Rankings report: Australia

Complexity keeps Australian firms in business

Despite a battered economy, demand for accountancy services is as high as it has ever been in Australia, thanks to the continued complexity of the tax system and regulation.

The complexity of doing businesses in Australia is a double-edged sword for the local accountancy industry. Increasing regulation for issues such as ESG and the complicated tax system means audit and advisory services are more in demand than ever. High inflation and interest rates have led to a churn in M&A activity among clients, creating a demand of advisory services. But in the long term, the tax system is hampering Australia’s efforts to build a sustainable economy, while decreasing business and consumer confidence will put pressure on fee growth.

Australia’s complex tax system seems to be becoming more convoluted and the accountancy industry despairs of ever seeing significant reform, with governments more likely to simply play at the edges. “This is not just about the amount of tax being paid and tax equity across different segments of the market, it is also about the increasing cost of compliance, particularly for small and medium size business,” said Greg Hayes, chairman of Hayes Knight, a Morison Global member firm.

Greg Hayes, chairman of Hayes Knight, a Morison Global member firm

The 2023 Federal Budget aimed to address this issue, with measures like raising the instant asset write-off threshold and introducing the Small Business Energy Incentive, in order to simplify the system. However, critics argue for more comprehensive steps to simplify the tax structure and reduce the number of taxes. BDO has been urging the government to reinvigorate the tax reform agenda with a focus on how the tax system can be simplified, to be more equitable and efficient.

“Building a sustainable economy relies on a sustainable revenue system and, at the moment, there is much room for improvement,” said Tony Schiffmann, chief executive partner, BDO Australia. “In our opinion, the major view that underpins the need for holistic tax reform is to produce an unambiguous tax system that also provides a fair and efficient means of revenue for the Australian Federal and State Governments. This means that where there are tax concessions provided, they need to translate into increased productivity and opportunity. Our major recommendation is the re-ignition of the tax reform process, not as a one off but rather as an ongoing process.”

Australia has plenty of short-term problems to keep it distracted from a long-term vision of how to overhaul the tax system. According to Schiffman, Australia faces the second highest skill shortage in the world and accounting professional shortages are at near record levels. In line with the migration strategy being developed by the Australian Government, the recent Federal Budget included several measures to boost skilled migration and deliver the skills required to support the economy. The government is also looking to review and strengthen Australia’s data privacy laws, which will bring it into closer alignment with European GDPR legislation.

Tony Schiffmann, chief executive partner, BDO Australia

From an audit and assurance specific perspective, a significant impact on the profession has been firms’ design and implementation of system of quality management in response to the suite of new quality management standards that were effective as of 15 December 2022. The other significant change in the auditing landscape has been the revisions to the standard on risk assessment. The revised standard requires a more granular risk identification and assessment process, promoting more targeted responses to risks.

ESG and sustainability reporting continues to have a significant focus in Australia. In June 2023, the International Sustainability Standards Board (ISSB) issued its first two global sustainability standards. IFRS S1 and IFRS S2 requires organisations to apply the standards for annual reporting periods beginning on or after 1 January 2024. There has been some indication that large, listed organisations and large financial institutions are likely to be mandated. However, Schiffman expects that the impact of mandatory reporting at the top end of town will likely trickle through to non-mandated and non-reporting entities based on their roles in broader supply chains.

“There have also been reforms to the thin capitalisation rules to limit debt deductions for multinational companies and new disclosure requirements for subsidiaries of Australian public companies,” said Jason Yu, managing partner, Byrons, a PrimeGlobal member firm. “The country has also introduced a refundable ‘digital games tax offset’ to support the development of games domestically and boost its digital industry. Regulatory bodies like ASIC (Australian Securities & Investment Commission) have intensified enforcement actions to improve transparency while the CFR (Councils of Financial Regulators) has published policy statements and reports on developing an Australian climate risk disclosure system to ensure transparency.”

Jason Yu, managing partner, Byrons, a PrimeGlobal member firm

High inflation and interest rates were beginning to bite when IAB last looked at Australia and while it may seem that these pressures have peaked, the return to the Reserve Bank’s target inflation band is not expected to happen until the 2024-25 financial year. As well as increasing the costs of borrowing, high inflation has also made it harder for businesses to plan, with owners spending their time protecting organisations against inflation rather than investing in productivity improvements, which has impacts on wage growth further down the line, according to Schiffman.

“The double impact of inflation and higher rates has seen clients become more cautious” said Tim Lane, partner at Accru Hobart, an MGI Worldwide member firm. “It has not been possible to recover all the inflationary cost increases with increased revenue so profitability has suffered.” Darren O’Malley, partner and head of Taxation Division at Kreston Stanley Williamson, has seen clients change their strategy to concentrate on looking for areas where costs can be cut. “Rising interest rates have required clients to review their borrowing arrangements to remain sustainable carefully,” he said.

Overall, respondents felt the accounting sector is quite healthy in Australia, although not without its challenges. Customer demand is strong and, post covid, there has been a lot of M&A activity and restructuring occurring. There is some fee pressure, according to Hayes, particularly at the smaller end of the market or where services are seen as being reasonably commoditised, or a ‘grudge’ spend. Like many other countries, staff recruitment and retention continues to pose challenges.

Tim Lane, partner at Accru Hobart, an MGI Worldwide member firm

“Cloud accounting software and offshore capabilities have introduced competition for compliance work with lower-cost services,” said Yu. “Accounting firms must find niche markets or scale up their offerings to stay profitable.”

But despite a slightly depressed economic outlook, the complexities of the tax system and regulation mean that business is booming for accountants. “There has been strong growth in M&A activity and all the advice work associated with it,” said Hayes. “All of the lead indicators suggest that this will continue for the next couple of years, at least. Advisory work in taxation, succession planning and estate planning are all also increasing in demand.” Schiffman said BDO has seen significant growth in its core service areas of audit and business services over the past 12 months as well as in its advisory practice in areas such as public sector and infrastructure advisory.  O’Malley is carefully watching the growth in the use of artificial intelligence tools and how they will affect the accounting industry. “In the next 12 months, we will likely see significant improvements to the accounting systems we already use and new products coming on the market,” he said. David Ross, director of Walker Wayland Services Pty Limited, a BKR International member firm, has seen advisory and ESG services increase substantially. “Tax advisory work with increased complexity and ATO audit and review activity has resulted in a lot of additional time spent attending to these matters,” he said.

The coming year is predicted to be a busy one for the accounting profession. “If the economy contracts further this may dampen things slightly, but the overall indicators are positive,” said Hayes. “The profession is not immune from the impact of inflation and firms will need to monitor changes in cost structure and their efficiency levels. There is likely to be some increased volatility but generally this provides an equal number of opportunities to the challenges that may arise. We expect to see an increasing adoption of client centric and services-based technology to support service delivery to clients.”

Darren O’Malley, partner and head of Taxation Division, Kreston Stanley Williamson

The difficulty in recruiting staff has led to some wage inflation, the costs of which many firms have passed on to clients through increased fees, but that balance could be upset in the coming year. “With business and consumer confidence decreasing this should drive down inflation, however, it is expected to also put fee growth pressure on practices within Australia,” said Ross. “For individual clients the increase in the interest rates has had a very large effect. In a span of 14 months the interest rates have risen at their fastest pace in modern history. A lot of borrowers who had fixed their interest rates at very low rates during Covid are now coming off those fixed rates and transitioning to variable rates with a substantial increase in the interest rates and the repayments required to service those loans. It is for this reason that lag effect of the rising interest rates is believed will put Australia into a soft recession within the next 12 to 18 months.”

Of course, one way to negotiate this high wire act is to get involved with M&A activity. “There is a constant amount of M&A in Australia now,” said Lane. “This has been driven by the need to chase scale for efficiency and to manage the margin crunch. The mergence of multi-disciplinary practices has become more pronounced due to client demand who want to deal with one place they trust. There is also a large amount of foreign capital coming into the market in Australia looking to aggregate firms.”

2023 will no doubt see fresh challenges for the accounting industry in Australia. It will take a lot of agility and a lot of investment not to feel the pinch in the next 18 months.