SMEs need reforms to help them shift up a gear or two

14/09/2015 - 10:36

SPECIAL REPORT: Business News looks at what needs to be done to energize small business during the state's economic transition, reviews the growth of franchises in WA, and looks at the rise of women owning SMEs.

SMEs need reforms to help them shift up a gear or two
ACCELERATOR: Eric Purvis says industrial relations reform would benefit his business. Photos: Attila Csaszar

Slowing growth is putting a handbrake on many small and medium-sized businesses. Business News spoke to representatives of the sector to find out what can be done to drive higher performance.

Having spent a considerable period in the shadow of the mining and energy industries, small businesses have re-emerged into the economic spotlight this year as the centrepiece of a federal budget and as drivers of the state’s transition.

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Yet barriers remain for SMEs seeking to do business in a competitive marketplace.

Major reforms are required for the sector to flourish, particularly in terms of taxation, industrial relations and competition policy, all of which will require political leadership.

There are some positive stories from the sector, too.

For example, one McDonald’s franchisee has grown his business by embracing innovation and taking opportunities when they arise.

Meanwhile, the number of women owning small businesses is growing as the number of men falls.

A Business News online readership survey earlier this month indicated that many small business owners believed the environment had deteriorated in 2015.

Around 37 per cent of SMEs felt conditions were ‘worse’ or ‘much worse’ at the moment than this time last year, while 27 per cent felt conditions were ‘better’.

Looking ahead, however, a more positive picture emerged.

Half felt the climate would be ‘better’ or ‘much better’ this time next year than now, while almost 15 per cent felt it would be ‘worse’ or ‘much worse’.

Kart World Belmont owner Eric Purvis said conditions were a bit softer this year for his business, given it was a discretionary spend for families in the area.

“You have to eat, you have to pay your rent, but you don’t necessarily have to come here,” he said.

“I’ve been in business long enough to know pain is cyclical, it comes and it goes.”

Mr Purvis’s bigger concern, however, was with the industrial relations system, which he said contributed to youth unemployment.

He said the changes to the industrial relations system under the previous federal government had taken it backwards and made it less competitive.

One area that particularly needed reform was in penalty rates, he said.

“Because we’re a society that operates seven days a week, there needs to be the flexibility,” Mr Purvis said.

Flexibility was particularly important when an employee could only work part time on a Saturday or Sunday and at no other time, meaning they would be employed at a higher cost to business.

“Employers say ‘no thanks’,” Mr Purvis said.

“If I’m going to pay somebody two-and-a-half times what they are worth, I’d rather give it to one of my regular staff and give them the bonus.

“Consequently, our youth unemployment is going through the roof.”

The recent Productivity Commission analysis of the national workplace relations framework took a similar position, arguing that penalty rates increase costs and reduce employment.

That report recommended aligning Sunday penalties in particular with those on Saturdays in retail and hospitality.

However, consultancy Business Foundations executive director Phillip Kemp said there was evidence to suggest small business would benefit more from increased consumer spending than they would save by cutting wages.

“The industrial relations system is a good system at the moment,” he said.

“I would rather Australians have more money in their pockets to spend in small businesses than small businesses cutting wages.”

Belmont Business Enterprise Centre chief executive Carol Hanlon was supportive of reform, although cautioned against going too hard too fast.

“Personally, I would like to see awards being as flexible as possible for employees to directly arrange hours with their employer at times that suit them,” Ms Hanlon said

She said before such a decision was made, the government would need to consult carefully about where workers might find alternative income sources.


Taxing times

Mr Kemp said small businesses paid a much larger portion of taxation than larger corporations.

“If that issue can be addressed, all the other problems will fix themselves,” he said, adding that larger businesses benefited most from the infrastructure and institutions that underpinned society.

Chamber of Commerce and Industry WA (CCIWA) chief executive Deidre Willmott said Australia generally was overly reliant on income taxes.

Federal Treasurer Joe Hockey has made similar remarks in recent times, with OECD research supporting the claim.

In fact, a study earlier this year by the OECD suggested that Australia was more reliant on income tax than any other developed nation, after Denmark.

GST reliance was low, however. “An important reform would look at redressing (the tax) balance, by increasing the rate and also the base of the GST and at the same time compensating people and businesses through reductions in income tax and corporate tax,” Ms Willmott said.

“It’s also important to remember that those high rates of income tax that we have are a significant issue for small businesses, many of which are not incorporated and pay tax at the marginal personal rates.”

Federal Treasury modelling shows company tax has a particularly high economic burden, with every extra $100 million raised costing the economy an additional $40 million in lost output.

For a similar increase in personal tax, the damage is about $24 million, while for the GST it is only $8 million.

Ms Willmott stressed that whatever policy was undertaken should not pick winners.

The principle should be that burdens, or assistance, were broad based and fair, to create a level playing field, she said.


Effective regulation

Broadly, there was a mood in the sector towards deregulation and red tape reduction, although views were mixed when it came to issues like competition policy and contract laws.

Independent Contractors Australia executive director Ken Phillips said he was disappointed the small business ombudsman legislation being reviewed by federal parliament didn’t provide the ombudsman with the authority to act to resolve disputes.

That would lower transaction costs, he said, as small businesses were forced to resort to costly court proceedings.

Similarly, laws being developed around contractual fairness were not satisfactory because it would only apply to contracts below a certain threshold, Mr Phillips said.

But a bigger issue would be in the effects test change to competition policy, he said.

Mr Phillips said that, under existing competition law, companies with market power would only break competition law if they had the intention of damaging competition through their actions.

The effects test would mean that the Australian Competition and Consumer Commission, as an example, wouldn’t have to prove intent if it could prove the effect, similar to manslaughter and murder.

Malaga & Districts Business Association chief executive Clive Haddow said that reduction of red tape was broadly good although sometimes didn’t happen fast enough.

He said there needed to be a clearer framework to train people starting businesses, with a structured approach from government.

Another idea floated was grants for businesses, similar to the first home buyer scheme.

Techforce business manager Nicole Cikarela said red tape reduction was a priority for her business, which employs seven people. She said bookwork, including filling out bureaucratic paperwork, particularly for taxation purposes, was convoluted and time consuming.

Tax cuts would be lovely, she said, but making the day-to-day running of a business simpler would be key.

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