Australia faces inflation and drop in significant FDI

While demand remains high for accountancy services in Australia, the country is facing uncertain times. It has recorded a staggering drop in Chinese foreign direct investment, which has bitten a chunk from its budget. The Australian dollar is on the slide but inflation is on the rise. The mood amongst investors and domestic businesses is gloomy. Firms hare having to adapt fast and offer a variety of services in an effort to build better relationships and promote loyalty with their client base. As well as skills amongst staff, IT infrastructure is being upgraded and firms are getting to grips with new technology and new ways of doing business, all while coping with the worst skills shortage the Australian accountancy industry has ever seen.

The last time IAB looked into the Australian market, there was criticism in the industry that the recent budget had not gone far enough in terms of shaking up the tax structure and the frameworks that regulate how tax advice is provided needed to be improved. A year on, there is still a lot of work to be done.

“How tax advice is provided is very much different from adviser to adviser,” says Sameer Kassam, partner at CharterNet Services Pty Limited, a subsidiary of PrimeGlobal member InCorp Group. “We often see clients come through the door that have been provided sub-standard technical advice on important matters such as corporate structuring, both domestic and global. This leads to inefficient tax outcomes as well as a lack of clarity from the company’s side. It’s imperative that tax advice be provided in a format that is clear and understandable to the client, as well as outcomes-focussed with succinct implementation steps to deliver value.”

According to Jenny Wong, manager of the Leebridge Group, a Morison Global member firm, there is a lot of scope for tax reform.

“We need to have a lower reliance on corporate and personal income taxes and move to an increasing reliance on the broad-based consumption tax,” she says. “According to a study by the OECD revenue statistics 2020, Australia’s income tax revenue is significantly higher than the OECD average. Based on empirical evidence and some reviews and OECD assessments, broad-based consumption tax has shown to be the least damaging tax to the economic growth.”

Wong also pointed out that there are several high economic cost taxes that have an ‘excess marginal burden’ or the value is destroyed by the revenue raised. These taxes or duties could be repealed or abolished to increase efficiency in the tax collection system. “The Australian tax system is in many ways, complex and over-complicated,” she says. “A more simplified and easier to understand tax system for personal, corporate, foreign, domestic, tax concessions and retirement taxes to help reduce pressure on compliance costs and promote trust and transparency between the taxpayers and the tax administrator.”

The Australian Labour Party won the federal election on May 23 and is planning several corporate tax reforms, including revisions to thin capitalisation rules. The change from a safe harbour debt limit based on 60% of asset value to an interest deduction limit based on 30% of profit could potentially benefit companies with high profitability and low asset values, and disadvantage those with high asset values and low profitability, for instance, digital companies versus bricks and mortar companies.

Alongside reforms to thin capitalisation rules, Labour is implementing the OECD’s 15% global minimum corporate tax rate. Although practical details on how the tax will be implemented are not available, tax professionals expect no delays for the incoming government to meet the 2023 deadline. Australia already levies corporate income tax at 30%, which is a higher than the average global rate of 23%.

The incoming government’s tax reform agenda also reflects a commitment to enhancing the tax transparency regimes in Australia. It is proposing to enhance tax transparency on international tax structures through a public country-by-country (CbCR) framework. Australian CbCR already applies to companies that report more than A$1 billion in global annual income. However, the proposal indicates that public reporting would only apply to large multinational companies and will mirror the European Commission’s efforts on public disclosures. Alongside public CbCR, there is a proposal for a public beneficial ownership registry to show who ultimately owns, controls, or receives profits from an Australian company.

Another part of the tax transparency strategy is to require companies to disclose where an organisation is operating in a jurisdiction with a tax rate below the OECD’s global minimum at 15% as a material tax risk. At the same time, all firms tendering for Australian government contracts worth more than A$200,000 are required to state their country of domicile for tax purposes. The international tax measures are predicted to raise A$1.89 billion in four years.

But this strategy could be interpreted as simply tinkering around the edges of what really needs to be done, according to some industry experts. What is really needed is a massive national overhaul of the entire tax structure.

“For real tax reform to take effect in Australia we need to rationalise the number of taxes we have to create a much more efficient system,” says Greg Winnett, partner at Accru Melbourne, an MGI Worldwide member firm. “It was highlighted in an independent review and report released in 2010 into Australia’s Future Tax System, that around 90% of Australian tax revenue is raised through only 10 out of some 125 different taxes that are levied on businesses and individuals. Not much has changed in the last ten years and unfortunately, we have one too many levels of Government in a small country that should be primarily managed at a federal level with regional councils taking care of local issues. The myriad of state government taxes should be abolished or seriously pared back and supplemented by a broader consumption tax that is offset by lower personal income tax while allowing for a fairer welfare system.”

The shortage of skilled staff has only become worse, according to Anthony Dobbyn, partner at MGI DobbynCarrafa, an MGI Worldwide member firm. “I have been in the accounting industry since 1988 and I have never seen a shortage of accountants like we are experiencing right now. This has placed unprecedented pressure on salaries and benefits and at the same time pricing on traditional compliance work is under pressure in the opposite direction. In order to cope with this, we are looking to automation and associated cloud-based software tools to assist in taking manual work out of the equation.”

Kassam feels the industry is in its most challenging times, certainly within the last decade. “Significant opportunities for growth exist in terms of clients needing more from their advisers in terms of value, but days of being a compliance-only firm are dead,” he says. “We have found that there is much more longevity in providing more services to the same client, instead of having a book of thousands of clients and seeing them once a year. As we now provide finance function, tax and advisory, corporate secretarial and government incentives across our client base, we’re seeing much deeper relationships with our clients, as well as a focus on future-focussed industries such as technology, life sciences, medical and financial services.”

Staff recruitment is an ongoing challenge, at CharterNet, more so than retention. “We find it difficult to bring in high performers who hit the ground running, but through the systems and processes we have created around coaching and development, our ability to then hold onto our best people is quite high,” says Kassam.

While the word ‘recession’ has been mentioned by economic analysts, Kassam sees no slow-down in demand for accountancy services. “We’re seeing increased demand across the board – for advisory-led firms, the opportunity to add value through deeper relationships and ‘doing more’ for your clients has never been higher,” he says. “Technology-led finance function, tax advisory, government incentives, and corporate secretarial services are all significant growth areas in the coming year.”

Dobbyn has seen non-traditional services grow the most. “The biggest areas for us right now are valuation, preparing clients for sale, ERP specification and selection, due diligence, and transaction negotiation. The transition of the baby boomer generation is contributing to an upsurge in this type of work.”

While plenty of projects are planned, there are rocky times ahead. “With the uncertain state of the economy, high inflation and rising interest rates, it will be interesting to see how our client base fares through this,” says Kassam. “Technology companies have suffered significantly in public markets where fundamental business activity remains strong, so opportunities will arise from this. It’s important for us to support our clients through the next 12 months as it won’t be smooth sailing for all.”

One of the most unexpected negative impacts on the Australian economy is the drop in Chinese investment. Chinese investment in the Australian economy fell 69% in the last financial year, according to data from KPMG and the University of Sydney Business School. Over AUS$1 billion in Chinese investment was lost to Australia in 2021, with Chinese Outbound Direct Investment (ODI) falling to its lowest level since 2007. The number of transactions between the two nations also dropped dramatically, almost halving from 20 in 2020 to 11 in 2021. Australia is the second-largest recipient of Chinese investment, with America being number one. However, Washington also saw a 34% drop in Chinese ODI in 2021, while Europe received a 25% increase of investment from Beijing.

With the current turbulence world-wide, the Australian dollar is tumbling in value, further weakening the economy. In July, the Australian dollar fell below US68 cents and moved towards a two-year low as commodities prices fell. The value of the Australian dollar is largely determined by the price movements of commodities like oil, iron ore, coal, aluminium, and zinc and all these prices are falling. What is rising is Australia’s inflation, which has a direct impact on foreign investment as investors are attracted to countries with relatively higher interest rates.