If JobKeeper is keeping your business afloat, do you have a plan for when JobKeeper ends?
Right now, a significant number of Australian businesses are struggling. This may be due to the ramifications of COVID-19 or other reasons which pre-date COVID-19. Some of these businesses are surviving on the metaphorical life support machines provided by Government stimulus measures. After September, when the JobKeeper program is scheduled to end, that number may explode.
The COVID-19 pandemic has already seriously impacted the Australian economy and hit many industries extremely hard. Virgin Australia has already gone into a much-publicised administration, and there is no doubt that many others will follow. In Australia, the industries likely to suffer the most are widely thought to be hospitality, tourism and tertiary education. But, the COVID-19 sword is likely to be more far-reaching than this as many individuals and businesses cut back on discretionary spending, supply chains are affected, and international trade experiences a downturn.
How JobKeeper is animating zombie businesses
Right now, though, two important lifelines are helping businesses survive (that is, avoid liquidation). One is the JobKeeper package, which provides wage subsidies to eligible employers so they can keep paying their staff during the downturn. The other is the extension of the ‘safe harbour’ regime that allows directors to avoid personal liability for debts incurred during the prescribed period.
In addition, companies now have six months (rather than 21 days) to respond to a creditor’s statutory demand. Creditors cannot issue statutory demands for debts under $20,000 (rather than $2,000). This makes it much harder for creditors to start winding-up proceedings, which may be artificially sustaining companies while the measure applies.
If your business is only staying afloat because of wage subsidies and other temporary support, your business may be a ‘zombie business’. Your business is still walking around and doing business with others, but you may have insufficient income to do anything except service your debts (and even then, maybe not all).
These lifelines are due to expire towards the end of September 2020. While the Treasurer has intimated that some industries may receive targeted support after that date, it would be extremely unwise to rely on that hope.
Additionally, the JobKeeper package is due to be reviewed on 23 July. Already, childcare workers have been told that they will not be eligible past July, and other industries could follow suit.
Keeping your head in the sand until September is therefore not an option. Here’s what to think about and why you should think about it now.
How many zombie businesses are there in Australia?
According to Treasury estimates, there are currently around 2.9 million people on JobKeeper payments. Those employees work for a combined total of 760,000 businesses, meaning that around one-third of all Australian businesses are receiving wage subsidies.
Of course, not all of these companies are zombie companies. Many are solid, healthy businesses and will be back in the black as soon as COVID-19 restrictions are lifted and there is a return to some pre-COVID-19 normality.
However, CreditorWatch, one of Australia’s biggest credit-reporting firms, thinks that at least 600 business administrations have ‘gone missing’ in the past financial quarter. That is, ordinarily, those businesses would have entered administration or been wound up but have held off. If the next two quarters see similar figures, there could be 2,000 zombie businesses by the time the September cliff arrives.
It is telling that according to the Q1 2020 Insolvency Barometer published by the Australian Restructuring Insolvency & Turnaround Association (ARITA), corporate insolvencies are down by 17%, which suggests there are a significant number of zombie companies that may implode once the stimulus measures end. According to ARITA: “March’s Insolvency Barometer could best be described as the ‘calm before the storm’. As all the variables are lagging indicators, the impact of the ‘great lockdown’ will not begin to show until next quarter.”
The rise of these zombie companies is due to a combination of factors. The first is the JobKeeper package, which provides struggling employers with the resources to pay staff. The second is the safe harbour provisions which give directors protection from personal liability for insolvent trading. The third is that creditors are unusually slow in lodging payment defaults, whether due to goodwill, under-resourcing or because of the changes to the statutory demand provisions.
Given the circumstances, it’s reasonable to expect a landslide of personal bankruptcies and corporate insolvencies in the last quarter of the year after the support is withdrawn.
If you’re concerned that this might be your situation, it’s crucial that you take action now. Here’s what you should be thinking about and why seeking early advice will give you the best chance of business success.
Why early action is important
If you are currently employing people using the JobKeeper package, you need to have a plan for September now. While it’s tempting to wait and see what happens, the reality is that delay will limit your options. If you take steps now to consider your options and potentially restructure your business, your business could survive an otherwise inevitable corporate death.
Once the government subsidies are withdrawn and the leniency of landlords and creditors is withdrawn, will your company be able to carry on? If not, what is your plan B? If you need to restructure, it will be harder to do in September, and at that point, you may have no other option but to place your company in voluntary administration to avoid liquidation – especially once personal liability for insolvent trading is reinstated. Creditors who have already been waiting six months for payment are less likely to be open to negotiation. You may have used up any cash reserves that remain. And if other companies like yours are hitting the wall at the same time, finding a buyer might be harder than you think.
Timely advice from an insolvency expert can help you think through your options.
Develop a business plan for the future
Sit down and develop a written plan for the business. In some cases, your business model may not need to change at all. In others, it will need to make a permanent shift. Set out:
- Where you expect your income to come from: what is your customer base and product?
- Will there be enough sales to generate the income you need? Consumer spending is down and likely to stay there while people deal with the ongoing repercussions of COVID-19.
- Do you have the same customer base as before? Ongoing global restrictions will make it difficult for companies who rely on overseas visitors, for example.
- How can you increase revenue? Is there a way to cut overheads or focus on the most lucrative part of your business?
- Do you need to borrow money, either to fulfil ongoing obligations or to pivot your business to a new direction? If so, speak to your lender as soon as possible and show them your business plan and projections.
Your business plan should have a strategy in place for a second COVID-19 wave or future pandemic. That may mean looking to a digital workspace with the ability to work as flexibly and remotely as possible. Agility is key to weathering what will doubtless be a volatile few years.
You may even want to consider entering voluntary administration as a vehicle to restructure your business.
Make contact with creditors
All the major lenders have made business loans available for small-to-medium businesses (SMEs) during the COVID-19 pandemic. At the same time, lenders have deferred payments on business, equipment and auto loans as well as credit cards.
If you’ve been granted a deferral of payments, the grace period is probably due to expire in September. It’s important that you speak to your lender now if you want to arrange an extension of the deferral. Don’t wait until September: if you do, and the credit is declined, you may find yourself out of options.
This extends to payments due to the Australian Taxation Office. In limited circumstances, businesses can apply for deferrals to assessed obligations, including income tax, fringe benefits tax and excise payments. If you have applied for a deferral and think you’ll need longer, ask your accountant for help in organising an extension.
If you have private creditors, like landlords or suppliers who are owed money, reach out to them too. If you can negotiate a repayment plan, it lessens the risk that they will register payment defaults against you and start the insolvency process rolling.
Make sure your books are in order
If you’re currently a JobKeeper eligible employer whose employees are receiving the payment, make sure you’re audit-proof. The ATO has already received thousands of tip-offs about possible JobKeeper frauds and has made it clear that they will be reviewing claims in depth.
Even legitimate businesses should be careful. If the ATO decides that you have insufficient evidence to support a JobKeeper claim, you may have to repay it. This includes situations where employers have anticipated a fall in turnover, applied for and been granted JobKeeper payments, and have not then experienced the drop in income they expected.
To be safe, it is advisable to review your application and any supporting documents or ask your accountant to do so. If there are mistakes, notifying the ATO early may mean you benefit from their discretion in relation to overpayments, and you can avoid penalties.
If you had a big fall in turnover followed by a quick rise, be prepared to answer questions about this. It might raise red flags with the ATO that you were falsely depressing your income to be eligible. If there is a simple explanation, like a large payment to you was delayed and then paid back, make sure you have supporting documentation.
What should businesses do right now?
The decisions you make about your company now will determine whether it is sustainable in the future. As a director, you have a duty to act with due care, skill and diligence and to act in the best interests of the company. Planning for life beyond JobKeeper is part of those duties.
By examining the strength of your business now, you have more time to put together a survival plan past September. That might mean pivoting your business, arranging an extension of credit, negotiating with creditors to manage existing debts, entering into safe harbour or voluntary administration. If you do need to restructure, you’ll be in a better position to do so if you still have reserves in place.
For that reason, it is crucial that you seek advice now if your company relies on JobKeeper subsidies or other stimulus measures or leniency to survive. A qualified independent advisor can help you understand your financial position and the options available to you going forward.
Further Information
For more information about what the end of JobKeeper might mean for your company, contact Trevor Withane: