Legislation changes set to impact Australian small businesses from 1 July have garnered a lot of attention in recent weeks, as the Government passes its budget measures through the federal parliament. While it’s pleasing to see support for small business, how have the proposed changes been received by those directly affected by them?
According to the latest Westpac-Melbourne Institute SME Index (the Index), which examines the economic health of Australian SMEs, the proposal for simplified Business Activity Statements was well received by time-poor business owners, with almost half (45.5 per cent) of SME’s identifying this as the top measure announced in this year’s budget.
The 12-month extension to the $20,000 instant tax write-off scheme was also met with open arms (35.4 per cent), along with proposed reductions to the corporate tax rate (31.7 per cent) – the latter of which was the top measure for SME’s in the May 2017-18 Federal Budget. Additionally, just over one quarter (28 per cent) of Australian SME’s are in support of the proposed infrastructure spend; in the hope that this will make it easier to do business and open doors to new opportunities.
Although SMEs are encouraged by policy measures, overall the 2018-19 Federal Budget didn’t see a lift in SME confidence. In fact, despite a relatively positive budget response and reported improvement in current market conditions over the last three months, small business confidence in Australia has reverted back to 2017 levels; falling from 103.2 in the March 2018 quarter to 98.3 in June 2018. Performances have again fallen short of expectations. Most notably, any gains that have come through, have delivered little to businesses’ bottom lines.
Profitability continues to get squeezed, most notably in the Wholesale & Retail Trade and Hospitality & Recreation Services sectors where price discounting continues to be aggressive.
In the 12 months to June 2018, only 19.1 per cent of SMEs in Retail & Wholesale Trade have increased their inventory volume (compared to 29.9 per cent in March) and just 25.8 per cent reported an increase in the volume of exports in this quarter (compared to 46.5 per cent). When it comes to Hospitality and Recreation Services, the sector reported a drop of 9.4 per cent in profits in the last 12 months alone and an overall drop in confidence by 11.5 per cent.
While some industries face a difficult mid to short term, small businesses operating in construction for instance, are experiencing the opposite. In the past 12 months, a considerable proportion of SMEs in Construction have seen an increase in real business activity (49.2 per cent), sales (45.8 per cent), volume of residential building (22.3 per cent) and non-residential building (25.3 per cent).
With profit margins still clearly under pressure and long-term predictability remains uncertain, it is understandable that SME’s are cautious about the future.
When navigating the current economic terrain, it’s important to strike a balance between making business decisions that are tied to long-term planning and those that temporarily work in favour of the bottom line. While budget measures are supportive at the margin, the going looks likely to remain slow with a clear risk that profits will continue to struggle if activity again falls short of expectations.
Matthew Hassan, Westpac Senior Economist