With the recent Federal Budget changes being brought into legislation within Australia, I thought it might be prudent to provide some commentary.
Some commentary was overdue on the challenging domestic landscape us as business owners need to navigate.
While I describe myself as a ‘realist with optimistic leanings’, I’ve found my normal effervescent enthusiasm for entrepreneurism tempered by recent events.
I provide the caveat that my commentary focuses on current domestic trading conditions within Australia coupled with the implementation of key budgetary changes (subject to legislation) around the Big 3 – Capital Gains Tax (CGT), Negative Gearing and the 30% Taxation of discretionary trusts.
My commentary is based on the impact of ‘policies’ rather than ‘politics’.
General trading conditions for Australian business owners (or budding future entrepreneurs) have been more difficult this year and last year with the following challenges:
Cost of living crisis with higher inflation, rising interest rates, higher fuel/utility bills and overall rising costs
Housing crisis expanding due to house-price to income ratios exploding, lack of housing, longer build times and migration
Margin pressures due to rising costs, lower productivity, and the inability to pass on price increases to customers
Slowing buying habits and reduction in discretionary spending
International political uncertainty with multiple wars and trade volatility
Massive increases in cost of building materials and construction
Negative GDP (net of migration) impacted by WFH, larger government sector (unproductive) and decreasing size of private sector
Lower productivity with hangover from covid’s ‘Working From Home’ (WFH) policies
Potential new mandatory two day minimum WFH laws (Victoria)
Increased claims with Fair Work (increased 40-60%) largely driven by ai use
Downturn in commercial property occupancy in business districts impacted from WFH
Downturn in hospitality industry due to WFH and cost of living crisis impacting discretionary spend
WFH resulting in less people in CBD and business districts decreasing retail spending
The continued explosion in online purchasing habits negatively impacting traditional bricks and mortar local business
Ballooning public sector size, rising debt and the inefficiency of bureaucracy
Increased property taxes (in particular Land Tax in Victoria)
Large government debt at record levels
Ageing population putting pressure on health care infrastructure, funding and tax base
Looking at the impact of the Big 3 budget night changes, let’s have a look at the impact we now need to consider (subject to legislation passing as tabled in the budget). Again, I am not detailing the technicals as the accountants and lawyers do that far better than me. My commentary relates to the impact and sentiment on the Australian business landscape.
Following budget night’s tabling of the Big 3 – Capital Gains Tax (CGT), Negative Gearing and the 30% Taxation of discretionary trusts, there seems to be an overwhelming feeling that this heralds the death of aspiration.
On the CGT changes, while grandfathering will provide a softening for most pre-existing ownership there are costs and complications in getting properties (share portfolios are easy to value at a nominated date) and businesses valued at the effective date. With the removal of the 50% CGT discount on assets owner over 12 months, there will be less incentive for investment as returns will be reduced through greater taxation. Young people and aspiring entrepreneurs in the past have invested in property and shares to save working capital for starting their own business. The risk profile between ‘making it’ in taking the plunge on starting a business has now changed in relation to the cost base of a business, greater taxation on gains and a dilution in reward for risk.
On the removal of Negative Gearing (excluding grandfathering), the above sentiment applies again in relation to new capital assets acquired with no negative gearing available. Again, future entrepreneurs will have a greater challenge in creating working capital from saving/investing. Worse still, while negative gearing will still be available on new property, this will now have significant development profits capitalized into purchase costs and other investors wishing to access negative gearing potentially bidding against them.
On the 30% Taxation of discretionary trusts, there is so much complexity that has been overlooked by the policymakers in making this change. Trusts have been used for legitimate asset protection for decades. They have also provided a legitimate mechanism in which to transfer profits within business and family groups. All the SME businesses that I know have held these structures for decades. Policymakers have suggested that taxpayers will have a transitional time period to restructure their affairs. However, this author asks why legal long-term arrangements now require accounting and legal costs be borne to disassemble prior long-term structures. Properties cannot simply be transferred out an entity without stamp duty being paid, typically in the significant tens of thousands. Not to mention the crystallization of capital gains and tax impact. Carried forward tax losses and other beneficiaries are impacted.
The cost, complexity and energy required to address transitioning after the Big 3 is significant.
Commercial property has been hammered by rising vacancies after the WFH impact continues to bite. CBD retail business owners and hospitality venues have seen their foot traffic dramatically drop by double-digit percentages.
Residential property, already dropping in Victoria due to significant Land Tax increases, has now seen auction clearance rates drop below 50%.
Shares are now being sold out of trusts and by individuals as they are no longer as attractive in these investment vehicles as a result of the recent budgetary measures.
Economically, we have both rising inflation and rising unemployment which are traditionally counter-cyclical both rising.
The negative GDP (excluding immigration) mentioned earlier, and the diminishing private business sector (and rising government sector) also bite.
The international uncertainty with wars and trade relation uncertainty only adds to the challenges.
These factors are dramatically impacting the psychology and performance of business owners with the often-heard phrase ‘I’m working harder for less’.
Younger people I speak to mention having to make a choice to either have children or buy a home. The dream of running their own business, owning a home and having children seems very remote and unavailable to most young people I speak to.
In the middle, business owners feel like the patty in the burger between their young adult children staying at home (and needing financial support) for longer as well as ageing parents requiring constant help and support. Individually, they’re concerned about their succession and retirement plans with higher living costs, tax and superannuation changes, longer life expectancy and increased domestic government intervention.
Older Australians are concerned about how they will sell their business and capitalize on their life’s work. While typically financially secure, they too have concerns around longer life expectancy, aged care standards, domestic and international instability and increased domestic government intervention.
Wherever I look, there seems to be this overwhelming feeling of working harder for the same or less.
A friend of mine interviews the same small to medium business owners – every year for decades – and these are simply confirming my sentiments on how they feel.
Many commentators are now predicting recession – so who knows?
In sticking to ‘policies’ rather than ‘politics, our policymakers have impacted the Australian business landscape detrimentally.
While most of us who have been at it for years will be OK, I fear that our children and grandchildren will inherit a distorted playing field where risk versus reward just got so much harder.
I recall mentoring so many young people two decades or more ago on dreaming to start their own business. An older man now, I might have to temper my enthusiasm in pushing them down this path as the odds have changed.
I remain a realist with optimistic leanings, but the realism has tempered the optimism more recently.
For now.
We’ll see.
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