4 ADVOCACY – OUR TAX SYSTEM 5 ACCESSING FOREIGN

CAPITAL TO FUND AUSTRALIA’S PROPERTY DEVELOPMENT 2 TRADITIONAL FINANCIAL

REPORTING IS BECOMING REDUNDANT 6 CONSIDER ESTATE

PLANNING EARLIER RATHER THAN LATER 7 SCHIAVELLO

– CULTURE OF EXCELLENCE3 SUPERANNUATION

POLICY: HOW DOES IT AFFECT YOU? 8 WHAT’S NEW

A PUBLICATION EXAMINING ISSUES FOR OUR CLIENTS

CONTACT WINTER 2016

As usual at this time of the year, there has been a flurry of activity both leading up to the Federal Budget announcement and following it. Middle market businesses are set to gain from the 2016 Budget, with a raft of tax and infrastructure initiatives that seek to fulfil the government’s objectives of encouraging economic growth and employment.

The State Budgets we’ve seen thus far in Victoria, QLD and WA have also focused on the economic growth-enabling possibilities of infrastructure investment, and we’d expect to see that theme continued in other states.

Infrastructure investment, when it results in nation-building projects that help Australian businesses move goods, services and capital to new markets, can have a real impact on jobs and growth at both a national and a local level.

Significant road, rail and water infrastructure projects will benefit both the economy and mid-market business, with downstream benefits for a range of businesses, especially in the construction industry. This is good news for engineers and construction workers who have struggled to find work with the end of the mining boom.

But thus far, from both federal and state government, we should also be seeing more investment in both port and airport infrastructure itself – not just the road and rail links that lead there. Infrastructure that helps our middle market manufacturers get their products to national and overseas markets will drive growth in the long term.

The real challenge for whoever wins government in the next term will be how to facilitate growth in the middle market. We’ve heard a lot about encouraging innovation in small business and start-ups but it is middle market that has the potential capacity to expand into new markets and find new sources of growth.

This can only take place through sound policy development. While Australia and our trading partners head down the path of securing their respective tax bases, we must not forget that unless the pie gets bigger, we will all be fighting over a share of the same sized market.

Pitcher Partners will keep advocating for real structural, investment, education and tax reform that helps Australian businesses.

By Ross Walker Brisbane

Over the last five years, we have witnessed the rapid adoption of cloud based applications across IT environments amongst our clients. These are systems whose data is easily accessible and talk readily to other systems. Consequently, the ability to produce useful and meaningful whole of business reporting is far easier than it has ever been.Mirroring the proliferation of niche applications on operating systems on mobile devices, the rise in popularity of cloud based applications in the business environment has been accompanied by bespoke applications that can enhance your IT system. The most recognised cloud based software at the centre of this change is Xero but this change is now common across most accounting applications.

Like the Apple iOS or Android platform, for many businesses it is becoming the hub of their business systems. Packages are so progressed in their development that they connect to bank feeds automating bank reconciliations, creditor payments and debtor receipts. Systems can integrate with equally advanced applications like Vend point of sale software for the automatic posting of sales occurring at stores as well as report on inventory.

Within days you can have a hundred invoices pushed into your accounting software by simply scanning the invoice/receipt, emailing or mailing to a third party, with a copy kept in the cloud for easy access at a later date if required. You can manage your staff rosters and timesheets allowing owners to send out messages for roster changes and staff to complete timesheets and access their payroll information online, including old payslips. The system will then seamlessly integrate with your accounting software.

Apart from the obvious financial benefit of efficiency, an automated process allows businesses to understand how their business is performing more quickly.

We are seeing our clients not only achieving this efficiency but investing the efficiency dividend in getting more meaningful reporting on their business that is readily available. Consequently, traditional financial statements are becoming redundant in business reporting for owners and managers. They are being replaced by meaningful management reports that are easy to tailor to ensure they communicate the true drivers of business performance. Useful information like the ageing of stock on hand, performance of stock categories, working capital performance and margin analysis all reported with accuracy on a single page. Combining the data coming from your website, Google analytics or Facebook site with financial information provides a far richer and relevant report on what is happening in your business.

At a click of a button you can have a management report ready for you to review that represents your whole business.

Efficient, integrated systems are not the domain of expensive IT systems like SAP. Meaningful management reporting is no longer the domain of specialist software consultants. This functionality is accessible to businesses of all sizes and importantly is far more affordable. The most significant outcome of this change in the business environment is opportunity for business owners to be better informed about the performance of their business quickly and wherever they may be.

Challenged or intrigued by the evolution of reporting platforms? Talk to your Pitcher Partners advisor.

ANALYSIS

By Adrian Clerici Melbourne

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The Turnbull Government, if it is re-elected in July, plans to reduce the amount of taxable income you can divert into super. This is to reduce the benefit from the lower tax rates on super relative to income (the lower tax rate being 0%, 15% or 30% depending on your total income position).Currently you can divert up to $30k, or up to $35k if you are age 50 or over, less the compulsory amount your employer is required to contribute.

Going forward the government’s proposal is to reduce the contribution cap to $25k.

Reducing the contribution cap is becoming a standard government move to raise revenue; this will be the fourth reduction in the last eight years. The cap reduction is projected to raise about $4b over four years, so it is significant and has wider application than simply applying to high income earners.

Older working Australians will be hit especially hard. For those who are later on in their working lives, and who have finally some discretionary savings capacity after paying off the house and putting the kids through school, this move affects their ability to ramp up super contributions when they have disposable income

The opposition haven’t announced any planned reduction to the standard $30k cap, however when they were last in government they did reduce the cap three times in about six years from $50k/$100k depending on age to a flat $25k for everyone.

The concessional contribution cap makes it hard enough to increase your superannuation contributions, but the government has also proposed a $500k lifetime limit on voluntary after tax contributions back dated to 1 July 2007, replacing the $180k annual limit that currently applies.

The Opposition have not announced any further restrictions on voluntary after tax contributions.

The $500k lifetime limit is the most ill-considered element of the Government’s superannuation changes. It strips out of the system the last meaningful incentive to save enough to remove reliance on the age pension. No-one coming through the system today will be able to save amounts greater than around $1m, which is marginally above the age pension qualification threshold.

The $500k lifetime limit will also have major impacts on certain groups. Divorcees who have used the $500k and split their super with their spouse will be locked out of the system. Downsizers planning to contribute property proceeds to super, or people receiving an inheritance will be locked out of the system to any meaningful degree. Ex-pats returning to Australia will now be unable to bring their retirement savings with them.

The constant winding back of the concessional contribution cap, and the government’s planned lifetime $500k non-concessional cap, will significantly reduce the incentives that were originally built into the system quite deliberately to encourage people to save over and above the compulsory super amount using tax concessions.

In fact, there will essentially be no voluntary savings potential left in the system for people on reasonably high incomes, as the employer contribution required under the compulsory system will broadly match the planned $25k maximum contribution cap.

Both parties are also proposing to limit the tax breaks for superannuation pensions.

The government has proposed a $1.6m limit on pension balances. That is, you can have no more than $1.6m in super pensions where investment earnings are exempt from tax. If you have super over $1.6m, the excess will have to be held outside the pension system, where investment earnings will be taxed at the standard 15%.

The Opposition have proposed an annual limit of $75,000 of pension investment earnings which will be exempt from tax. Pension investment earnings above $75,000 in any year will be taxed at the standard 15%.

The pension tax proposals are broadly comparable, with the ‘better’ system dependent on the investment return achieved by the super fund in any particular year.

At a high level and following the Budget announcements, the superannuation policy positions of the Government and Opposition are broadly similar in terms of what contribution taxes and taxes on superannuation pensions will look like.

Both parties plan to increase taxes on contributions and pensions. Both parties will target higher income earners and those with higher current superannuation balances. Both policy positions are a net negative if the purpose of the superannuation system is to encourage Australians to save for their retirement and reduce reliance on the government aged pension.

Pitcher Partners can provide significant insight into the impact of the proposed changes on your superannuation, and put in place strategies to best manage your funds. Contact your usual Pitcher Partners partner for more information.

By Brad Twentyman Melbourne

Superannuation policy: how does it affect you?

SUPERANNUATION

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We’re on the cusp of a new government, and no matter who wins, it’s very clear that tax reform needs to be high on the agenda.Our tax system must reflect a world that looks very different in 2016 than it did in 2006, but the scrapping of the Tax Reform White Paper means that we are operating in the dark.

There is a revenue and spending imbalance at the heart of the Australian economy. It is well and truly time to get serious about solving that so it is easier for business to grow and continue to provide employment, in addition to insulating Australia for the future.

With continued uncertainty over commodity prices in China and Europe, our leaders need to present Australia with an economic vision backed by commitment to tax reform. In particular, we need tax reform that makes it easier for the middle market to do business.

Despite being the engine room of the economy, middle market businesses are disproportionately affected by inefficient taxation systems. The middle market misses out on innovation grants and favourable tax treatments that are offered to start ups and small business, and it lacks the market power of big business despite contributing more to economic growth and employment.

Pitcher Partners has outlined a series of reforms to assist the government in designing a better tax system that supports business growth.

Both political parties have said changes to the GST are not on the agenda in the next term of government. In our view that’s a mistake.

We support the increase of the GST to 15 per cent on the current base, or an increase to 12.5 per cent on a broader base, with

exclusions for health and education and balanced by appropriate compensation measures for Australians on lower incomes. We want government to be visionary in outlining a long term commitment to replacing less efficient means of taxation with a more stable long term revenue source.

The current corporate tax rate compromises our ability to compete for foreign investment and is a drag on business growth, especially for the middle market. We support a cut in the corporate tax rate.

Division 7A rules are needlessly complicated and do not represent the best approach to taxation for mid-market business. We support Division 7A reform. Red tape and compliance reduction is critical. Government need to focus on reducing complexity and compliance for the middle market and to make the tax system more efficient for those taxpayers.

Continuous attempts by governments of all persuasions has compromised public confidence in superannuation, undermining its premise. Australians need superannuation certainty if it is going to function as an optimal savings vehicle.

And instead of demonising foreign investors we should be looking at ways to attract foreign capital and investment while expanding our trade links with the rest of the world.

None of the major parties have advanced a cogent tax reform platform over the election campaign. That’s been a huge missed opportunity and no matter who takes government on July 2, Pitcher Partners will keep advocating for tax reform that supports the middle market and allows the Australian economy to grow.

By John Brazzale Melbourne

Our tax system needs to reflect a world that looks very different in 2016 than it did in 2006

ADVOCACY

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Accessing foreign capital to fund Australia’s property development

With interest rates remaining at relatively low levels, access to capital and funding is one of the major challenges facing businesses around the world, and property developers and investors looking to expand into Australian markets will not be immune from this challenge.Currently, funding requirements in the Australian property sector essentially reside at two levels – funding for property development projects to be constructed and sold, and funding for investors looking to acquire completed projects to hold for rental purposes and capital growth.

For property developers, 2016 has been a challenging year so far as Australian banks take a more conservative approach to lending to developers in the property sector, and we expect that to continue for the next six months. It is possible this is being driven by more cautious assessment of the continued sustainability of growth in property prices in Australia, but more acutely, it reflects changing banking regulatory requirements that compel global banks to hold greater levels of capital. Monetary tightening by central banks around the world is expected to continue and this will also affect lending.

This means that property developers and investors alike will need to look to alternative funding strategies to secure finance.

Pitcher Partners has identified three trends towards alternative funding strategies. We expect to see greater utilisation of these strategies in the property sector:

1. A resurgence in securitisation markets and non-bank funding.

2. Greater utilisation of managed investment trusts (i.e. REITs) as a collective investment vehicle for property investment.

3. For multinationals looking to invest in Australia, a shift towards funding projects through capital sourced in the home jurisdiction, and greater use of cross-border funding instruments.

Securitisation or pooled debt fundingDomestic funding programs are looking to foreign investors to invest in debt securities as a means of obtaining greater access to foreign capital. An important feature of cross-border debt funding is obtaining access to the interest withholding tax exemption that exists for publicly offered debt – without the exemption there is a 10% withholding tax on interest payments made on cross-border debt.

This is an additional cost of debt that may eliminate any incremental cost advantage in sourcing funding outside of Australia rather than domestically. Pitcher Partners can assist in advising on securitisation and pooled debt funding, including the requirements that need to be satisfied in order to access the withholding tax exemption.

In addition to traditional securitisation lending, there are alternative forms of funding offered by non-bank lenders. One of the most talked-about alternative funding sources is crowd-sourced equity funding, where we have already seen some new players entering the sector.

It will be interesting to see how the government’s attempts to facilitate crowd-sourced financing will play out for property investors. So far the legislative framework is geared towards promoting investment in start-ups and microbusinesses, making it inadequate for the needs of property investors.

Managed investment trusts regimeIn the context of managed investment trusts (MITs), Australia already has a regime that seeks to incentivise foreign investment in Australian property, whereby certain foreign investors are able to access a concessional withholding tax rate of 15% Australian tax – instead of 30%, or possibly more – on net rental returns and distributions of capital gains.

In May, changes were made to the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016 (the Act), establishing a new tax system for MITs. In recent years, Australia has been very focused on incentivising further inflows of foreign capital into the Australian managed funds sector, and the MIT regime is a key component of this program.

Multinational investmentThere are a range of cross-border funding strategies which may be considered by multinational groups looking to invest in Australian property.

In an environment where the risk appetite of domestic lenders is reduced, there is always the option for multinationals to raise funds in their home jurisdiction and deploy the funds in Australia. There are a range of very important issues to consider when doing so; for example, provision of funds in debt vs. equity form; fixed vs. discretionary returns on funds, and differing tax treatments in Australia and in the lending jurisdiction.

For more information on how the intersection between alternative funding strategies in the property sector and the government’s aim to drive foreign investment in Australia, please contact Pitcher Partners.

By Stuart Dall and Andrew Clugston

Melbourne

PROPERTY

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As more and more baby boomers transition out of their careers into retirement, advisors and policymakers are increasingly considering the financial and economic effects of this mass retirement.Baby boomers are not only passing control of their businesses on to their children but are facing questions about what is to happen to their wealth when they ultimately pass away. Accordingly, it is critical effective estate planning is undertaken to ensure the desired outcomes occur upon transition.

Estate planning can be a tricky subject to address; it often involves hard decisions involving family, dealing with complicated structures, and of course, a reminder of one’s own mortality. Addressing these challenges you need to be balanced between managing relationships, while having a keen eye for technical detail. Ideally, you need to be able to stand back and see the whole picture, but also see and understand how every component of your estate fits together and interacts. We support our clients through this process, essentially acting as a facilitator, giving our clients control over the decision-making, while providing guidance and assistance with the more difficult and complicated aspects of the estate planning process.

Ultimately, not taking appropriate action on estate planning will lead to incomplete or ineffective arrangements for dealing with your wealth after your death, compromising all the hard work and effort that you have put into building that wealth. When people build a business and accumulate wealth, they often mention the importance of taking care of the generations that follow, and of their desire to leave behind a lasting legacy and memory to their life’s work. Poor estate planning compromises these goals.

The role of estate planning is to provide maximum certainty by putting in place the right plans and arrangements to protect the all aspects of the wealth when this wealth is ultimately passed on. Estate planning is even more critical when you hold large parts of your wealth in entities such as discretionary trusts or superannuation funds. On a day-to-day basis, you may treat assets in the family discretionary trust as your own, but legally you do not own the assets in the trust. A person’s will deals with what the person owns. As you do not own the assets in the family trust, your will cannot touch, control or direct where those assets go where you desire. Likewise, a self-managed superannuation fund (SMSF) is just another form of trust.

There are very effective ways in which discretionary trusts and SMSFs can be controlled and the wealth in those entities passed on as you want, but these control mechanisms are quite separate and distinct from whatever instructions there are in a will. Estate planning needs to encompass the provisions of an individuals will as well as the separate provisions needed to deal with associated trusts and superannuation entitlements.

The estate plan needs to both recognise and co-ordinate these separate control mechanisms to meet the estate desires.

We often find that once we’ve embarked on an estate planning exercise, we uncover gaps in their pre-existing arrangements, inefficient or ineffective structures, and competing priorities. This often arises as business and investment structures and arrangements are built, added to and developed over a long time frame. Not always does someone take a bird’s eye view of the entire arrangement. This is where an estate planning exercise can add real value.

We approach estate planning by identifying and writing down every aspect of a client’s wealth circumstances in one document. This helps ensure that every single aspect is dealt with appropriately. Estate planning is fundamentally about ensuring that your desired outcome is achieved in relation to every aspect of your wealth.

Estate planning is, by its nature, an intergenerational exercise. Good planning can not only meeting your aims, but can identify ways in which the next generation can be supported, helped and prepared to properly deal with the wealth that is to pass to them from their parents and other family members.

It is always true that it is better to engage in estate planning earlier rather than later. Early planning allows time to amend structures as required, put new arrangements in place to support and develop the next generation so that the wealth will be properly controlled and passed on according to your wishes.

Good estate planning ultimately provides comfort and certainty that wealth will pass on as you desire and intend.

By David Foulds Melbourne

Consider estate planning earlier rather than later

WEALTH

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With Schiavello celebrating an impressive 50 years in business in 2016, we asked founder Tony Schiavello and his son Peter Schiavello about the background to their success. Tell us about your business.

Tony: We started out doing interior fitouts and supplying office partitions for Melbourne businesses. Now we’re a multi-disciplinary, global organisation employing over 1,200 people, operating 10 showrooms and six manufacturing plants.

What drives your business?

Peter: Innovation. Whenever we do anything we always aim to innovate. And property development is no different. We always strive to add value.

How did you build your business?

Tony: Every organisation has its own culture and ours is focused on forming long term relationships. So it’s important to us to make sure that in whatever we do, we deliver great value to our partners. We hope if we do a great job we continue to have a great relationship with our clients. We value and cherish our customers. That doesn’t mean we always are able to take the easy road. If something is wrong, we rectify it to the satisfaction of our customers. That is what builds and sustains a brand.

What’s behind your success?

Tony: We are in a service industry. We try to keep our client’s doors open all the time.

Peter: In many ways it is attitudinal. In everything we do, the way our people behave, we like to demonstrate great service, and demonstrate responsibility back to the community. Behaving ethically and responsibly, being kind to environment, and thinking of the future is an attitude that resonates with us. It has become increasingly important with our corporate

clients. They want to understand what our CSR position is. They don’t just want a nice statement – they want to understand our actions and activities to demonstrate it. For example we have had an ISO14001 certification, which is an environment accreditation, since 1997. We were one of the first 200 corporations in Australia to achieve this environmental management certification, and it’s one that the whole business operates on. This becomes part of the culture and value system of the business.

Tell us about one of biggest challenges you’ve faced.

Tony: I faced many challenges along the way while building the business. The biggest challenge was turning the company around in mid-1972 from a loss to profit in six months.

Where would you like to see your business in 10 years?

Peter: We continue to diversify. Development is only one area of that diversification. Continuing to look for international opportunities is the way forward for us. Competing on the global scale is where we’d like to see the business continue to head.

What makes you proud?

Tony: I am proud of everything we achieve. When I started, I just wanted to work for myself and look after my family as best I could.

What would you like your legacy to be?

Tony: We have a company that is national and international and has a good reputation. For me, I consider that to be my greatest accomplishment. It’s a family company.

A culture of excellence Schiavello By John Brazzale

Melbourne

CLIENT PROFILE

Photo credit: Schiavello Kayt Village is an intelligent furniture collection that enables dynamic work environments.

Photo credit: Schiavello Savills Brisbane’s new office .

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Pitcher Partners in the Community

NSWIn March, Pitcher Partners Sydney’s managing partner Rob Southwell took part in OzHarvest’s 2016 CEO CookOff. Rob joined 151 business leaders and 50 of Australia’s top chefs at The Cutaway at Barangaroo in Sydney to cook meals for over 1,100 Australians in need.

The OzHarvest CEO CookOff is an annual event, aimed at delivering food to people in need, providing nutrition, education and training to vulnerable Australians and minimising food waste. With a large amount of generous and greatly appreciated support, Rob smashed his $10,000 goal by raising $16,452; contributing to the overall $1.5 million raised this year. Since it began in 2012, the OzHarvest CEO CookOff has raised over $5.5 million for charity.

QLD Over Christmas 2015 and Easter 2016, the staff at Pitcher Partners Brisbane made donations of gifts, money, gift vouchers and food to Women’s House Shelta in Brisbane. Women’s House Shelta is a community-based organisation established over 40 years ago to support women and children affected by domestic and family violence.

WA Amanda Geijsman, Chenelle Pappas and Karina Foxon from Pitcher Partners Perth recently gave up their weekends to walk 60 kilometres over two days to raise money and awareness for cancer affecting women. For almost eight hours each day, they were on their feet walking the streets of Perth in hot, 30-plus degree weather. Together, the PP team raised over $6,000 for the Weekend to End Women’s Cancers, supporting the Centre of Women’s Cancers at the Harry Perkins Institute of Medical Research.

The creative workplaceCreativity plays an important role in the process of innovation and entrepreneurship as it is the stepping stone for a business to develop a functionally innovative and entrepreneurial environment.

Creativity involves using your imagination to solve a unique problem. It differs from innovation which empowers you to use creativity to generate solutions that are new to the world in some form. Furthermore, entrepreneurship involves applying innovation to bring ideas to life and to the rest of the world.

Creativity can be enhanced within the workplace by:

• Looking at how problems are defined. Redefining the problem to challenge existing assumptions can expand the number of possible solutions.

• Propose as many solutions to a problem as you can. The most creative ideas can come about when you think you are out of ideas.

• Inspire and engage employees to use their imagination to solve the problems they face.

This is an example of learnings from the current Pitcher Partners Institute of Entrepreneurship and Innovation course. The focus of studies is to support the development of an entrepreneurial mindset amongst staff and our community. To find out more, visit pitcher.com.au/PPIEI

What’s New For comments on this edition or if you wish to be removed from the Contact mailing list please email us at editor@pitcher.com.au. You can view Contact electronically at www.pitcher.com.au/insights/contact-magazine.

MelbourneJohn Brazzale Managing Partner +61 3 8610 5000 partners@pitcher.com.au

SydneyRob Southwell Managing Partner +61 2 9221 2099 sydneypartners@pitcher.com.au

PerthBryan Hughes Managing Partner +61 8 9322 2022 partners@pitcher-wa.com.au

AdelaideTom Verco Principal +61 8 8179 2800 partners@pitcher-sa.com.au

BrisbaneRoss Walker Managing Partner +61 7 3222 8444 partners@pitcherpartners.com.au

NewcastleGreg Farrow Managing Partner +61 2 4911 2000 newcastle@pitcher.com.au

Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

www.pitcher.com.au The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals and agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. © Pitcher Partners 2016 PrintPost Approved PP381827/0043

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Photo credit: Cole Bennetts/Getty Images for OzHarvest Amanda Geijsman, Chenelle Pappas and Karina Foxon