Government Economic Stimulus Package – What it means for the economy and YOUR DENTAL PRACTICE
A few people have asked me for my views on the stimulus package including practice owners, associate dentists, supply company reps as well as others in business, more broadly.
Firstly, let me begin with a BIG CAVEAT. The economic outcomes of this stimulus are largely dependant upon the progression of disease. That is, if Australia ends up with 15,000 cases, the outcomes are going to be vastly different to if it ends up with 150,000 cases.
The other BIG influence is going to be China and the specific stimulus measures it announces for its own economy. That will impact Australia being such a large trading partner of ours. It is positive that supply chains from China are opening back up again and that is a testimony to the authoritarian government over there and the measures they were able to put in place at a macro level, something that may not have been as readily accepted in Australia and the West (and rightly so, in my opinion). I will depart slight from the budget topic for a word on supply chain. A MASSIVE POSITIVE that could come out of this is if governments globally realise and wake up to the fact that local manufacturing is paramount. CHINA MAKES SO MUCH OF THE WORLD’S MEDICAL SUPPLIES! Actually, it makes up so much of the world’s EVERYTHING! What happens if we were at WAR with china right now? Instead of supply chains coming back online, they would absolutely constrain us by withholding key products. India is another country that we depend on for key supply chains; it makes so much of the world’s precursor drugs for many medications. They had announced they would ban all exports of these precursor drugs and if this continues, will lead to massive shortages of key drugs, all over the world. China has at best, a strained relationship with the West. We really need to assess key supply chains and encourage local manufacturing of medical supplies, at least. I must admit, I was pleasantly surprised by the Chinese now helping Europe and going above and beyond. The cynical part of me wonders if its an effort to increase its PR at a time when much of the world is looking at China with disdain.
Onto the package itself. Let me be partisan for a second. This stimulus package is phenomenally good. Its EXTREMELY WELL THOUGHT OUT and in my opinion its not a budget that I would EVER EVER trust Labor to be able to deliver. The silence of the LEFT has been HUGE. THEY HAVE STAYED SHUT and the only thing the HARDCORE lefties are saying is along the lines of “where is the promised surplus?”. To them, I say, ask the bushfires or ask Coronavirus.
Many of you may think that voting for Labor is great because you get handouts or because they, “care about the workers”, but understand that a rising tide raises ALL ships and my breakdown of this economic stimulus will show you WHY having a government in charge that understands the economy and that actually knows the key drivers, benefits everyone. Not the wealthy but EVERYONE.
𝙒𝙝𝙮 𝙙𝙤 𝙄 𝙩𝙝𝙞𝙣𝙠 𝙩𝙝𝙚 𝙨𝙩𝙞𝙢𝙪𝙡𝙪𝙨 𝙞𝙨 𝙨𝙤 𝙜𝙤𝙤𝙙?
1) Its targeted at the right things – UNLIKE THE GFC, the current issue we face is a demand side issue but also a supply side issue. In the GFC, we had consumer spending falling because of the credit crunch. This time, we have consumer spending falling (tourism, education sectors hit hard plus bushfires and coronavirus reducing spending generally) but also, because of supply chain interruptions, the supply side is problematic. The stimulus package needed to address both and it has done that very well.
2) Its duration is perfect. We will overcome coronavirus. What happens after that? We still have a budget deficit to balance. We need to return to a surplus ASAP because we need to repay our debts. Once the budget is balanced, or close to it, if we are faced with ANOTHER massive shock like coronavirus, we will have bullets left in the gun to fight. If you look at the reduction in budget deficit over the last few years of the LNP, it’s what has allowed our government to deliver the stimulus package it has. So we can’t have this stimulus and spending continue past the length its actually needed. Noteworthy, is the fact that some of these measures will actually have POSITIVE effects on future budgets. I’ll discuss this more later
3) The quantum of the spend is perfect. Leading economists are saying this will avoid a recession. That’s gotta be the goal. It’s short, but its also SHARP and it’s front loaded. They have left bullets in the gun if the fight drags on and we need more ammunition.
In essence, it’s well targeted and addresses the correct issues, it doesn’t run for too long and it’s large enough to make a difference.
𝙇𝙚𝙩’𝙨 𝙡𝙤𝙤𝙠 𝙖𝙩 𝙨𝙥𝙚𝙘𝙞𝙛𝙞𝙘 𝙢𝙚𝙖𝙨𝙪𝙧𝙚𝙨 𝙣𝙤𝙬.
1) Cash payments to those on welfare. $4.8 Billion cost
The measure itself is good because Newstart does need to be raised anyway. Also, working families, single parents and other hardworking but economically disadvantaged groups on tight budgets need to have support during this period.
2) Instant asset write-off increased to $150,000. $700million cost
The government needs profitable businesses to help the economy. This measure is designed to encourage small businesses that are in a relatively strong financial position to spend on assets to gain a HUGE financial incentive now. The tax savings for businesses will be massive and will then allow these businesses to have more money to contribute to the economy. The assets themselves can be used in the future to generate more income and the spending by these businesses will have a massive boost to the economy. Buying cars, investing in business equipment etc is a good thing for the economy at this time and it will also be great for your business. Front loading this depreciation means that for a 200,000 asset, many business owners will be $60,000 better off on their personal tax returns this year. If you are thinking of buying a cad cam system for example, you would be well placed to ensure that the Scanner and the Mill are split up (this is perfectly legal as one can operate independently of the other). This deduction is available for businesses upto $500 million in aggregated turnover and that’s also a generous increase as previously it was only for businesses upto $50million in turnover
3) Backing business investment initiative. $3.2 billion
This won’t really impact many dental practice owners but it will be very beneficial for bigger businesses. This is for assets over the instant writeoff threshold and will allow deduction of 50% upfront. The fact this accelerated depreciation is time limited, will encourage businesses to bring forward large investments they may have been considering and will ultimately result in an uplift in demand.
Before I move onto the other measures, let me make clear why these two asset investment initiatives are so good. When profitable businesses are investing, they are buying goods off other businesses. This means other business can keep their staff employed for longer and those other businesses have money to spend on other businesses which then also get to hold onto staff. The cycle continues. Some of these investments by businesses might even keep another business afloat. Each of these businesses then get accelerated deductions on the investments they make which in turn gives them more cash to spend and helps the positive feedback loop continue. The ultimate result of this is people in JOBS FOR LONGER at better pay rates. During a big economic downturn, instead of handing out cash to people who don’t want to work, isn’t it better to give businesses these type of incentives so they can move money around the economy? People in jobs are what our aims should be or encouraging people to get back into employment.
The other genius of these measures is that they are actually positive for future budgets. The LNP has an eye on returning the budget to surplus and these measures in the 2022-2024 financial years will actually result in a $5BILLION boost to those budgets.
4) Boosting cashflow to businesses. $6.7 billion.
Each business can receive a payment of upto $25,000 and this represents 50% of your PAYG withheld amount from March to June. The minimum payment will be $2,000. Economically, this is genius. “Keep employees in work and don’t let them go”. Understand, the government could have just given handouts to people. Businesses would lay them off, they would get depressed and the payments they receive from government would be used up in the short term. Instead, the government is encouraging businesses to keep their staff and carry them through this tough period and is doing this by providing a pretty compelling amount of money as an incentive for doing so. Also, unlike the investment initiatives, this measure will also help business that are struggling to pay bills or facing forced shutdowns who have decided to help their staff by keeping them on.
Implications for dental practices are huge. For businesses with a $4,000 per week wage bill, the total payment you could get would be just under $6,000.
Ensure any family that supports your business and may otherwise get dividends or distributions of profit, are instead on payroll. For multi practice owners, look at if you can have employees working across businesses in a way that allows you to (legally) maximise the refund. E.g. Group practice managers employed at your biggest practice that caps out the $25,000 deduction get properly rewarded from each business for how much work they do so as to maximise the deduction you get. Spouses helping on your business getting on payroll. For those owners who work clinically NOT operating an SFA, get yourself on payroll for management tasks or even as an employee clinically.
What about contractors that you pay for things such as cleaning. Would they consider getting on payroll for a period of time? All of this needs to be discussed with lawyers and accountants, obviously as there are legal implications.
5) Supporting apprentices/trainees. $1.3 billion
Again, an excellent measure that provides upto $7,000 per QUARTER, PER TRAINEE for a maximum of three quarters and $21,000. This is HUGE. Not just for your dental practice, but for the entire economy. Instead of laying off apprentices, this will encourage employers to retain them and also to possibly look at hiring new ones. This means we will have more people trained and in jobs when the economic turnaround comes. If the government then commits to some infrastructure spending in future years, this will have a long term compounding effect on the economy and the benefit will be further enhanced. We will have more skilled trades people to work on those projects. This benefit is for small businesses upto $50mill turnover and less than 20 FTE employees. It is also for bigger businesses who hire trainees who have been laid off by other businesses. Again, another genius measure that puts back into work those that have not been able to keep their jobs because their employers were too severely impacted.
6) Assistance for severely affected regions, $1 billion
This will help businesses in regions affected severely by coronavirus including tourism. Some excellent initiatives here and should help the local economies in these regions, and thus dental practices.
7) ATO assistance.
On 12 March 2020, the Australian Taxation Office (ATO) announced a series of administrative concessions to assist businesses impacted by COVID-19, which include:
- deferring by up to 4 months the payment of tax amounts due through the BAS (including PAYG instalments), income tax assessments, FBT assessments and excise by affected businesses;
- allowing affected businesses on a quarterly reporting cycle to opt into monthly GST reporting to get quicker access to any GST refunds;
- allowing affected businesses to vary PAYG instalment amounts to zero for the April 2020 quarter. Businesses that vary their PAYG instalment to zero can also claim a refund for any instalments made for the September 2019 and December 2019 quarters;
- remitting any interest and penalties, incurred by affected businesses on or after 23 January 2020, that have been applied to tax liabilities; and
- allowing affected businesses to enter into low-interest payment plans for their existing and ongoing tax liabilities.
The ATO assistance is not automatic, taxpayers must first contact the ATO to request assistance, and if eligible, the ATO will ‘tailor the assistance package for the relevant taxpayer.
These measures will be massive for cashflow for dental practices affected by the downturn. Deferring large tax liabilities for the upcoming quarter and also getting an instant refund on those that you have already paid, will allow you to put back tax payments to April 2021. Welcome relief for MANY dental practice owners, I’m sure. If you are a practice owner, now is the time to get onto an accountant who knows what they are doing with respect to business but also the dental sector broadly. There are many ways to skin a cat and your priority should be to use the tax system effectively to maximise your cashflow! If you have benefited from, or enjoyed this post, please let me know. Feel free to add your opinions or comments as well!