Start-ups kept waiting for long-term vision

All in all, the Federal budget contained a patchwork of initiatives for small businesses with trade and service-based businesses, particularly those who support the mining sector, being the major beneficiaries.

However, although small companies account for 96% of all businesses, there was very little new funding directed to this sector. The lack of a long-term vision and policy for Australian entrepreneurship is a major concern.

As a small business advisor the budget for me delivered three key messages:

• As a result of labour shortages Australian small businesses will be facing increasing cost pressures from rising wage costs and most likely higher interest rates.
• The strong Australian dollar will continue to put significant downward pressure on prices and profit margins of those small businesses which export or compete with imports.
• The Government has no long-term vision and policy initiatives that will support and build the capability and skills of budding Australian entrepreneurs. We need capable and skilled business owners to start-up and build the next generation of businesses that will create employment and export dollars for this country. The mining boom will not last forever.

While the Government openly acknowledges there is a two speed economy, and there are increasing cost and inflation pressures, the budget was disappointing with its lack of policy response to this problem for small and start-up businesses.

The Government has announced a number of significant initiatives to address the labour shortage problem and to boost skills and capacity, which is greatly needed.  But this will take a while to flow through the economy and in the meantime expect wages to increase.

For small fast growing business it would have been good to see some of this funding go towards support for hiring the management talent and skills they require and in dealing with the tax burden of employee share schemes brought about by changes to the rules last year.

The $5,000 immediate write-off for car purchases is probably a measure that supports the car industry more than small business. Rather than providing additional deductions or a rebate from the ATO, the write-off purely creates a timing benefit by bringing forward a deduction that small businesses would normally have received as depreciation over a period of time.

When you take into account the reduced depreciation charge, this measure actually results in an additional upfront deduction in the first year of only $4,250.

The other problem with this initiative is that it only benefits businesses that use cars; typically the traditional trade and service-based businesses. Innovative entrepreneurial businesses developing new technologies, that don’t need or use cars, miss out.

The write-off is also inconsistent with the Government’s environmental reasoning behind changing the Fringe Benefits Tax treatment of cars, by acting as incentive to put more cars on the road. The change to FBT will to a certain extent result in a claw back of some of the benefits arising under the $5,000 car write-off initiative.

These changes are anticipated to result in more Fringe Benefits Tax being paid on the private use of cars.

The Government also confirmed changes announced as part of the Henry Tax Review.

The company tax rate for small business will be reduced to 29% from 2012-13. While the change is welcome, it only benefits those small businesses that operate in a company structure. It also results in potential tax implications for shareholders.

Lower company tax rates means lower franking credits and the effect of this is that shareholders will pay more tax when the profit is paid out as a dividend.

The immediate write off for assets costing $5,000 or less will apply to small businesses from 2012-13. Once again, a welcome initiative, but it is a timing benefit not an additional deduction.

While the Government was spruiking a tough budget, there is some concern that the cost saving measures did not go far enough. It’s feared that with the expected wage inflation and budget cuts not taking enough cash out of the economy, pressure will mount on the RBA to raise rates.

If this happens small businesses will face increased funding costs and less profit.

While the budget includes some additional welcome measures such as the creation of a $100 million venture capital fund to support start-ups in the renewable energy sector, it’s clearly lacking initiatives to provide significant additional support to counter the pressures currently being borne by innovative SMEs and start-up businesses, such as:

• The competition and price pressures faced by small exporters as a result of the strong Australian dollar. The Export Market Development Grant program, which is in place to support small exporters, is significantly under funded and should have been increased.
• The new and revised R&D Tax Concession program, which, if passed, will provide greater incentives to small innovative companies, still remains in a holding pattern with no announcement or clarification on changes to the program.
• Small business assistance programs were not expanded. Instead, funding for Enterprise Connect was reduced, and redirected to increase funding for the Small Business Support Line.
• No additional support has been provided to build the capability and competitiveness of budding Australian entrepreneurs. It would be nice to see some of the funding allocated to training, directed to this initiative.
• Reforms to the employee share scheme rules to make it easier and less costly for small growing businesses to offer equity to skilled executives.

Marc Peskett is a partner of MPR Group a Melbourne based firm that provides business advisory and planning services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises. You can follow Marc on Twitter @mpeskett