Government cuts red tape for Small-to-Medium Enterprises

New Thresholds for Financial Reporting of Large Pty Ltd Companies Under the Corporations Act

Commentary from Nicholas Benbow, Director of Audit and Assurance at William Buck

The Australian Government, through a joint statement by Josh Frydenburg and Michaelia Cash, have announced financial reporting requirements that appear to significantly impact Small-to-medium-Enterprises (SMEs). The initiative is a positive move by the Government to cut red tape and enable SME businesses to have more ability to manage the commercial confidentiality of their operations.

Previously, as set out in s.45A of the Corporations Act Newly announced requirement, to be enshrined in the Corporations Regulations effective for financial reporting periods commencing 1 July 2019
Consolidated revenue for the financial year $25.0m $50.0m
The value of consolidated gross assets at the end of the financial year $12.5m $25.0m
Employees in the consolidated group 50 100

These changes, which have not been indexed or altered since 2007, appear at first glance to be substantial; they double the existing thresholds. The expectation is that this will save more than $300m to SME business over four years.  It also appears that this will be a blow for the compliance-based service providers industries that ostensibly benefit from these rules.

However, the impact of this may not be as far-reaching as many may predict.

There are already structuring tools in place for SMEs to avoid audited financial reporting
Many SME Australian businesses trade in a Trust structure and therefore, are not caught by the Corporations Act 2001. Those that do trade in corporate entities also have the ability to by-pass the rules by structuring their employees (i.e.: in an employee services entity) and assets (in an assets Trust) from their trading operations. Therefore, only one of the three thresholds are breached. Unlike rules for payroll tax or other state and federal taxes, there are no grouping rules that impact financial reporting requirements when there is no single controlling entity answerable to the requirements of the Corporations Act.

The commercial advantages of audited financial statements
An SME with $40m turnover, $20m in assets and 60 employees may find that advantages and benefits of annually audited financial statements – now no longer mandatory – are difficult to cast aside for commercial (and not compliance-based) reasons. Consider the following:

The value of an annual independent appraisal of the systems and controls that drive financial reporting and the robustness of those numbers that arise from that process;
The value of an audit as a tool for raising and rolling over debt, equity or mezzanine financing in order to maintain and/or finance future growth; and
The value of an audit in establishing the track record a company needs for a future exit event (i.e.: IPO, trade sale, generational change…)

Overall, the initiative is a positive one. It places greater autonomy in the hands of SME owners and executives to assess whether or not audited financial statements are a net positive or negative for them.  For those for whom the process is overly burdensome with little to no commercial benefit, I suspect that they would have, through consultation with their business advisor(s), already structured themselves in such a way (through Trusts or segmenting their business into different corporate entities) that these changes in thresholds have no impact.