2021 Risks & Opportunities

Coming into the New Year, there is a hunger for a return to ‘normal’. But, with the cloud of Coronavirus still hanging over our heads, there are plenty of risks and opportunities to consider in 2021.

The Westpac-Melbourne Institute Index of Consumer Sentiment articulates this desire to ‘get on with things’. However, the Reserve Bank of Australia cautions that the recovery will be uneven and drawn out. And, GDP is not expected to return to pre-pandemic levels until the end of 2021.

The risks are not limited to the pandemic. It’s also important to look at Australia’s geopolitical relationships, notably with our largest trading partner, China.

Opportunities

Employers & Job Building

Reducing unemployment is a national priority. While the unemployment rate is expected to decline in 2021, further rises are expected as businesses restructure in response to the pandemic. Wage growth will also be subdued with excess capacity in the market.

Analysis from the Reserve Bank of Australia suggests one in five jobs were saved by JobKeeper. The November 2020 analysis found that one in five employees who received JobKeeper would not have remained employed during this period without it.

“Given that 3.5 million individuals were receiving the payment over the period from April to July 2020, this implies that JobKeeper reduced total employment losses by at least 700,000 over the same period.”
Reserve Bank of Australia

The number of businesses accessing JobKeeper reduced by around 450,000 in October 2020 with the transition to more stringent eligibility requirements. The shift now is to create jobs, not just keeping them.

There are a number of incentives for employers to grow employment and skills, including:

JobMaker

A 12 month “hiring credit” available for jobs created from 7 October 2020 until 6 October 2021.
JobMaker provides a payment to employers of $200 per week for eligible new employees aged between 16 and 29; and $100 per week for eligible employees aged between 30 to 35 years.
Eligibility restrictions apply to the business and the employee.
Employees need to have been out of work and receiving Government support for at least one month within the three months before they were hired.

Apprenticeship Subsidies

Subsidies of 50% of an apprentice’s wage (up to $7,000) are available for new and existing apprentices to keep them employed.
The schemes apply to the wages of new apprentices from 5 October 2020 and 30 September 2021, and existing apprentices from 1 January 2020 to 31 March 2021.
Eligibility requirements apply to the business and the apprentice.
In addition, subsidies are available for employers engaging apprentices in key industries with skills shortages. This includes: carpenters and joiners, plumbers, hairdressers, plasterers, bakers and pastry cooks, vehicle painters, wall and floor tilers, arborists, bricklayers and stonemasons and air-conditioning and refrigeration mechanics.
There is also support available for adults re-skilling and undertaking an apprenticeship, and for apprentices with a disability.

See the full list of incentives here.

State-Based Incentives

At the end of last year, the Victorian government announced a New Jobs Tax Credit for SME.
NSW has reduced payroll tax to 4.85% from 5.45% from 1 July 2020. There are also a myriad of incentives targeted to specific areas like the NSW regional growth fund.
WA has an Employer Incentive Scheme with a base payment of $8,500 for employing apprentices.

It’s worth seeing what is available in your region and in your industry.

Federal Government incentives generally do not overlap. That is, your business cannot receive incentives for JobKeeper and JobMaker, or JobMaker and an apprenticeship subsidy.

For individuals, JobTrainer offers those aged between 17 and 24 the ability to up-skill or re-skill and minimal cost.

HomeBuilder & the Housing Industry

The HomeBuilder scheme provides a tax-free grant to those building a new home or renovating. To date, around 27,000 homes are expected to be covered by the scheme.

The Assistant Treasurer recently announced an extension of the HomeBuilder scheme from 1 January 2021 to 31 March 2021.

HomeBuilder Extension:

For all new build contracts signed between 1 January 2021 and 31 March 2021:

Eligible owner-occupier purchasers will receive a $15,000 HomeBuilder grant (down from $25,000); and
The property price caps for new builds in New South Wales and Victoria will be increased to $950,000 and $850,000 respectively (from $750,000).

In addition, the construction commencement deadline will be extended from three months to six months for all eligible contracts signed on or after 4 June 2020.

Licensing Requirements and Registration for Builders & Developers:

Where an eligible contract is signed on or after the 29 November 2020, the builder or developer must have a valid licence or registration before 29 November 2020
Where an eligible contract is signed before 29 November 2020, the builder or developer must have a valid licence or registration before 4 June 2020

The eligibility criteria to access HomeBuilder remains the same. To be eligible you need to be an individual owner occupier, 18 years of age or more, an Australian citizen, and pass the income test. The income test for individuals is $125,000 and $200,000 for couples (based on your 2018-19 or later tax return).

The grants are available if you build a new home where the value of the house and land does not exceed the threshold ($750,000 to $950,000 depending on when the contract was signed and the State you live in), or a renovation where the value of the property is $1.5m or less.

Asset Write-Off Extensions

In the 2020-21 Federal Budget, the Government introduced a measure that allows businesses with turnover under $5 billion* to immediately deduct the cost of new depreciable assets and the cost of improvements to existing assets in the first year of use.

This means that an asset’s cost will be fully deductible in the year it’s installed ready for use, rather than being claimed over the asset’s life. And, there is no cap on the cost of the asset.

In November 2020, the Government announced it will modify the rules again enabling a broader range of businesses to access the instant write-off.

The amended rules will enable businesses with an aggregated annual turnover of $5 billion or more (the current maximum threshold) to access the measures if they can satisfy an alternative test.

Entities are able to pass this test if they have:

Less than $5 billion in total statutory and ordinary income in either the 2019 or 2020 income year; and
Incurred more than $100 million in expenditure on tangible depreciating assets between the 2017 and 2019 income years.

This will allow some Australian businesses that are connected with large global groups to access the measure.

In addition, the Government will enable businesses to opt-out of using the new instant asset write-off and accelerated depreciation rules on an asset by asset basis. Currently, the rules apply automatically if certain conditions are met, which for some businesses is not an effective use of the deduction. We recommend you talk to your accountant or financial planner to find out what will work best for you!

_{*Aggregated turnover. Aggregated turnover is your turnover plus the annual turnover of any business connected with you or that is your affiliate.}

The Risks

COVID-19 rules and regulations

Despite feeling like we are emerging from the pandemic, the promise of a widely available vaccine is still over the horizon and the risk of another wave remains very real.

For business, it will be essential to ensure that COVID-19 safe conditions are maintained. Aside from the obvious health risks of not maintaining a safe environment, a lockdown risks your business’s survival.

And the fines for breaching public health orders are hefty. In most regions, fines of around $1,000 apply to individuals and $5,000 for businesses

Australia’s relationship with China

Non-compliance with China’s political will comes at a cost.

China is Australia’s largest trading partner by a margin that dwarfs trade with any other single nation. The value of exports to China has doubled in the five years since the signing of the China-Australia Free Trade Agreement. Imports have also grown significantly up 42% over the same period.

But in response to Australia’s public positioning (in regards to the new defence pact with Japan, and a continued pro-democracy stance on Hong Kong), China has flexed its economic muscle through the disruption of Australian exports.

Cause & Effect Timeline:

April 2020 – Australia pushes for a formal WHO inquiry into the origins of COVID-19.
May 2020 – 80.5% tariff on Australian barley on the basis that barley is undervalued and subsidised. China imports approximately 70% of Australia’s barley crop.
May 2020 – Suspension of beef exports from four Australian processing plants relating to a 2019 investigation regarding inconsistencies with labelling and consignment certificates for some frozen and chilled beef products. China is the largest importer of Australian beef at 24%. Japan is second at 23% and the USA at 20%.
September 2020 – China states that Australian exports of wheat will face “enhanced inspection.” At the same time, wheat imports from the US to China have increased.
October 2020 – Chinese importers unofficially instructed to stop buying seven types of Australian exports – coal, barley, copper ore and concentrate, sugar, timber, wine and lobster. Goods in transit at the time the ban was imposed have been in limbo – $2m of rock lobsters were left on the tarmac unable to clear customs at Shanghai airport.
November 2020 – 107% to 212% “provisional” tariff imposed on Australian wine on the accusation that Australian wine is being dumped on the Chinese market causing “substantial” damage to Chinese wine manufacturers. Treasury Wine Estate, that make Penfolds, and represent an estimated 40% of the total annual wine export market to China, went into a trading halt after China’s announcement.

During a speech to the Press Club in August 2020, Minister Wang Xining stated that any long term relationship is based on “mutual respect”. Australia’s perceived lack of respect was highlighted by the 14 grievances leaked by a Chinese diplomat to Channel 9.

So, what does 2021 hold? Both the Prime Minister and the Defence Minister acknowledging China’s economic success and our strong ‘people to people’ relationship. But Australia has not publicly backed down, so there is likely to be more pain to come for Australian exports to China and no short-term resolution or conciliation.

Cashflow crunch

Australian economists are fairly united that there are a number of “zombie businesses” that are being kept alive by JobKeeper. These are the businesses that are only surviving because salary and wages are propped up by the subsidy.

The danger with these businesses is that they are continuing to take on debt. JobKeeper ends in March 2021, which coincides with one of the traditionally worst cashflow months of the year. It will be important to ensure that your business stays on top of its debtors and doesn’t become a bank for your customers.

It will also be important to understand your cashflow position, don’t over commit, and stay on top of labour costs.

We recommend you talk to us about how you can prepare early and optimise your cash flow to manage the transition out of JobKeeper.

You can find key dates for 2021 here.

Get more information about Coronavirus Stimulus available in Australia here.