'We've kicked the can down the road': Australian businesses brace for slow recovery

For the thousands of small businesses, which have been the beneficiary of many of the Covid-related measures announced by the government over the past three months, the landscape after September is particularly treacherous.

The single biggest unknown is the extent to which they will be able to resume business. It’s unlikely international tourists will resume arriving.

But will people be back in their offices, going to dinner in restaurants, having coffee meetings, or even travelling between cities? Or will there be a second wave of infections that sees us retreat to more stringent rules on social interaction.

And what will that uncertainty mean for confidence and spending?

The unknowns are compounded by a lack of clarity about what will happen when the various Covid stimuli end. Now is the time to consider whether they have worked and what needs to be done to either taper them, or move to the next phase of support.

The $31bn success story

First the good news.

The cash flow boost, one of the most costly measures at $31bn for six months, appears to have been largely successful in providing extra cash flow to small businesses that employ people.

It has proved easy to access, did not involve extra paperwork, and was available early. It gives businesses with a turnover of $50m or less to get a credit for the PAYG tax they would usually pay on behalf of employees.

Each business received a minimum of $20,000 and up to $100,000 in two payments and they didn’t need to do anything other than lodge their usual business activity statements.

The credits for those who filed their BAS monthly flowed swiftly and gave them 300% in the first month. This meant that many did not then need to write cheques to the ATO during the crisis and could use the credit against other liabilities like GST payments.

Combined with jobkeeper, which also injects money into businesses by way of a wage payment (that must be passed on to the employeee) it appears to have forestalled a mass of collapses, particularly in retail and hospitality.

Whether businesses can survive beyond September without these cash injections depends entirely on how fast the economy comes back. If as the Treasury secretary, Steven Kennedy, suggested last week, we are heading more for a U than a V-shaped recovery, then some additional support for cash flow may be essential.

However, other measures have proved less successful.

The devil in the writeoff detail

One of the early business Covid-19 stimulus measures – an enhanced instant asset writeoff to encourage businesses to invest – appears to have fizzed because of fears about the direction of the economy and disrupted supply lines during the crisis.

The measure, announced in the first round of stimulus measures on March 12, allows businesses to claim the full value of equipment they buy up to the value of $150,000 (up from $30,000) against their income for the 2019-20 financial year.

The writeoff is now available to not just small business but businesses with a turnover of up to $500m. But there’s a catch. The equipment must be paid for and delivered to the business by 30 June.

Hard data on the uptake of the concession won’t be available until companies lodge their tax returns but anecdotal evidence (and perhaps common sense) suggests that many business owners, faced with uncertainty, are choosing to preserve their cash rather than buy new items.

For instance, motor vehicle sales were down 48.5% in April, compared to the same month last year, according to the industry sales tracker, V-Facts. Sales were already sluggish in calendar 2019, down 8% in compared to 2018.

V-Facts doesn’t separate business and private sales, but purchases of Hi-Luxes, the ubiquitous tradie vehicle, were down 35.5% in April.

“I want to say it’s fantastic: $150,000 gives farmers the capacity to buy a major piece of kit whereas $30,000 was not sufficient,” said the small business ombudsman, Kate Carnell.

“But you have to have something to write it off against. It’s not a grant, it’s an immediate writeoff of assets to $150,000,” she said.

For farmers likely to get a decent crop this winter, a new harvester or tractor might be just what they need, but they have had big hits to their incomes over the past 12 months or more during the drought.

Then there is the problem of disrupted supply lines.

Around the world, factories such as John Deere, which makes farm machinery, have been affected by shutdowns or have pivoted to making Covid protective gear.

“It’s a great incentive for business to invest and that flows right through the economy. But there are issues around the rules. Not just ordering and paying for it but it must be delivered by June 30,” says Carnell.

That means businesses have to take a gamble on equipment coming from offshore. Carnell would like to see the rules on delivery relaxed so that companies, who can now see the light at the end of the lockdown, can take advantage.

Surprisingly there are some bright spots. It seems Australians can’t do without coffee.

Rob Maisano, managing director of the Coffee Machine Warehouse in Clayton Victoria said the stimulus measure had been good for his business and he had been busier than usual.

“We usually keep about a thousand machines in stock. We’ve been selling to offices and to people who want to set up little cafes and coffee carts,” he said.

“There’s some models that have run out of stock but suppliers have plenty and if customers want a specific model, they say they can get them here in four weeks, which should be before the June 30 deadline,” he said.

The great insolvency unknown

Perhaps the most concerning is what will happen when the moratorium on filing for bankruptcy and insolvency are lifted.

Experts say the extension of the time frames to respond to a claim created a six months’ breathing space and staved off a tidal wave of corporate collapses and bankruptcies during the initial stages of the pandemic but will have unknown consequences down the track.

The timeframe for a company to respond to a demand from a creditor was extended from 21 days to six months and the government also temporarily increased the minimum threshold for creditors issuing a statutory demand from $2,000 to $20,000.

Accompanying those measures were changes to directors’ duties. They were given a six-month reprieve from personal liability for insolvent trading for “any debts incurred in the ordinary course of the company’s business”.

The debts are still payable and insolvency experts are predicting an escalation in October when six months expires.

Michael Catchpoole, partner at Corrs Chambers Westgarth and an insolvency expert says with the exception of Virgin Australia and a few others, there has been a general deferral of insolvency applications.

“That means we’ve kicked the can down the road with some of these companies. It could be much more difficult to restructure. Cash burn will have increased and creditors are likely to be less sympathetic.

“We have seen a tidal wave of equity raisings and that will have helped. But there is an opportunity cost that is lost if companies delay restructuring. It will be harder for companies to restructure if they have exhausted their reserves, especially as we are less likely to have a V-shaped recovery.”

Catchpoole doesn’t think there will be an avalanche of collapses in October but there will be “a recommencement of push factors” which will lead to an increase in filings for bankruptcy or insolvency.

It will range from the very large public companies to small and medium-sized enterprises , he says.

A wave of business failures will have some nasty side effects on the pace of recovery: a further spike in unemployment and a spiral effect as one collapse pushes creditors and those that depend on the enterprise into stress.

He suggests that this hiatus offers an opportunity for Australia to look at further reforms to insolvency laws similar to those announced in the UK last week , which will offer a better chance for companies that are genuinely trying to restructure to successfully navigate the process.

Adam Nikitins, an insolvency partner at EY said it looked like the hibernation strategy had been a success as there had not been a wave of corporate failures, which would be usual in a sharp downturn.

But he says there are challenges in the next phase as companies begin trading again.

He says many EY clients are concerned about the strains on working capital as they restart their businesses and begin ordering stock and paying suppliers again, but are still waiting for revenue from sales to come in the door.

“From a policy viewpoint, there has been a lot of support in place currently to keep people employed. A lot of the narrative has been about keeping skilled people engaged. Continued support will be required from government and financiers as we emerge from hibernation because of the increased cash flow need,” he said.

“No one has been here before. We don’t usually shut down the whole economy and then try to restart it,” he said.

“Businesses will be laser-focused on cash flow and looking for clear signals from the government post-September, when its is expected the economy will have started percolating again,” he said.