Mid-market businesses showing their customary resilience and optimism in pre-budget survey
It is encouraging to find Australia’s mid-market businesses, the heartbeat of the national economy, are feeling relatively upbeat about the future, after emerging from two largely interrupted years.
KPMG Enterprise’s annual Pre-Budget Pulse Check – a survey of over 100 mid-tier business leaders across industry sectors – finds that more than half (54 percent) were confident about growth prospects for the rest of 2022 and the next three years.
Over a quarter (26 percent) go further, predicting growth of 10 percent or more during that timescale. A third of those surveyed (35 percent) were neutral and 11 percent pessimistic about prospects for their business and the wider economy.
Encouragingly for the government and the RBA, nearly half (44 percent) of leaders believed wage growth would be significant – between 4-8 percent – with a small number predicting rises of more than 8 percent. Another 44 percent said rises would be more restrained, between 2-4 percent. While this may introduce cost pressures for business, it has to be seen as a positive sign for the Australian economy overall.
Increased competition for talent appears to have had a direct bearing on these wage forecasts, with more than two-thirds (69 percent) of respondents saying that recruiting and retaining talented staff was their biggest challenge. The talent issue is the notable change from the same survey a year ago, when cost and margin pressures and supply chain disruption were the top two issues of concern. This time they were the second and third most important issue for mid-tier businesses, after talent.
These findings are consistent with other recent KPMG research among large companies, which also had talent as the top concern, so it is clearly felt across the board in Australia.
Interest rates are a topical discussion point and while almost all business leaders we surveyed expected rates to rise in 2022, a large majority (71 percent) felt their debt levels were low enough to be manageable. But over a quarter (26 percent) had concerns here, acknowledging that an interest rate hike would impact their business and its profitability.
In terms of Australia’s COVID-related debt, the overwhelming majority believed it was time for the Federal Government to start repaying some of this, with two-thirds nominating economic growth and increased productivity as their preferred way to do so. Other methods such as cutting spending or hiking taxes were far less popular, and a sizeable minority (28 percent) said tax rises should be avoided in all cases.
But If taxes do have to rise, then the best way to do this was via a GST increase, leaders said. While 50 percent said this would be the most palatable option, far fewer contemplated other tax rises. Measures such as reducing superannuation, capital gains tax or negative gearing concessions received support of just 16 percent. A similar lack of support was found for increasing company tax (13 percent) for reducing access to franking credits (6 percent) or for increasing personal tax, land tax or stamp duty (just 2 percent in favour).
These findings are consistent with answers over our last two pre-Budget surveys and shows that business leaders have a clear and consistent view – Australia is over-reliant on direct taxes.
A majority called for tax reform and measures to help boost growth in the mid-market sector in the Budget. It was pleasing to see support for retaining the Instant Asset Write-off over the long-term, increasing access to R&D Tax Incentives, and innovation and start up tax incentives, for example, again consistent with last year. Re-establishing critical manufacturing and greater investment in training programs to address the skills shortage were also priorities.
But there was one contentious issue raised by the survey, which needs a lot more focus than it seems to be getting among mid-tier business leaders. This is the increasing ATO compliance activity aimed at the Enterprise sector.
A majority (60 percent) of respondents said they were concerned about this, with many feeling they need more time to recover from the COVID issues of the past two years before handling the cost and disruption of tax audits.
Whether it is fair or not, businesses need to take this very seriously. Those 60 percent of respondents are right to be concerned and in fact that figure should probably be higher. In addition to its Next 5000 program, the ATO’s recent announcements on trust taxation show that family enterprises and businesses across the mid-tier are facing ramped-up compliance activity.
While many have benefited from a pause in audits during the COVID lockdowns, they should be aware that this lull is well and truly over. It is crucial that the mid-tier sector prepares and review key areas of known ATO focus.
In addition, in terms of the ATO’s growing expectations around Tax Risk Management, only properly documented frameworks will suffice to meet the new requirements. Less than a third of respondents said they currently had this in place. These figures are very similar to last year’s and shows that warnings haven’t been taken on board. Our advice is to start preparing Tax Governance documentation now, in advance of any tax audit.
Overall, our findings show that Australia’s mid-market businesses are showing their customary resilience and optimism. It is important that they demonstrate this in all areas of operations.