Businesses and the Stimulus…

The coronavirus, bushfires and climate change are coming together as a perfect storm that threatens Australia’s economy.

So much so that, after 10 years of denigrating the ALP’s handling of the global financial crisis of 2008/2009 that the LNP are now engaging in a similar “cash splash” to “stimulate the economy”.

Let’s put this into perspective.  Unfortunately, to do so, I’ll need to go through some details of their “stimulus package”.

Firstly, they are planning on handing out $4.8 billion to welfare recipients – $750 each. 

My parents have a self managed super fund – it’s not huge and they receive part pensions, so they’ll get that.  Do they need it?  Not really.

Do I personally know, or spend time with people that are on Newstart, single parenting payments, or relying solely on aged pensions?  Not that I can think of.  But, if I were trying to live week to week on $560 a fortnight, I could move to Wagga Wagga and rent a 1 bedroom unit at $200 per week.  That leaves me with $80 per week for all other expenses (food, travel, health care, clothing, etc).

If I got a $750 hand out, what would I do with it?  Probably make a minimum payment on my credit card, and buy some minor goods and services.

I’m certainly not suggesting the government not pay this, but I suspect a significant portion of it will just go to the banks in credit card interest and payments for goods that have already been purchased.  i.e. it won’t really get spent in the community.

And, even if it is spent in the community, what will be purchased?  Food, petrol, clothing, new phones and other electronic devices?  A large proportion of these goods are either manufactured overseas or owned by companies based overseas.

So, what percentage of the $750 will be taken as profits or transferred overseas as payment for these goods?  If it’s spent on electronic gear, probably 50% or more.

What is the long term benefit to the original welfare recipient of the $750?  Probably not much.  They’re not likely to race out and:

  • Pay for a course that improves their employability
  • Buy a long term investment
  • Use it to upgrade their home (although maybe it almost covers the bond on a very small regional rental unit, so maybe they can help a struggling investor pay their bank)
  • Buy a better car (again, if it is used for a new car, most of it goes overseas, but $750 new cars are few and far between)
  • Get that knee replacement for which they’ve been on a waiting list for 2 years

According to https://www.abc.net.au/news/2020-03-12/federal-government-coronavirus-economic-stimulus/12042972, “It’s not for us to tell those Australians how to spend their money,” (Treasurer Josh Frydenberg).

Which is correct (although, as an aside, read up on the “Indue” Cashless Welfare Card –https://www.theguardian.com/australia-news/2020/feb/06/i-feel-sick-thinking-about-being-forced-onto-cashless-welfare-its-so-insulting) which is what the government use to control what  some welfare recipients can spend money on, at a cost of over $10,000 per year, per card.  Which kind of makes old Josh a little bit two faced).

However, this wasn’t supposed to be about government bashing.

Ok, just another little one.  Josh is correct in saying it’s not his job to tell Australians how to spend their money.  But it is his job to put in place systems that allow Australians to spend their money on a better future.

He’s not doing that, so here is my slant on it.

But first, a little more background on the stimulus package.

The same ABC article states “The Government wants its stimulus to be temporary and offer an immediate boost to the economy rather than making permanent changes to the budget.”

Whilst 6,000,000 poor and welfare recipients (note, the family home is not considered an asset for pension eligibility, so someone with a $10 million home will also get the $$$) are getting $750 for a total of $4.8 billion, “Nearly 700,000 small and medium businesses will receive cash payments of between $2,000 and $25,000 to help pay wages or hire extra staff.”

The total cost of this measure is expected to be about $6.7 billion.

Also,

“Medium and big businesses will be encouraged to spend on equipment and other investments through an extension of the instant asset write-off, which means they can claim a tax break for what they spend.

This is currently restricted to companies with turnovers of up to $50 million, for maximum investments of $30,000.

But this will be significantly lifted, allowing companies with turnovers of up to $500 million to make assets write-offs of up to $150,000.”

https://pm.gov.au/media/economic-stimulus-package states

“Businesses with a turnover of less than $500 million will be able to deduct an additional 50 per cent of the asset cost in the year of purchase”

Cool, says this business owner, rubbing his hands with glee.  Let’s see, what can I spend this on?

Let’s assume my little IT business receives a cheque for $2000 in the mail.  What would I realistically do with it?

It goes into the bank account.  I could buy a new laptop with it.  Of course, 80% of the cost is then transferred overseas, so it adds $400 to the Australian economy.  Oh, hang on, many of the big distributors are foreign owned, so some of that $400 will go to boosting a foreign company’s bottom line.

If my business were in retail, I’m probably going to the wall anyway, so the $2000 goes to either my ticket to an overseas location to run away from my bankruptcy, or perhaps I can pay a weeks worth of rent to the big shopping mall owner I’m chained to.  Or pay that outstanding invoice to a minor supplier that’s currently 60 days overdue.

Ultimately, whilst a $25,000 grant to a business will sound like a massive amount of money to someone receiving $750, an extra $25,000 in the bank doesn’t normally change the strategic direction of a business.  That doesn’t even cover a month’s worth of wages for my small business with 4 staff.  Imagine what it doesn’t do for a business with 20 staff.

So, if I have a financially viable business and receive a $25,000 cash grant from the government, what could I do with it?

  1. Pay it as a bonus to directors, who then pay tax at their marginal rate
  2. Send the directors, key staff and their family members to explore business opportunities in  an overseas coronavirus haven as part of a strategic decision to ensure business continuity (i.e. a junket paid for out of pre-tax dollars and mostly spent overseas)
  3. It shows up as a profit, so it could get paid to the business owners as a dividend
  4. Pay it as a bonus to staff (nah, what capitalist in their right mind would do that)
  5. Buy some actual business equipment:
    1. As a farmer, I could put up a small shed, buy a small tractor, get a couple of truckloads of hay for my starving cows, etc.
    1. As a white collar business (office workers), buy new computers, software, paint the office, replace the kitchen, rent some nice artwork from a Superannuation fund on a long term contract
    1. As a service business, I could buy a new small car, new phone, some tools, a trailer, etc.

Ah, but I haven’t mentioned this gem from https://pm.gov.au/media/economic-stimulus-package.

  • “$700 million to increase the instant asset write off threshold from $30,000 to $150,000 and expand access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020. For example, assets that may be able to be immediately written off are a concrete tank for a builder, a tractor for a farming business, and a truck for a delivery business.
  • $3.2 billion to back business investment by providing a time limited 15 month investment incentive (through to 30 June 2021) to support business investment and economic growth over the short term, by accelerating depreciation deductions. Businesses with a turnover of less than $500 million will be able to deduct an additional 50 per cent of the asset cost in the year of purchase.”

What does that really mean?

Well, I have until 30 June to be able to claim an “instant asset write off” of up to $150,000.  Normally, if it’s worth more than $30,000, I have to depreciate it over a number of years.  About 3 for a computer system, 5-10 for a delivery vehicle, 25 years for a building, etc.

Damn, so I can go and buy a $150,000 BMW today and claim the entire purchase price on the businesses tax return this financial year.  Not only can I claim the $150,000 as an expense, I also get to claim an additional 50% of the cost.  So, the business gets a $225,000 tax deduction.  Holy crap, I need to make some profit, so I can make it disappear on my new car!

Actually, it’s not quite that clear (which is good, clarity means I have to pay tax like all you non-business owning plebs out there):

  • The $150,000 includes 10% GST (which my business immediately gets refunded, so it really only costs the business $136,363, so only a $204,545 tax deduction ☹.  Unless I buy a $165,000 car with $15,000 GST, then I’m back to my 😊.  I love tax perks!).
  • If I buy a $150,000 BMW car that is used for private use, then Fringe Benefits Tax applies which means I need to pay my accountant to ensure my log book totaling 100% business use is legit.  As long as I garage the vehicle at work and travel to and from work via pushbike or public transport, that should work out. Especially, if the staff also use it during the work day for client visits.
  • But if I buy the new Tesla truck (or a stupidly big polluting 6.7L V8 truck) for $150,000 and, if it qualifies as an exempt vehicle (https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Exemptions-and-concessions/Fringe-Benefits-Tax—Exempt-Motor-Vehicles/?anchor=Eligiblevehicles#Eligiblevehicles), then no FBT applies

You know the best bit?  After 30 June, it’s a new financial year.  The $150,000 car isn’t an asset on the businesses books as it was written off (financially, not accidentally).  The business can now dispose of it as a 2nd hand vehicle.  As long as we keep the GST gods happy – i.e. declare the market value of the vehicle properly (https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Motor-vehicle-and-transport/GST-and-motor-vehicles/?page=3#Reportingmotorvehicledisposals) and pay $12,000 GST to the ATO, declare the value properly to the RTA and pay the stamp duty (3% of about $120,000 = $3600 – see sidenote) then we can sell the vehicle as we see fit.  E.g. to the director of the business for, say $5,000). 

Even if I set my sights lower and buy a $30,000 car in this manner, the business could get a $45,000 tax deduction this financial year, I could personally buy the car for $5,000 in 4 months time, pay $3,000 GST (I’m not devaluing the car to avoid any risk of the ATO challenging the businesses GST returns) and a bit of Stamp Duty.  All up, I get to personally pay about $4,000 for a $30,000 car, the company pays the $3,000 GST and gets a $45,000 tax deduction out of it.

Oh, and this is per item.  So, I could buy 20 x $150,000 BMWs as long as they’re not all on the one invoice….

All in all, it throws some money out there, some of it is used to buy goods and services from Australian businesses, some to buy goods and services from overseas companies and some disappears into trusts, trips and wealth creation schemes for business owners and operators.