1. Personal income tax measures

1.1 Increasing the Medicare levy low-income thresholds

The Government will increase the Medicare levy low-income thresholds for singles, families and seniors and pensioners from 1 July 2022 as follows:
• The threshold for singles will be increased from $23,365 to $24,276.
• The family threshold will be increased from $39,402 to $40,939.
• For single seniors and pensioners, the threshold will be increased from $36,925 to $38,365.
• The family threshold for seniors and pensioners will be increased from $51,401 to $53,406.

For each dependent child or student, the family income thresholds will increase by a further $3,760 instead of the previous amount of $3,619.

The increase in the thresholds provides cost-of-living relief by taking account of recent CPI outcomes so that low-income individuals continue to be exempt from paying the Medicare levy.

1.2 Exempting lump sum payments in arrears from the Medicare levy

The Government will exempt eligible lump sum payments in arrears from the Medicare levy from 1 July 2024. This measure will ensure low-income taxpayers do not pay higher amounts of the Medicare levy as a result of receiving an eligible lump sum payment, for example as compensation for underpaid wages.

Eligibility requirements will ensure that relief is targeted to taxpayers who are genuinely low-income and should be eligible for a reduced Medicare levy. To qualify, taxpayers must be eligible for a reduction in the Medicare levy in the two most recent years to which the lump sum accrues.

Taxpayers must also satisfy the eligibility requirements of the existing lump sum payment in arrears tax offset, including that a lump sum accounts for at least 10% of the taxpayer’s income in the year of receipt.

2. Small business measures

2.1 $20,000 instant asset write-off

From 1 July 2023 until 30 June 2024, the Government will temporarily increase the instant asset write-off threshold from $1,000 to $20,000.

Small businesses with an aggregated annual turnover of less than $10 million will be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. The $20,000 threshold will apply on a per-asset basis, so small businesses can instantly write off multiple assets.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter.

The provisions that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended until 30 June 2024.

2.2 New Energy Incentive for small businesses

Small and medium businesses with an aggregated annual turnover of less than $50 million will be able to deduct an additional 20% of the cost of eligible depreciating assets that support electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with the maximum bonus deduction being $20,000.

A range of depreciating assets, as well as upgrades to existing assets, will be eligible for the Small Business Energy Incentive. These will include assets that upgrade to more efficient electrical goods (such as energy-efficient fridges), assets that support electrification (such as heat pumps and electric heating or cooling systems), and demand management assets (such as batteries or thermal energy storage). Full details of eligibility criteria will be finalised in consultation with stakeholders.

Eligible assets will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024. Eligible upgrades will also need to be made in this period.

Certain exclusions will apply such as electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels.

2.3 Lodgment penalty amnesty program

A lodgment penalty amnesty program is being provided for small businesses with an aggregated turnover of less than $10 million to encourage them to re-engage with the tax system.

The amnesty will remit failure-to-lodge penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 that were originally due during the period from 1 December 2019 to 28 February 2022.

2.4 Halving the increase in quarterly tax instalments

The Government will amend the tax law to set the GDP adjustment factor for pay as you go (‘PAYG’) and GST instalments at 6% for the 2024 income year, a reduction from 12% under the statutory formula. The reduced factor will provide cash flow support to small businesses and other PAYG instalment taxpayers.

The 6% GDP adjustment rate will apply to small businesses and individuals who are eligible to use the relevant instalment methods (up to $10 million aggregated annual turnover for GST instalments and $50 million aggregated annual turnover for PAYG instalments), in respect of instalments that relate to the 2024 income year and fall due after the enabling legislation receives Royal Assent.

3. Superannuation measures

3.1 Government to amend the non-arm’s length income (‘NALI’) provisions

The Government will amend the NALI provisions which apply to expenditure incurred by superannuation funds by doing the following:
• Limiting income of self-managed superannuation funds and small Australian Prudential Regulation Authority (‘APRA’) regulated funds that is taxable as NALI to twice the level of a general expense. Additionally, fund income taxable as NALI will exclude contributions.
• Exempting expenditure that occurred prior to the 2019 income year.
• Exempting large APRA regulated funds from the NALI provisions for both general and specific expenses of the fund.

3.2 Increasing the frequency of superannuation guarantee payments

From 1 July 2026, employers will be required to pay their employees’ superannuation guarantee entitlements on the same day that they pay salary and wages.

Currently, employers are only required to pay their employees’ superannuation guarantee on a quarterly basis. By increasing the payment frequency of superannuation to align with the payment of salary and wages, this measure aims to ensure employees have greater visibility over whether their entitlements have been paid and better enable the ATO to recover unpaid superannuation.

Changes to the design of the superannuation guarantee charge will also be necessary to align with increased payment frequency.
This package will particularly benefit those in lower paid, casual and insecure work who are more likely to miss out when superannuation guarantee is paid less frequently.

3.3 Earnings for superannuation balances above $3 million taxed at 30%

From 1 July 2025, the Government will reduce the tax concessions available to individuals with a total superannuation balance exceeding $3 million.

Individuals with a total superannuation balance of less than $3 million will not be affected.

This reform is intended to ensure superannuation concessions are better targeted and sustainable. It will bring the headline tax rate to 30%, up from 15%, for earnings corresponding to the proportion of an individual’s total superannuation balance that is greater than $3 million. This rate remains lower than the top marginal tax rate of 45%.

Earnings relating to assets below the $3 million threshold will continue to be taxed at 15%, or 0% if held in a retirement pension account.
Interests in defined benefit schemes will be appropriately valued and will have earnings taxed under this measure in a similar way to other interests. This will ensure commensurate treatment.

The measure will not place a limit on the amount of money an individual can hold in superannuation. The current contributions rules will continue to apply.

4. Tax integrity measures

4.1 Expanding the general anti-avoidance rule (Part IVA)

The Government will expand the scope of the general anti-avoidance rule for income tax (Part IVA of the ITAA 1936) so that it can apply to:
• schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and
• schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

This measure will apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date.

4.2 Extending the compliance program for personal income tax

The Government will provide $89.6 million to the ATO and $1.2 million to Treasury to extend the Personal Income Tax Compliance Program for two years from 1 July 2025 and expand its scope from 1 July 2023.

This extension will enable the ATO to continue to deliver a combination of proactive, preventative and corrective activities in key areas of non-compliance, and to expand the scope of the program to address emerging areas of risk, such as deductions relating to short-term rental properties to ensure they are genuinely available to rent.

4.3 Improving engagement with taxpayers to ensure timely payment of tax and superannuation liabilities

The Government will provide funding over four years from 1 July 2023 to enable the ATO to engage more effectively with businesses to address the growth of tax and superannuation liabilities.

The additional funding will facilitate ATO engagement with taxpayers who have high-value debts over $100,000 and aged debts older than two years where those taxpayers are either:
• public and multinational groups with an aggregated turnover of greater than $10 million; or
• privately owned groups or individuals controlling over $5 million of net wealth.

4.4 Investing in superannuation guarantee compliance

The Government will provide $40.2 million to the ATO in the 2024 income year, which includes $27 million for the ATO to improve data matching capabilities to identify and act on cases of superannuation guarantee underpayment by employers and $13.2 million for consultation and co-design.

4.5 Four-year extension for GST compliance program

The Government will provide $588.8 million to the ATO over four years from 1 July 2023 to continue a range of activities that promote GST compliance.

These activities will ensure businesses meet their tax obligations, including accurately accounting for and remitting GST, and correctly claiming GST refunds. Funding through this extension will also help the ATO develop more sophisticated analytical tools to combat emerging risks to the GST system.

4.6 Extending and merging the Serious Financial Crime Taskforce and Serious Organised Crime program

The Government will extend funding for the Serious Financial Crime Taskforce (‘SFCT’) and Serious Organised Crime program (‘SOC’) over four years to 30 June 2027 and merge the programs, with a merged SFCT to commence from 1 July 2023.

The SFCT and SOC are currently separately funded ATO-led cross-agency collaborations between the ATO, national policing and other law enforcement and regulatory agencies, targeting serious and organised crime groups and serious financial crime and tax evasion.

An extension and merging of these programs will maximise the disruption of organised crime groups that seek to undermine the integrity of Australia’s public finances.

5. Other budget measures

5.1 Capital allowances – Accelerating the capital works tax deduction for ‘Build-To-Rent Developments’

For eligible new build-to-rent projects where construction commences after 7:30pm (AEST) on 9 May 2023 (Budget night), the Government will:
• increase the rate for the capital works tax deduction to 4% per year; and
• reduce the final withholding tax rate on eligible fund payments from managed investment trust (‘MIT’) investments from 30% to 15%.

This measure will apply to build-to-rent projects consisting of 50 or more apartments or dwellings made available for rent to the general public. The dwellings must be retained under single ownership for at least 10 years before being able to be sold and landlords must offer a lease term of at least three years for each dwelling.

The reduced managed investment trust withholding tax rate for residential build-to-rent will apply from 1 July 2024. Consultation will be undertaken on implementation details, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time dwellings must be retained under single ownership.

5.2 FBT – Electric Car Discount

The Government will sunset the eligibility of plug-in hybrid electric cars for the FBT exemption for eligible electric cars. This change will apply from 1 April 2025.

Arrangements involving plug-in hybrid electric cars entered into between 1 July 2022 and 31 March 2025 remain eligible for the Electric Car Discount.

Note that this announcement is already reflected in the legislation. Specifically, Treasury Laws Amendment (Electric Car Discount) Act 2022 included a ‘sunset clause’ with respect to plug-in hybrid electric cars. The law applies such that a plug-in hybrid electric car ceases to be a ‘zero or low emissions vehicle’ from 1 April 2025 and, thus, ceases to be eligible for the FBT exemption from 1 April 2025, subject to transitional measures.

5.3 Incentivising pensioners into the workforce – six months extension

The Government will provide $3.7 million to extend the measure to provide age and veterans pensioners with a once-off credit of $4,000 to their Work Bonus income bank and temporarily increase the maximum income bank until 31 December 2023.

Under this measure, pensioners can earn up to $11,800 before their pension is reduced, supporting pensioners who want to work, or work more hours, to do so without losing their pension.

How to address goal-cascading pitfalls

The goal-cascading process can be derailed by personal biases and other issues along the chain of command, according to the experts interviewed the World Business Council for Sustainable Development. Here’s how to address key issues.

‘Safety-first’ mentality

It’s tempting for managers to focus their efforts on their own areas of expertise. This may lead them to ignore or change goals that force them into new territory. Addressing this bias may require establishing a sense of safety by assuring the employee there is room for error; suggesting ways for the person to improve their skills in a given area; and underlining the importance of a particular goal to the success of the business.

Moral hazard

Complying with corporate goals often comes with trade-offs for managers and employees. For example, a corporate goal of making a more efficient retail product line-up might require store managers to drop some of the products they prefer. Leaders can respond by assuring these employees that the change won’t affect their chances of a promotion or salary increase; sharing detailed information that shows why the change will benefit the company; and working with employees to create new strategies.

 Differing interpretations of strategy and goals

Especially in a large organisation, the original intent of a goal can be lost in translation. There also may be debates over the best way to achieve a goal. Leaders can avoid confusion by providing specific strategies and tools to achieve goals. They also can engage with employees throughout the organisation, including through “skip level” meetings with lower-level staff, to ensure that everyone shares the same understanding of the company’s goals.

Lack of transparency and efficiency in the cascade process

The cascade process is meant to create “line of sight” between the work of individuals and an overall strategy — but it can become cumbersome and confusing as goals are passed from level to level of the organisation. To improve transparency and efficiency, the experts interviewed for this article suggested that businesses create and share documents that clearly “map” the overall strategy and demonstrate how each individual’s goals are linked to the pillars of that strategy. An open and receptive culture also will allow staff to ask questions and highlight potential inefficiencies.

Tips for financing sustainable transformations

Don’t limit your thinking to borrowing money or issuing new stocks or shares. Apply a bit of imagination to look for alternative sources of funding that are aligned with what you want your project to achieve:

1. List the positive sustainable benefits the project will achieve and the negative impacts it will avoid. Use this list to search for innovative forms of sustainable funding that match those impacts.
2. Search for industry- or business-specific grants and subsidies that cover the sustainable impacts of your projects. If you feel your project doesn’t fit, consider modifying it accordingly.
3. Search for nongovernmental organisations, charities, or philanthropic foundations that share your aspirations and where there can be a meaningful collaboration. Don’t be afraid to undertake pioneering projects where you can be an exemplar for these organisations. Often funds are available for these innovative, transformative projects.
4. Search for targeted financial products or sources of funding linked to the potential impact of your project, eg, impact investors or sustainability bonds.
5. Consider blended finance products that combine public and private sources of funding.
6. Consider joint ventures with other commercial businesses, as this may make the project more investable for finance providers, eg, by having large enough scale, shared risks, and reduced set-up and monitoring costs.
7. Keep an eye on market innovations, as the finance market is dynamic, agile, and fast-moving. Don’t discount crowdfunding and even consider pre-selling sustainable products.
8. Always consider the after-tax cost of any financial instruments, as different funds and projects may have different tax treatments.
9. Check for any additional disclosure requirements, enhanced assurance, or accountability requirements attached to the funding, as this could add to the cost.

ASIC Announces Extension To Reporting Deadlines For Unlisted Entities

The Australian Securities and Investments Commission (ASIC) announced that it will extend the statutory reporting deadlines for unlisted entities reporting at 30 June 2022. 

The media release cites resourcing pressures as the main reason for the extensions. Many companies and audit firms are battling staff shortages due to travel restrictions, resignations, and increasing COVID-19 cases. Furthermore, current world events and changes in economic conditions may mean that pulling financial reports together will require more work, especially when it comes to making judgements around asset values and provisions. More effort may also be needed to ensure financial reports contain high-quality disclosures that address changes and events that had a significant impact on entities during the reporting period.

The one-month extension has the following implications for Chapter 2M lodgement periods of unlisted entities:

Full year financial reports

• unlisted disclosing entities and unlisted registered schemes – extended from three to four months
• all other unlisted entities (non-disclosing public and proprietary companies) – extended from four to five months

Half year financial reports

• unlisted disclosing entities – extended from 75 days to 75 days plus one month

Chapter 7 reporting deadlines have been affected as follows:

• unlisted Australian Financial Services (AFS) licensees that are bodies corporate and are also disclosing entities or registered schemes – extended from three to four months
• unlisted AFS licensees that are body corporates and are not disclosing entities or registered schemes – extended from four to five months
• AFS licensees that are not bodies corporate – extended from two to three months

The reporting relief does not apply to registered foreign companies.

Grandfathered proprietary companies that make use of the deadline extension relief will retain their grandfathered status. However, the directors’ report must disclose the fact that ASIC relief has been applied to report to members no later than one month after the usual reporting deadline.

Entities that are not within the scope of the latest reporting relief granted by ASIC can apply to ASIC individually for a lodgement extension. Such applications should contain sufficient information to allow ASIC to evaluate the impact of current events and conditions on the entity.

ASIC has indicated that there is no intention to grant extensions for balance dates commencing after 1 July 2021, however it will continue to monitor changing market conditions and how these impact entities and audit firms.

For further information, please refer to ASIC’s media announcement.

ATO Focus On Rental Property Income And Deductions

Income And Tax Deductions From Rental Properties Is One Of The Four Key Areas That The ATO Is Focusing On This Tax Time.

The ATO is urging rental property owners to ensure they carefully review their records before declaring income or claiming deductions this Tax Time, and for registered tax agents such as KGBM to ask a few extra questions of our clients who own rental properties.

As your registered tax agent, we can only work with the information we gather from our clients, and we know some clients won’t know everything they need to tell us (which is understandable).

INCLUDE ALL RENTAL INCOME

The ATO receives rental income data from a range of sources including sharing economy platforms, rental bond authorities, property management software providers, and state and territory revenue and land title authorities. The amount of data the ATO accesses grows each year, making it easier and faster for them to spot any rental income that you have charged your tenants, but haven’t declared (even unintentionally). When preparing tax returns, all rental income must be included, such as from short-term rental arrangements, renting part of a home, and other rental-related income like insurance payouts and rental bond money retained.

Further, income and deductions must be in line with a rental property owner’s ownership interest, which should generally mirror the legal documents.

GETTING YOUR EXPENSES RIGHT

Not all expenses are the same – some can be claimed straight away, such as rental management fees, council rates, repairs, interest on loans and insurance premiums. Other expenses such as borrowing expenses and capital works need to be claimed over a number of years. Capital works can include replacing a roof, or a new kitchen renovation. Depreciating assets such as a new dishwasher or new oven costing over $300 are claimed over their effective life.

Refinancing or redrawing on a rental property loan for private expenses such as holidays or a new car, means that the amount of interest relating to the loan for that private expense can’t be claimed as a deduction.

If income from a rental property in a holiday location is earnt, it needs to be included in tax returns.

KEEP GOOD RECORDS TO PROVE IT ALL

Records of rental income and expenses should be kept for five years from the date of tax return lodgments or five years after the disposal of an asset, whichever is longer.

Adequate records should demonstrate how the expense was incurred for the rental property and the extent to which it relates to producing rental income. Records must include the name of the supplier, amount of the expense, the nature of the goods or services, the date the expense was incurred, and the date of the document.

ATO’s New Crackdown On Discretionary Trusts

T he ATO has just updated its guidance around trust distributions made to adult children, corporate beneficiaries and entities that are carrying losses. Depending on the structure of these arrangements, there is a potential that the ATO may take an unfavourable view on what were previously understood to be legitimate arrangements.

Background

For various reasons, including legal tax minimisation and asset protection, many business owners operate their affairs through a trust structure. While trust structures are legitimate, the ATO has become increasingly sceptical of the motivations behind the use of trusts which it believes in many cases are motivated chiefly by tax minimisation. In February 2022, the ATO updated its guidance directly focusing on how trusts distribute income, and to whom! Consequently practices which may have once been previously accepted may now not be. This may result in  higher taxes for family groups in particular – both going forward, and potentially retrospectively.

Target

The ATO is chiefly targeting arrangements under s100A of the Tax Act, specifically where trust distributions are made to a low rate tax beneficiary but the real benefit of the distribution is transferred or paid to another beneficiary usually with a higher tax rate. In this regard, the ATO’s new Taxpayer Alert (TA 2022/1) illustrates how s100A can apply to the quite common scenario where a parent  benefits from a trust distribution to their adult children.Released at the same time, the ATO’s new draft ruling states that for the new guidance to potentially apply, one or more of the parties to the agreement must have entered into it for a purpose (not necessarily a sole, dominant purpose) of securing a tax benefit. This sets the bar quite low and may capture a number of arrangements.

Assessing The Risk

The ATO released an accompanying guideline providing taxpayers with a risk assessment framework for them to work through with their accountants to assess the level of risk involved in current and past distribution arrangements. In the guideline, the ATO has provided a number of examples of high-risk arrangements that are actually quite common and include:

1. Arrangements where the presently entitled beneficiary lends or gifts some or all of their entitlement to another party and there is a tax benefit obtained under the arrangement
2. Arrangements where trust income is returned to the trust by the corporate beneficiary in the form of assessable income and the trust obtains a tax benefit
3. Arrangements where the presently entitled beneficiary is issued units by the trustee (or related trust) andthe amount owed for the units is set-off against the beneficiary’s entitlement
4. Arrangements where the share of net income includedin a beneficiary’s assessable income is significantly morethan the beneficiary’s entitlement
5. Arrangements where the presently entitled beneficiary has losses.

For arrangements that fall into the high-risk category, the ATO advises that it will conduct further analysis on the facts and circumstances of the arrangement as a matter of priority. If further analysis confirms the facts and circumstances of your arrangement are high risk, they may proceed to audit where appropriate.

What Next?

The ATO’s new ruling and guidelines are still in draft form, and are expected to be finalised soon. Once finalised, they are intended to apply both prospectively and retrospectively. However, for entitlements conferred before 1 July 2022, the ATO has indicated it will stand by any administrative position reflected in its prior website guidance before the new material was released.

If you have any concerns about your trust distributions and exposed risk to Section 100A, you should contact KGBM for a discussion based on your personal circumstances.

How CFOs are grappling with increasing complexity in M&A market

The rapidly shifting economic landscape is driving changing approaches to valuations and deal activity.

Diligent finance leaders are finding new ways to reduce risks in merger and acquisition (M&A) deals and drive long-term value. They’re scrutinising deals in much more detail and finding different valuation metrics, as markets become crowded with hard-to-price startups. This helps finance leaders weigh risks and benefits while moving quickly to avoid missing out in fast-moving markets.

A barrage of factors have increased complexity in M&A markets.

Rocketing prices for technology firms have threatened the validity of traditional valuation techniques as tech companies’ values are often based more on intangible factors and future cash flow potential and less on fundamentals like current cash flow.

Economic and supply chain disruptions caused by the pandemic and the ongoing war in Ukraine have made it harder to identify and quantify risks in acquisition targets. Increasing regulation is adding risk and red tape. The shift to remote working slowed the deal-making process by depriving negotiators of the face-to-face meetings that are often critical to building mutual trust and closing deals.

CFOs say these complexities are testing their skills as they strive to ascertain fair prices for companies they are trying to acquire. Deriving long-term value from deals continues to be a challenge, with more than half of all mergers underperforming, according to PwC.

Addressing all these complexities is a critical issue, given that 62% of companies indicated their growth would come primarily from M&A in 2022, according to an outlook report by the US-based Citizens Bank.

Startups and complexity

Las Vegas-based Rodrigo Vicuna, CFO at the financial infrastructure provider Prime Trust, said soaring valuations of financial technology and related companies in 2020 and 2021 sparked impressive growth and spurred more startups to enter the market.

“But with interest rate increases and overall economic growth expected to slow in 2022, valuations are under pressure,” he said. “Emerging and growth-stage companies will consolidate, and companies will turn to M&A to further growth.”

As a result, finance executives will need to be nimble in this complex global market.

“CFOs will need to justify higher multiples,” he said. “The fundamental complexities of valuing a company haven’t necessarily changed, but finding or defining useful comparison has.”

Vicuna added that companies that can stave off competition with unique intellectual property are more valued than those in the industry that can’t offer solutions that are as dynamic. But it may not be fair to compare newer fintechs to older or less innovative companies.

Given that technological adaptation is now a consistent pressure across all industries, this is not just a tech sector issue. The increasing number of startups trying to disrupt many traditional industries can create a complicated picture of fair value, said India-based Anish Ailawadi, senior director at research firm Acuity Knowledge Partners.

“Complexity is higher in a startup ecosystem, where loss-making businesses are valued on future cash flow or uniqueness of business plans,” he said. “As such, firms use those distinctive valuation metrics and KPIs in place of traditional metrics such as profitability or return on investment.”

Adriana Carpenter, CPA, the CFO at the US-based expense management technology platform provider Emburse, encountered many of these issues in two acquisitions her company made last year.

“Valuations are high, with lots of competition for assets,” she said. “‘But there is also more uncertainty, which breeds more risk. For tech targets, we are getting savvier about digging into the type of tech and maturity of its infrastructure.”

Carpenter said she now needs to understand fully the answers to questions such as, how are the company’s operating platforms integrated and can they be transitioned? Do they use open source software? Where does their intellectual property sit, and are there issues with it?

Other factors include which international laws and taxes apply to the target and how they might mesh with local ones, Carpenter said. The proliferation of regulations in different regions — for example, around privacy and security in the EU’s General Data Protection Regulation (GDPR) — also create valuation and integration challenges.

She suggested using a third-party firm familiar with tax laws and other regulations to fully understand any cash, tax, or integration challenges that could arise after a deal is finished.

Not ‘room for forgiveness’

This proliferation of regulations may help explain why interest in international deals declined among both buyers and sellers, according to the Citizens Bank M&A Outlook 2022 survey. It showed middle-market companies’ decreased interest in global M&A for sellers (from 33% in 2021 to 29% in 2022) and buyers (from 47% to 41%).

Citizens also highlighted that explosive growth means companies need to make more and faster returns to make deals work. But this is harder to predict, given the way the COVID-19 pandemic and other economic factors such as labour market challenges and higher commodity prices have hampered operations in many sectors.

As Carpenter put it: “There’s not as much room for forgiveness, and the pandemic made that worse.”

She highlighted that, with a workforce that is increasingly scattered around the globe, buyers must understand exactly where acquired employees are, how they can be integrated into the new company, whether there will be any headcount reduction or merging of teams, and how to communicate that.

“In a technology deal, you also need to know specifically who and where the software developers are, and whether they are outsourced or internal,” she said.

Carpenter said using workers based in other countries is much more prevalent. So a key consideration is how likely it is that individuals in various locations will stay in the transition.

Buyers also have to balance all this detail about workers against the speed of the process and risk of losing out to competition, she said.

Effect of market uncertainty

Adding to these issues is a slew of economic uncertainties, including those linked to Russia’s invasion of Ukraine and to rising inflation and interest rates.

Carpenter said: “We are watching the Ukraine situation closely. Any buyer needs to do a lot of due diligence into the target company’s exposure, including any Russia-related revenue, operations, and potential effect from sanctions.”

Vicuna said that with rising interest rates and organic growth forecast to slow, it is difficult to predict the trajectory of stock prices. In this situation, it is best to focus on fundamentals such as how fast and consistent the target company is growing, its debt level, and its competitive advantage.

“With capital tightening, companies that relied on short-term growth might have weaker positioning,” Vicuna said. “Those with better fundamentals, such as strong balance sheets, will be better positioned in a changing market and benefit from acquisitions. Capital tightening means fintech companies will increasingly have to rely on investor capital, M&A, or organic growth, which could make it easier for acquirers.”

Despite all these headwinds, PWC’s 2022 outlook on global M&A industry trends predicts intense competition between corporates, private equity, and special-purpose acquisition companies for deals will continue. The strategic shift to digital, disruptive business models is not going away and should continue to drive M&A decisions. As these factors push up multiples and return expectations, it heightens the need to bring deeper operational expertise and puts sharper focus on value creation than ever before, PwC found.

How to weight ESG risks

Companies will also have to intensify their focus on environmental, social, and governance (ESG) factors, due to increased interest in sustainability issues amongst investors and consumers, according to PwC.

Buyers are increasingly accounting for ESG-related risks and opportunities in M&A decisions. For example, in PwC’s 2021 survey on global private equity responsible investments, more than half of respondents either refused to enter an agreement with a partner or turned down a potential investment on ESG grounds.

Ailawadi said to expect more focus on sustainability as time goes on.

“We expect the increased focus on ESG metrics in deal-making and valuations to be more pronounced in 2022 and beyond,” he said. “Valuations are expected to remain high for sustainable businesses.”

Capability plays

PwC’s report on doing the right deals shows 53% of acquirers underperformed their industry peers over the 24 months following completion of their last deal. This was based on analysis of 800 deals between 2010 and 2018.

The best way to avoid this is to base deals on capabilities, the report said. The analysis showed “capability access” deals — those that aim to capture value-creating strengths — were the only type that delivered above stated aims, across all sectors. Deals aiming to diversify strategy delivered as expected, while those looking to consolidate or increase product, category, or geographical adjacency all underdelivered.

PwC attributed the success of capability strategies to companies acquiring new strengths enabling them to thrive in a changing competitive landscape.

Carpenter explained how this kind of strategy has worked at Emburse.

“Take our acquisition of the Roadmap app last year,” she said. “Many mobile apps will connect you to a travel platform, but our acquisition went way beyond that — integrating manual task automation with a suite of information that increases traveller happiness at their destination. It aligns with our strategic vision to humanise work.”

She added that buying pre-revenue companies can be a drag on revenue growth. But it might be worth it if you can, for example, acquire synergistic technology. Start some integration before closing the deal or it could impair your ability to execute that vision.

You also can’t miss a beat in making acquired employees feel welcomed and integrated, Carpenter said. As there is so much competition, the stakes are higher.

Despite the reduced interest in international deals, buying foreign companies is still a way to address complexity by widening your search into areas where there may be less competition or regulation, she said.

Are You Ready for the New Director IDs?

Who?
All directors of a company registered Australian body, a registered foreign company or Aboriginal and Torres Strait Islander corporation will need a director identification number (director ID).

What?
A director ID is a unique identifier you need to apply for once and will keep forever, regardless of whether you change companies.

Why?
It will help prevent the use of false or fraudulent director identities and identify and eliminate director involvement in unlawful activity, such as illegal phoenix activity. Thank goodness!

When?

• If you were already an existing director under the Corporations Act on or before 31 October 2021, you must apply for your director ID by 30 November 2022.
• If you become a director between 1 November 2021 and 4 April 2022 you must apply within 28 days of appointment.
• If you become a director from 5 April 2022 you must apply before appointment.

If you don’t meet your obligations, you may be issued with an infringement notice or there may be civil or criminal penalties.

How?
The fastest way to do this is to apply online.
You will need:

• Your tax file number
• Residential address held by the ATO
• Two documents to verify your identity

Once you have done this, you can login and apply for your director ID. The application process should take less than 5 minutes.

https://www.abrs.gov.au/director-identification-number/apply-director-identification-number

Businesses need innovation now more than ever – How CFOs can enable innovation

Organisations in every corner of the economy are focusing with renewed intensity on innovating to anticipate and meet new customer expectations accelerated by and arising from the pandemic. We are not going back to the way things were pre-2020. The pressure is on to transform business models from top to bottom and acknowledge that innovation, far from being “cool stuff” or an off-to-the-side, not-always-measurable set of activities, is core to any business’s strategy in this rapidly changing, uncertain, and unpredictable world.

CFOs, by virtue of their role in an organisation, their platform, and their relationship to the board, the CEO, and their C-suite colleagues, are uniquely positioned to enable an organisation’s innovation results. Their ability to exercise innovation leadership at this moment may be vital to their business’s future. This article presents recommendations on what they can do to enable the innovation agenda and how to ensure their actions translate into results. (For a look at whether an organisation could benefit from devoting one executive to the innovation function, see the sidebar “The Pros and Cons of Appointing a Chief Innovation Officer”.)

Defining ‘innovation’ — a word that sparks admiration and controversy

The word “innovation” itself can be polarising. It conjures up coolness and threat, inevitability and unpredictability, attraction and avoidance. Few will debate that innovation is essential — yet it fails more often than it succeeds and can be easily derailed by the forces of the status quo.

Innovations are viable new offerings that solve people’s real problems; ie, they:

• Can be executed and delivered — technically, legally, ethically, financially, operationally, etc.
• May be new to a segment, geography, industry sector, or even to the world.
• May be incremental — enhancing an existing business, product, service, experience, etc. — or disruptive and completely game-changing.
• Address actual needs of the people a business wants to serve, whether the business has a business-to-business or business-to-consumer focus.
• Exist in many forms as illustrated by the Ten Types of Innovation model created by The Doblin Group. In its research, Doblin has found that innovations tend to be least effective when focused solely on product, and most effective when combining five or more of the ten types. For example, consider how Ikea has combined innovating the brand, customer experience, product, business model, and processes, or how Zappos innovates the brand, customer experience, channel, product assortment, and business model — in both cases creating unique positions in the market and in the minds of their customers.

Where is the CFO’s leverage to enable innovation?

The CFO can accelerate innovation progress, energise the organisation, and signal culture change by taking action in three areas:

Ensure resources are adequately allocated to innovation

Innovations don’t generally happen within the confines of the annual planning cycle. The reality is that innovation can feel messy relative to the structures most businesses follow around budgeting, forecasting, and planning. It’s driven by the marketplace, by customers’ expectations, and, as the world has experienced this year, by events beyond our control.

Consider good practices for resourcing innovation that create flexibility and support financial management requirements. For example:

• Challenge teams coming forward with innovation proposals to see themselves as founders, who self-fund the very first steps before seeking outside capital. Good founders gather qualitative, directionally meaningful customer feedback, and develop rough prototypes for proof-of-concept purposes on shoestring budgets.
• Borrow from the startup playbook by funding early-stage concept development in incremental tranches, investing relatively small amounts of capital as milestones are met. Plan a research and development line into the budget so that these investments are accounted for; and anticipate larger investments when it is time to scale.
• Value and consider each innovation initiative as an item in the investment portfolio the business is creating to assure the company’s future. Each investment will have a different degree of risk and reward, and likelihood of success, and will pay off at a different point in time. We know that a balanced portfolio mitigates risk and also bakes in the reality that not all portfolio items will succeed or succeed to the same degree or at the same time. Expect that many projects will yield learning and fail to reach commercial success but create value insofar as they can inform future efforts or may be “version 1.0” renditions that require further iteration or time, so should not be discarded. Mapping the portfolio initiatives on a matrix will help confirm whether the mix is right, too aggressive, or too conservative relative to the company’s strategy and goals.

Develop policies and processes that facilitate innovation

Some years back my team wanted to run a test in partnership with a startup company whose advanced technology could enable exceptional delivery of critical elements of the customer experience, overcoming a significant barrier that business-as-usual solutions had not addressed.

The project manager set off through the standard approval process, starting with contacting the procurement team. I received a call one day from the procurement specialist who told me, “We cannot work with this vendor because, according to their [Dun & Bradstreet] report, they lose money.”

No kidding. This was an early-stage startup (which, incidentally, ended up with a $100 million-plus exit a few years later that we never could have foreseen). As is typical of early-stage businesses, this startup was losing money at that point — capital had been invested in building a world-class platform, and the sales pipeline was not close to maturing.

By the standards of a scale business operating in a highly regulated sector, integrating a capability from a P&L-negative provider would not be acceptable. But in the case of a low-volume test of a new capability whose functionality is not core to the safety and soundness of the enterprise, the risks are different and so are the mitigation strategies. In this case, we articulated upfront a clear exit plan, including what we would communicate to customers involved in the pilot; acknowledged that the pilot investment would be written off; and had a clear plan to account for a write-off in our financials.

Applying policies and processes that work well for a scale operation can be overkill for a nascent concept. Innovation requires a different approach with rigour appropriate to the task, risk, and capital involved.

What can the CFO do to cultivate innovation-appropriate policies and processes?

• Help C-suite colleagues and the finance team focus on asking the question “What is the problem we are trying to solve?” in assessing next steps for a new concept.
• Ensure relevant processes are in place to assess and approve innovation vendors and other strategic decisions that both enable experimentation and address the need to protect the enterprise.

Adopt relevant metrics

The CFO can lead the adoption of common-sense approaches to ensure discipline — the right kind of discipline — for evaluating and monitoring emerging business models.

When measuring innovation effectiveness, what is most important is to ask the right questions, be confident in relying on judgement where facts simply do not exist, seek metaphors from other sectors or markets, and accept good enough data that can be refined along the way.

Smart questions answered in fast test-and-learn cycles can help a team to derive the relevant metrics and keep innovation projects moving closer to success, or to the set-aside pile.

There is comfort in hard data. It is reassuring to see numbers in organised columns and rows with optimistic trends demonstrating success. But innovation is messy, and it’s vital to explore, listen, and dig into qualitative insights that could be important signals that are just too raw to quantify. (See the sidebar “What to Ask First”.)

What can the CFO do to succeed as an innovation enabler?

The CFO role is evolving, and for people pursuing careers that include even a stint in the finance function, this is an exciting time to make an expanded contribution to their company, leveraging the unique positioning and attributes of their roles. Address these four priorities to support this evolution:

• Step up to the broader role, acknowledging the opportunities beyond traditional reporting, budgeting, and forecasting responsibilities and how critical this scope is to the business’s future.
• Update the talent strategy for the finance function, in particular by recruiting diverse team members and encouraging the strengthening of skills in customer insight, data analytics, and trend analysis that will enable them to be productive and highly valued thought partners to colleagues working on innovation initiatives.
• Assess and augment the capabilities the function needs to perform effectively now, particularly technology capabilities that allow ready access to useable data and support the team’s ability to get from data to insight to action.
• Find the right balance between shareholder requirements and those of the other stakeholders to the business — customers, vendors, partners, employees, regulators, and the broader community.

CFOs must embrace the reality that to be an innovation enabler, many of the decisions they will be asked to make will be “and” decisions, not “either/or” choices. They will be faced with polarities. To identify, shape, test, launch, and scale innovations requires financial management approaches that may feel at odds with traditional ways of operating. But the adoption of fit-for-innovation methods is essential to nurturing new ideas and allowing them to grow into commercial successes.

The pros and cons of appointing a chief innovation officer

As a two-time former corporate chief innovation officer, I am often asked, “Is it a good idea to have a chief innovation officer?” Here’s the not-so-simple answer:

• Innovation happens with skills, leadership, and a mindset that are quite different from those that drive a mature business at scale. The benefits of a C-suite innovation executive with the authority to hire and lead a small team are that this team, properly built, can seed those complementary skills and capabilities, and the role can be a powerful signal to the organisation that innovation is a priority.
• The downside is that innovation does not happen in a silo and will benefit from the capabilities and institutional knowledge of the organisation at large. A separate team can send a false signal to the rest of the organisation that the accountability rests in the team, when in fact everyone should feel they have skin in the innovation game.

The CFO is well positioned to advocate for innovation governance that engages the entire C-suite and:

• Holds business unit heads and functional experts accountable for contributing to the innovation team’s success;
• Encourages collaboration and pooling of expertise needed to advance concepts before they warrant dedicated staffing; and
• Helps ensure that innovation priorities and corporate strategy are connected.

What to ask first

Top questions for establishing innovation metrics for early-stage concepts include:

• How big is the addressable market?
• What would you have to believe for this to be a concept worth pursuing? In the absence of a rear-view mirror’s worth of history, it’s better to look forward and envision market, customer, operational, and other basics that would need to exist for a concept to appear reasonable.
• What appear to be the likely key drivers of revenue, expenses, and the balance sheet?
• What is the unit profit model, and what is the potential to scale?

Trust Set Up: Frequently Asked Questions

What is the difference between a Family Trust and a Unit Trust?

A Family trust, also known as a Discretionary Trust, give the trustee the discretion to decide who recieves distrubitons, how much and how often payouts occur. They tend to also include clauses that allow distribution to extend to family members of the Specified Beneficiaries.

A Unit Trust (also known as a Fixed Trust) differs from a Family Trust in that the trustee generally does not hold discretion over the distribution of assets to beneficiaries.
These structure divide the trust property into units, similar to shares of stock. Each beneficiary (known as a “unit holder”) owns a given number of those units, and at the end of each year, he or she receives a distribution from the trust, based on the number of units held. Ideal when multiple families are involved, Unit Trusts operate somewhat like a company.

What is the role of a Settlor?

The settlor must hand over the settled sum to the trustee to be held on the terms of the trust for the benefit of the beneficiaries.
The settlor does not have to reside in Australia, however they must be present when the trust deed is settled because he/she is responsible for the trust asset becoming vested in the trustee.
Once they sign the deed, therefore putting the trustee in charge of the trust assets, the  settlor then steps out of the picture.
It is advisable to limit the settlor’s role in a trust to the initial establishment of the trust and payment of the settled sum.
To avoid the perception that the settlor’s declaration of trust is revocable, the settlor should be unrelated to the trustee and the beneficiaries of the trust.

Should I have a Individual or Corporate Trustee?

It is a common practice to have corporate trustees for family trusts for asset protection. This ensures the limitation of the trustees’ liability to the corporate asset.

Generally, corporate trustees are shell corporations with no, or minimal, assets. The trustee is personally liable for the trust’s liabilities. Therefore, it is common for trusts to have corporate trustees to limit the trustees’ liabilities to the assets of the corporation.

Advantages of switching/implementing a corporate trustee structure include:

• they can exist indefinitely, unlike an individual trustee;
• you do not have to change the legal ownership of the trust’s assets when the directors or shareholders of the corporate trustee change. In contrast, you have to change the legal ownership of the trust’s assets when an individual trustee changes;
• the shareholders of the corporate trustee can effectively control the trust by appointing the directors of the corporate trustee;
• asset protection; and
• limited liability.

Therefore, corporate trustee can be very beneficial and allow the trust further longevity.

You can set up a company to act as corporate trustee here.

If you have already set up a trust with an individual trustee and wish to switch, you can have a Deed of Variation drafted here.

How to Set Up a Trust?

The process required is simply please email us on info@kgbm.com.au we will get back to with the details need to set up.

If needed, we also provide advice as to what structure is best for your needs and your trust, so feel free to contact us at 1300 998 248 .

After receiving the deed and relevant structures, certain states in Australia require the payment of stamp duty.

Stamping can be arranged either directly through the relevant revenue authority in your state or territory us.

NOTE : The above information is intended to be general in nature and should not substitute professional tax advice. We encourage that you contact one of our Tax Specialists to discuss your personal circumstances