately report on gross, paid leave, allowances, overtime, bonuses, directors’ fees, return to work payment (lump sum W) and salary sacrifice amounts.  

While STP Phase 2 commenced on 1 January 2022, most DSPs have obtained deferrals which cover their customers. This means that if your DSP has a deferral in place, you do not need to apply for your own deferral and will only need to start reporting Phase 2 information from your next pay run after your DSP’s deferral expires. However, if your business needs more time in addition to your DSP’s deferral, you can apply for your own deferral online.

Need help to comply with Phase 2?

Payroll is complicated, and if your business needs more help to understand the extra information required for Phase 2 reporting, we can help. If your DSP is ready for Phase 2 reporting but you need more time, we can also help you to apply for a deferral to give you more time to get ready.

ASIC Focus Areas for 2022 Reporting

As COVID-19 begins to lose its place in the public consciousness, the uncertainty felt during the pandemic has been replaced by the economic challenges presented by high inflation, an increase in energy costs and higher interest rates. ASIC has reminded directors and preparers of financial statements for the year ended 30 June 2022 to review and be aware of the impact of these uncertainties.

For the 30 June 2022 reporting period, ASIC will be focusing on areas of concern. One of these is uncertainties and risks which may affect asset values, liabilities, and assessments of solvency and going concern. This includes factors such as COVID-19 conditions and restrictions during the period, the discontinuation of financial and other support from governments/parent companies/lenders etc., and the impact of rising interest rates on future cash flows and on discount rates used in valuing assets and liabilities.

Other considerations also include the increased likelihood of ongoing geopolitical risks, such as the Ukraine/Russia conflict and the flow-on effects for the broader Australian economy and the industry the business is in. This is compounded by the difficulty in obtaining sufficiently skilled staff and expertise due to the slow ramping up of migration activity after COVID-19.

It is perhaps no surprise then that ASIC considers industries that may be particularly affected this year to include the construction industry, owners of commercial properties and large carbon emitters.

Flowing on from these uncertainties, one of the other important areas that ASIC will be focusing on will be asset values, which encompasses the following:

  • impairment of non-financial assets – including goodwill, indefinite useful life intangible assets and intangible assets not yet available for use. The appropriateness of key assumptions and disclosure of estimation of uncertainties will need to be reviewed and justified.
  • value of property assets – factors that could adversely affect commercial and residential property values should be considered, including levels of migration, changes in shopping habits and future economic or industry impacts on tenants.
  • expected credit losses on loans and receivables – key assumptions used in determining expected credit losses should be reasonable and supportable.
  • value of other assets – including the value of investments in unlisted entities, whether deferred tax assets will be realised, and the net realisable value of inventories.

According to ASIC, financial report preparers and directors should also pay close attention to disclosures. It notes that when considering what information should be provided in the financial report, those responsible should consider what their backers and potential investors would want to know. Salient changes from the prior year should also be disclosed.

Given the challenging economic conditions, the adequacy of provisions for such things as onerous contracts, leased property make good, financial guarantees and restructuring need to be carefully considered. In addition, subsequent events after the reporting period which may affect assets, liabilities, income, expenses or disclosures also need to be reviewed and disclosed.

While companies may experience differences depending on their industry, where they operate and how their suppliers and customers are affected, what remains consistent is that all companies will face some level of uncertainty about future economic and market conditions. ASIC encourages companies to ensure that impacts on the business are appropriately disclosed, and that underlying estimates and assessments for financial reporting purposes be reasonable and supportable.  

Need help preparing your financial statement?

With the end of financial year drawing closer, we can assist in preparing financial statements and ensuring that all estimates and assessments are reasonable. Contact us today for help and advice.

Rising interest rates: what Australian SMEs need to know

Key Points:

  • The RBA expects underlying inflation to rise to 4.75 per cent, while the Consumer Price Index (CPI) has already risen to 5.1 per cent annually
  • Most small businesses have outstanding loans in one form or another, and an increase in interest rates will essentially result in more expensive loan repayments for them

The world has changed a lot since the global financial crisis of 2008, but one thing has remained constant: record low interest rates. No matter what turbulence they faced, Australian businesses could rely on the fact that borrowing remained cheap.

Now, we are finally coming to the end of the cheap lending cycle. Inflation is rising globally, spurred by pandemic-induced supply chain shortages, rising commodity prices, including oil and gas, thanks to Russia’s recent invasion of Ukraine.

In the US, inflation hit 7.9 per cent in March, causing the Federal Reserve to raise rates for the first time since 2018. This has, rightly, put Aussie businesses on notice to expect a rise in interest rates, with Commonwealth Bank already tipping that cash rates will increase in June.

While Australia is far behind the US on inflation, pressure will likely increase. The RBA expects underlying inflation to rise to 4.75 per cent, while the Consumer Price Index (CPI) has already risen to 5.1 per cent annually. Just this week the RBA has increased the cash rate target by 25 basis points, which was swiftly passed on by the major banks, despite there being some abnormal economic factors caused by COVID over the last two years.

But what does all this mean for small businesses? Many business owners, particularly those running high-growth, eCommerce companies, will be focused on supply chain issues that will negatively impact their ability to secure stock, which in turn will restrict their cashflow. The rising interest rate environment is only going to further impact on a business’s freedom to operate.

The end of cheap money

Until this point, businesses have enjoyed record low borrowing rates from traditional banks due to the all-time low cash rate and fierce competition from non-bank lenders, enabling them to fund their growth cheaply.

This has meant it has often been considered ‘best practice’ to borrow to fund growth. Most small businesses, therefore, have outstanding loans in one form or another, and an increase in interest rates will essentially result in more expensive loan repayments for them. Since these are often long-term debts that will take years to repay, this will mean carrying the debt for longer, incurring more interest.

For those businesses looking to obtain shorter-term funding to invest in growth or cover them until more cash arrives, this funding will become more expensive. Banks and other lenders that require physical assets to secure finance to, will likely set more stringent terms. As any business owner who has taken out a bank loan knows, the prospect of losing your house because you can’t make payments really ups the pressure.

Borrowing to stay ahead

The issue is that, now more than ever, businesses need to have cash to get ahead. Competition in the supply chain is fierce, with suppliers, particularly those in Asia, able to select which buyers they want to sell to. Australian businesses are also facing record high container prices, with shipping operators preferring to focus on larger markets, such as the US.

All this means that Australian businesses may not be getting the best terms from suppliers, meaning that stock is slower to arrive, and margins are cut (or costs are passed onto customers).

Companies that have emerged cashflow-positive from the pandemic are in an excellent position to get ahead of competitors by buying stock more quickly and in greater volume from suppliers, in order to secure themselves better rates and more immediate availability. But those companies that can’t fund this may fall behind.

Finance, for supply chains

There are a range of so-called ‘non-bank lending’ products out there which businesses can turn to that will be much more flexible to the needs of smaller, high-growth businesses across a range of industries.

Many non-bank lenders won’t require a business to specify a physical asset to secure lending to, making them more suitable for eCommerce or other similar businesses. Plus, funding types such as Debtor Finance (sometimes known as invoice finance) mean that companies can receive cash from unpaid invoices early, without waiting for the usual 30, 60 or 90 days to pass. An innovative supply chain financier, such as Octet, can provide the facility for this, and will take a small fee, but ultimately that funding is still yours from your own sales, and, therefore, is less prone to interest rate rises.

Take advantage of any available early payment discounts, whilst receiving your goods quicker than the competition. The next few years are going to be uncertain and challenging, but savvy businesses shouldn’t settle for high-interest bank funding to see them through, without at least considering the alternatives. For more information, book a consultation with us today.

Disclaimer: The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners. Liability limited by a scheme approved under Professional Standards Legislation.

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