Family Business

With David Pring

Welcome

Welcome to KPMG Family Business feature articles. If you would like to discuss these articles or how KPMG can help with your business please feel free to contact me on 9455 9996 or davidpring@kpmg.com.au

Challenges of Indigenous businesses

Start by getting on top of your finances

 GLEN BRENNAN

WHILE the buzz words of 2020 like agile, pivot and adaptability are used as COVID-19 descriptors, the truth is that those words could be used to describe Indigenous Australians for the last 60,000 years.

Now more than ever Indigenous organisations need these traits because if COVID has revealed anything, it is that “everyone has a plan until they get punched in the mouth” to quote Mike Tyson.

Running Indigenous organisations is challenging at the best of times. Managing community expectations while acquitt ing funding and complying with rules and regulations presents a minefi eld of risks for Indigenous boards and executives.

With the pandemic far from over and continuing to impact organisations in Australia and around the world, Indigenous organisations who are part of the mainstream economy are not immune.

When I refl ect on the last six months, there has been one recurring theme that has challenged Indigenous organisations more than most. It was that Boards and Executives of Indigenous organisations found that they were unable to access accurate and timely fi nancial information to make informed decisions.

Because of this, there has been a heightened level of anxiety among Indigenous Board and Executives about their organisation’s fi nancial health.

Th is anxiety wasn’t purely because they thought they were in fi nancial trouble, rather they just didn’t know how they were travelling with their fi nances. As one Indigenous executive said, they felt they were ‘fl ying blind’.

To further compound the visibility issue, even when some Boards and Executives got their organisations fi nancial information it was more of a ‘data dump of numbers’ which required decryption.

Indigenous organisations with multiple funding sources need clarity, not just of their organisation’s overall performance, but also individual programs. As another worried Indigenous executive bemoaned ‘the devil is always in the detail’.

If COVID-19 has taught us anything, it’s that the old ways of doing business may not be the best way in the future.

Leaders have been forced to review how they do business and the performance of core functions. So, it should come as no surprise that the fi nance areas of Indigenous organisations have come under closer scrutiny.

Fed up with fl ying blind, data dumps and sleepless nights, worrying that they had missed something important, Indigenous Boards and Executives have embraced the new normal and looked to outsource their bookkeeping, payroll and fi nance function.

Th erefore, here are my top four tips of what Indigenous organisations need to look for when outsourcing. • A dedicated finance officer – Just because you outsource doesn’t

mean you don’t have someone to talk to. The truth is its always handy to have a dedicated person who will answer your queries.

• Reconciling receipts and in-

voices – It is painful at the best of time, however, make sure there is a simple way to digitise receipts and invoices and send them through to a single source for processing. • Bank transactions – You should be able to avoid printing bank statements. Ensure bank transactions feed straight through to your accounting software. • Single touch payroll – You need an integrated system that will report to the ATO as well as keeping a good record of your payroll and super stream.

I realise it might sound counter intuitive to many Indigenous organisations to outsource their fi nance function. I understand that organisations have long standing relationships with bookkeepers and accountants. However, from my experience it will provide you with more visibility and greater control over your fi nances.

No more fl ying blind and sleepless nights and more time to deliver your important work.

At the end of the day, that is what matters the most…

First published by Glen Brennan, Partner, KPMG Indigenous Services, KPMG Australia on KPMG Newsroom on 13 November 2020.

R&D Tax Incentive changes to investment

 ALEX DEMETRIOU

SINCE the COVID-19 pandemic impacted our economy, we have seen three key trends emerge across Australian businesses. They have: — made a clever pivot to products and services needed in response to the pandemic — experienced a massive uptick in demand for existing products or services that have specifi cally solved problems created by the pandemic — or, through no fault of their own, are experiencing serious fi nancial stress and are struggling to remain solvent.

Th e central need for all businesses facing these challenges is capital. Th is applies to businesses that have made a pivot and now need to invest in their new approach to unlock further opportunities, to organisations that have seen a surge in demand now searching for ways to continue to capitalise on their new-found success, and to businesses that are struggling to remain solvent and are seeking capital to simply make it through the pandemic.

Access to capital is particularly challenging for pre-revenue start-ups that may have limited cash and so rely on third-party funding to keep going.

Stimulating the economy with R&D tax offsets

Th e good news is that the 2021 federal budget acknowledged that investment in research and development (R&D) is an important lever to help stimulate the economy.

Prior to the budget, proposed amendments to the Research and Development Tax Incentive would have reduced the support provided by the program by $1.8B over four years. Industry had been lobbying for many years to prevent the government from making these changes on the basis that  KAAJAL PRASAD activist once said, “When everyone is included, everyone wins”. Whilst said in a different context, its sentiment can be applied to a variety of different spaces including Family Offices.

For a Family Offi ce to thrive the executive needs to engage successfully with their key stakeholders – members of the family. Even though this can be done in a variety of diff erent ways, one which deserves more focus is inclusivity.

Quite simply, an inclusive mindset encourages stakeholders to remain engaged in the business and share a long-term commitment to its future. Whilst it’s a hard thing to immediately achieve, there are four key aspects we think should be considered as Family Offi ces look to the beginning of a new year:

1. Socio-emotional wealth (SEW)

Th e concept of SEW suggests that enterprises that create a stock of emotional value for the family are more likely to perform bett er fi nancially. Th e fi ve most common factors of SEW are: • Family control and influence – the value the family places on its ability to control the strategic direction and key decisions of the enterprise. • Identification with the enterprise – the value the family places on the identity it gains through its involvement in the enterprise. This is often the case with philanthropic activity. • Binding social ties – the value the family places on the relationships it was going to put a handbrake on R&D investment in Australia and, in some cases, force companies to go off shore to seek more support.

Fortunately, this budget confi rms that government will invest heavily in developing sovereign capability across the research, manufacturing and energy sectors to help businesses grow. Importantly, assisting companies invest in R&D is no longer being viewed as a cost to treasury, but as an investment in our future.

Th is is a welcome shift in att itude and will allow companies, including those from overseas, to view Australia as a viable location to undertake R&D activities, meaning more high-skill jobs, investment and growth in our economy.

Th e revised R&D Tax Incentive applies for years of income commencing on or aft er July 1, 2021. Companies with annual aggregated turnover of less than $20m will be able to access a refundable off set pegged at 18.5 percentage points above the corporate tax rate, which from 1 July 2021 will be 25 percent providing a 43.5 percent refundable tax off set. Th ere will also be no cap on the refundable tax off set.

Companies with an annual aggregated turnover of $20m or more will have a twotiered R&D intensity (R&D spend compared to total business expense) framework providing a premium intensity benefi t of 8.5 percent above the corporate tax rate for R&D intensities up to 2 percent, and 16.5 percent above the corporate tax rate for R&D intensities above 2 percent.

Other application and compliance aspects of the current program continue in their present form, meaning companies can now enjoy a level of certainty regarding their future investment in R&D.

Modern Manufacturing Strategy

Of particular note, the government also announced as part of the budget its new with different stakeholder groups. • Emotional attachment – the importance a family places on family cohesion and wellbeing as part of their involvement with the enterprise. • Renewal of family bonds through dynastic succession – the extent the family desires to hand down the enterprise to future generations.

2. Effective communication

When delivering information or a message to a family member, it is important to consider whether: the delivery method is appropriate for the content, who the information is being communicated to, how timely the communication is and who is delivering the communication. Modern Manufacturing Strategy (MMS), a $1.5B program designed to strengthen Australia’s manufacturing capability across a range of key sectors. A number of funding streams will be available under the MMS, addressing issues such as supply chain resilience, manufacturing modernisation, collaboration, translation and integration.

Th is new funding announcement, combined with low interest rates and the instant asset write-off measures announced as part of the budget, should give manufacturing businesses greater confi dence to consider investing in a wide range of growth activities, including R&D, if they take advantage of the support on off er. However, access to grant programs is likely to remain highly competitive.

Eligibility criteria and compliance requirements

It is always important to remember that accessing government funding needs to be approached in a strategic fashion. While programs like the R&D Tax Incentive are based on self-assessment, there are strict eligibility and compliance requirements that need to be met.

AusIndustry and the Australian Tax Offi ce (ATO) are active in enforcing these requirements by conducting reviews of claims that can go back a number of years.

Both regulators have increased the level of transparency around their assessment frameworks so claimants should be more aware of particular risk areas and concerns for the regulators. However, when it comes to fast moving R&D programs, staying on top of the necessary detail can be challenging.

Grant programs, on the other hand, are merit based and typically highly competitive with many applicants seeking funds.

Th ey require a strong, whole-of-business investment case to be successful. Almost

Inclusion the key to unlocking engagement

JESSE Jackson, an American rights civil

without doubt, businesses’ chance of suc-

Given the complexities of family enterprises, it is oft en the case that some family members fi ll multiple roles. Implementing family forums may help to ensure that information is communicated to appropriate family members in the most appropriate way.

3. Transparent decision making

For family members to be engaged in the enterprise and its activities, they must understand how decisions are made and how they can contribute to this decision-making process. If there are one or two dominant family members who always call the shots and override the consensus, family members will swift ly disengage.

In the absence of eff ective governance frameworks, it is easy for decisions to be cess will be reduced if they are caught simply reacting to the announcement of a grant program for which they only have four to six weeks to prepare and lodge an application. Businesses need to be bett er prepared for what may be a signifi cant fi nancial request.

Preparation is key

R&D Tax Incentive claims should be prepared on a real-time, concurrent basis to capture the right activity and costing information, at the right time. Th is allows for eligibility criteria to be addressed when it counts, so that businesses are not caught short when AusIndustry or the ATO conduct a review.

During this challenging economic period, businesses can least aff ord to be repaying any of their previously claimed R&D benefi ts, so need to consider what their compliance obligations are.

Preparing a successful grant application requires a sound understanding of government policy as it relates to business, the industry sector or region in which a company operates. Government funding measures are designed to help facilitate policy outcomes.

Th e task of preparing a strong application is therefore made much harder if a business does not understand or address the government’s priorities.

It pays for a business to be well informed and appropriately prepared so that an application for funding presents a suitably targeted, fully developed and policy-aligned case for support.

Th ere are also many diff erent funding options available which many businesses may not have the capacity to keep across. Businesses that are well prepared, and knowledgeable of desired outcomes, will face a bett er chance at success in accessing grants.

First published by Alex Demetriou, Partner In Charge, Accelerating Business Growth, KPMG Australia on KPMG.com.au

made ‘quickly’ without thought of the broader consequences nor making sure that the basis for the decision has been documented. Th erefore, constantly reviewing the frameworks and guidelines which govern business decision making are vital to ensure that all family members feel included in the decisions which aff ect them.

4. Trust and confidence

Without trust, the entire family ecosystem faces signifi cant continuity risks. Alignment and a strong and unifi ed sense of purpose goes a long way in encouraging an enduring commitment to the offi ce

Trusting their commitment, having confi dence in their ability to execute, no matt er what the ask, and ensuring accountability and support, will go a long way in keeping them engaged for the long term.

Engaging the family in the Family Offi ce takes dedication, time and commitment. It’s an inclusive and ongoing activity and the best time to start is now.

Refresh your family’s purpose and values and get alignment amongst family members. Open the channels of communication and organise meaningful forums. Th ere’s too much to lose if you don’t.