copy the linklink copied!3. Australia

Liaison with industry

A strong financial system that facilitates the flow of savings to efficient investment opportunities assists SMEs to invest in new technologies, fund innovative practices and expand. Government authorities regularly monitor developments in SMEs’ access to finance. The RBA annually hosts a Small Business Finance Advisory Panel, while both the RBA and the Australian Treasury regularly speak with Australian banks, non-bank lenders and businesses about business financing conditions, as well as the broader economic environment for businesses.

Comprehensive credit reporting

In Australia, customers deal with a system dominated by major banks and this reinforces an information asymmetry between consumers, banks and non-bank lenders. For several years, the finance industry has attempted to establish a voluntary comprehensive credit reporting regime in Australia.

As part of the Australian Government’s agenda to improve competition in the financial system, the Government announced on 2 November 2017 the introduction of mandatory Comprehensive Credit Reporting (CCR). CCR will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan. The accurate assessment of credit risk may lead to the reduction in the need for lenders to seek additional collateral and personal guarantees. CCR is also expected to benefit consumers, who will be able to better demonstrate their reliability and thus get better deals on financial products. The Government expects to re-introduce legislation implementing reforms to CCR this year.

Open Banking

On 9 May 2018, the Government agreed to all the recommendations of the Review into Open Banking in Australia (Farrell Review). Open Banking will give customers greater access to and control over the data their banks hold on them. It will create a secure environment, where customers can direct that they, or trusted and accredited third parties chosen by them, be provided with their banking data.

Open Banking will lead to more competitive banking products that better suit a customer’s needs. It will also encourage the development of new and innovative financial tools to help customers more easily manage their finances.

The Government has outlined a phased implementation timetable:

• In July 2019, all major banks will voluntarily make available product reference data in relation to credit and debit card, deposit and transaction accounts. This will become mandatory once the reforms have passed Parliament.

• By 1 February 2020, all major banks will be required to make available to customers data on credit and debit card, deposit, transaction and mortgage accounts.

• By 1 July 2020, major banks will need to make available data on all the remaining products recommended by the Farrell Review.

• All remaining banks will be required to implement open banking milestones twelve months after the timeline for the major banks.

The introduction of Open Banking will make it easier for entrepreneurs to share banking data securely with third-party service providers, such as non-bank lenders. Non-bank lenders can benefit from Open Banking by becoming accredited to receive customer banking data (including transaction and product data). This will provide greater transparency for non-bank lenders when they are making a credit assessment and will lead to the reduction in the cost of assessing credit risk.

The Australian Prudential Regulation Authority proposed revisions to the capital framework

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. On 14 February 2018, APRA commenced consultation on revisions to the capital framework for authorised deposit-taking institutions (ADIs). The proposed changes to the capital framework include amendments to the treatment of exposures to SME loans, including those secured by residential property, and the recognition of additional types of collateral for SME lending. The proposed changes to the capital framework are expected to be implemented from January 2021 onwards.

Financial Services Royal Commission

The Australian Government established a Royal Commission into the alleged misconduct of Australia’s banks and other financial services entities on 14 December 2017 to ensure the financial system is working efficiently and effectively. The Commission considered the conduct of banks, insurers, financial services providers and superannuation funds. It also considered how well equipped regulators are to identify and address misconduct. The Commission undertook public hearings, with hearings on loans to SMEs conducted in May-June 2018. An interim report was released on 28 September 2018 and the final report was released along with the Government response on 4 February 2019. The Government is taking action on all 76 recommendations made by the Commission in its final report.

The Productivity Commission’s Inquiry into Competition in the Australian Financial System

On 8 May 2017, the Government tasked the Productivity Commission to undertake an inquiry into Competition in Australia’s financial system. The Productivity Commission has reviewed competition in Australia’s financial system with a view to improving productivity, supporting financial system innovation and stability, and improving consumer outcomes including for small businesses. The scope of the inquiry also includes an examination of the degree and nature of competition and financial services for SMEs, and any barriers to and enablers of innovation and competition in the financial system.

The Productivity Commission’s final report was released on 3 August 2018.

Australian Securities and Investment Commission’s (ASIC) Regulatory Sandbox

On 15 December 2016, ASIC introduced industry wide licensing exemptions to allow eligible FinTech businesses to test certain specified services for up to 12 months without an Australian financial services or credit licence. Eligible companies need only send ASIC written notice of their intention to test under the exemption.

The regulatory sandbox provides a flexible regulatory framework, which makes it easier for FinTech companies to test the viability of innovative financial services, increasing the potential for new finance options.

On 9 May 2017, the Government announced an enhanced regulatory sandbox. Legislation for an enhanced regulatory sandbox will shortly be introduced to the Parliament, which will allow more businesses to test a wider range of new financial products over a longer period, further facilitating innovative new finance.

Payment on time

Australian business surveys consistently show that cash flow and late payments is a prime concern of SMEs in Australia. In supporting SMEs in this area, the Australian Government has commitments to procure goods and services from SMEs through a focussed 35% target from SME participation in contracts valued up to AUD 20 million. From July 2019, the Government will be required to pay invoices for contracts worth up to AUD 1 million within 20 calendar days. The Government is encouraging large businesses to pay small business on time by developing an annual reporting framework requiring firms with over AUD 100 million turnover to publish information on their small business payments. Large businesses tendering for Government contracts will be required to match the Government’s 20 day payment terms. Government agencies already report on their payment times for small business.

Innovative finance and crowd-sourced equity funding

New forms of innovative finance, such as peer-to-peer lending and crowd-sourced equity funding (CSEF), can increase the funding options available to SMEs. The peer-to-peer lending sector, for instance, has been emerging under existing regulatory arrangements.

The Government has introduced a CSEF framework for public companies, which commenced on 29 September 2017 and will provide a new funding avenue for early stage businesses, whilst still providing a level of investor protection. The Government has extended the CSEF regime to enable more closely held proprietary companies to raise funds through CSEF, with accompanying modifications to increase accountability and investor protection. An appropriately regulated framework will ensure that Australia remains responsive to the funding needs of innovative businesses.

Australian Business Securitisation Fund

On 14 November 2018, the Government announced the creation of a AUD 2 billion Australian Business Securitisation Fund. The fund will invest in the securitisation market, providing additional funding to smaller banks and non-bank lenders to on-lend to small businesses.

The Government has established a AUD 2 billion Australian Business Securitisation Fund, which commenced on 1 July 2019. The fund, administered by the Australian Office of Financial Management, will invest in the securitisation market, providing additional funding to smaller banks and non-bank lenders to on-lend to small businesses.

Australian Business Growth Fund

The Government is encouraging the creation of a Business Growth Fund that would provide longer term equity funding to small businesses. The Government has committed to invest AUD 100 million into the Fund.

Taxation and business incentives

On 7 December 2015, the Australian Government announced a suite of new tax and business incentive measures under the National Innovation and Science Agenda (NISA). The measures include tax concessions for early stage investors in early-stage innovation companies. Eligible investors can claim a 20% non-refundable, carry-forward tax offset, capped at AUD 200 000 per investor per year, as well as an exemption from capital gains tax, provided investments are held for at least 12 months. Another NISA measure is the introduction of a 10% non-refundable, carry-forward tax offset for capital invested in new Early Stage Venture Capital Limited Partnerships (ESVCLPs), and an increase in the cap on committed capital from AUD 100 million to AUD 200 million for new and existing ESVCLPs.

Reducing costs for SMEs is a priority for the Government, as this is a key way to improve the financial viability of their operations, and thereby encourage additional investment. Small business tax concessions are generally available to businesses with aggregated annual turnover less than AUD 10 million. Most notably, the Government has lowered taxes and compliance costs for small business by:

• Increasing the instant asset write-off threshold for capital expenditure to AUD 30 000, expanding access to medium-sized businesses (with aggregated annual turnover less than AUD 50 million), and extending it to 30 June 2020;

• Cutting the tax rate for small (and medium) sized incorporated businesses with aggregated annual turnover less than AUD 50 million from 30% to 27.5% in 2018-19, and further to 26% in 2020-21 and 25% in 2021-22;

• Increasing the tax discount rate for small unincorporated businesses from 8% currently to 13% in 2020-21 and to 16% in 2021-22 (up to a cap of AUD 1 000 for unincorporated small businesses with an aggregated turnover below AUD 5 million);

• Streamlining GST reporting for around 2.7 million small businesses.

Many SMEs in Australia are engaged in primary production, and they face significantly greater levels of risk, largely due to seasonal factors and fluctuations in commodity markets. As higher levels of risk discourage SMEs from investing in new operations, Australia has put in place a number of tax measures to allow these SMEs to better manage this risk, including:

• Income tax averaging for primary producers; and

• Farm Management Deposits, which provide a tax incentive to better managing income fluctuations associated with price variability and seasonal variations.

In relation to SME employment, the reform of taxation arrangements of Employee Share Schemes (ESS) provides incentives for new start-ups, thus encouraging them to grow and invest in new capacity. Firstly, employees who are issued with options under an ESS are now generally able to defer tax until they exercise the options (convert the options to shares), rather than having to pay tax when they receive the options (and often before any benefit is realised). Secondly, eligible start-ups are now able to issue options or shares to their employees at a small discount, and have that discount exempt (for shares) or further deferred (for options) from income tax. The changes are designed to make Australia’s taxation of ESS more competitive by international standards, and allow innovative Australian firms to attract and retain high-quality employees.

In addition to the tax changes, the Australian Taxation Office has issued standardised employee share scheme plans and safe harbour valuation methods to make it easier for firms to establish and administer an employee share scheme.

Export financing

The global economy provides Australian SMEs with an opportunity to access new markets and the government is committed to helping SMEs reach their export potential.

The Government has committed AUD 20 million over four years from 2018-19 to establish a Small and Medium Enterprises Export Hubs program. The Hubs will enable cooperation and boost export capability of local and regional businesses, through support to develop collective brands, leveraging local infrastructure to scale business operations, and positioning regional businesses to participate in global supply chains.

Export Finance Australia is Australia’s export credit agency. Through its loans, guarantees, bonds and insurance products, Export Finance Australia has helped many Australian exporters and subcontractors to take advantage of new business opportunities that may otherwise have been out of reach. In 2019, the Government passed legislative amendments to provide Export Finance Australia with additional capital and new powers to finance overseas infrastructure projects in the Indo-Pacific region. An enhanced role for Export Finance Australia in infrastructure financing will boost its ability to support Australian businesses, including SMEs, which have the specialised skills and knowledge that underpin major projects, especially through the supply chain. The amendments also establish the new, simpler name of ‘Export Finance Australia’ (previously the Export Finance and Insurance Corporation) that provides greater brand recognition for the agency and the Australian Government with Australian SMEs, other exporters and counterparties and in important overseas markets.

These reforms complement Australia’s strategies to expand opportunities for businesses, including SMEs, under Australia’s free trade agreements.

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Figure 3.3. Trends in SME and entrepreneurship finance in Australia

Source: See Table 3.4.

 StatLink https://doi.org/10.1787/888934116186