Aura High Yield SME Fund: Letter to Investors 1 April 2022

The Treasurer delivered the annual Federal Budget this week, largely supportive of SMEs and individuals in the wake of inflationary pressures now hitting businesses and consumers across a multitude of goods and services.

Budget 2022-23 1 2

The delivery of this year's Federal Budget has landed just weeks out from the anticipated Federal Election and off the back of a post pandemic rebound. The Budget comes at a time where we are beginning to experience consistent and strong economic growth, low unemployment, mixed with increasing price pressure. With the employment rate now at 4%, the lowest in almost 50 years, and the Australian economy now 3.4% larger than it was at the start of the pandemic; the Government is shifting focus from responding to the economic shocks caused by the global pandemic, to a focus on longer term growth and stability initiatives.

The economy proved to be resilient to the impacts of the global pandemic and the more recent unexpected events, including the flooding in Australia and the conflict in Ukraine. We are seeing significant support for SMEs with the government acknowledging that small businesses are the engine room to the Australian economy. Assistance will come across various avenues which we have noted at a high level below:

Reducing red tape

As mentioned in last week's letter, the Government has a Deregulation Agenda, whereby they are focused on reducing the excessive administrative and bureaucratic challenges small businesses face. By reducing red tape, businesses will be able to shift their attention to the growth and development of their business without being hampered and restricted by excessive regulation and paperwork. Overall, the aim is to reduce compliance costs, streamline reporting requirements and improve cash flow for SMEs.

ATO to Develop Accounting Software

In line with reducing red tape, the ATO is shifting to automate reporting requirements for SMEs with the aim of reducing the cost and time currently involved in this process. They intend to align instalment payment obligations with real time intelligence on financial performance. This will achieve improved cash flows for SMEs.

Lower Taxes

The company tax rate was reduced from 30% to 25% from 1 July 2021. With this reduction, the Government will deliver around $2.6bn in tax cuts to SMEs over 2022-23, and more than $21bn from initial support provided in 2015-16 up until 2024-25.

Technology Investment Boost

About $1bn has been allocated to a new Technology Investment Boost as a way of incentivising
SMEs to shift to digital operation. SMEs with annual turnover less than $50m will be able to deduct an additional 20% (120% total tax deduction) off the cost of expenses and depreciating assets that support digital uptake. Eligible expenditure caps out at $100,000 per year and can be incurred from Budget night until 30 June 2023.

Skills and Training Boost

SMEs will have access to a further 20% deduction for eligible external training courses for the purpose of upskilling staff. Available from Budget night until 30 June 2024, this will provide a $550m in tax relief for the industry.

Expansion of Patent Box Regime

The regime is being expanded to include the agricultural sector from 1 July 2023, offering a concessional tax rate of 17%, an 8% decrease for SMEs. This may reduce pressure on their bottom line and increase access to cash flow. For our agricultural lender, this will be well received by the underlying borrowers.

The Federal Budget addressed inflationary pressures impacting individual Australians, introducing additional stimulus and monetary support measures across a few areas. At this stage, all businesses are feeling cost pressure. Despite the rising daily cost of living we are currently facing, the impact at this stage is only moderate in comparison to many other advanced economies. Unprecedented fuel prices and supply chain disruptions are causing a monetary flow on effect to the end consumers. Individuals will feel some direct relief immediately with a six-month reduction to fuel taxes, lowering the retail price of fuel. Additionally, the Government is offering tax offsets and direct one-off payments to eligible individuals.

Business Conditions and Sentiment – March 2022 3

Inflation was the key driver of this month’s insights into Australian business conditions and sentiments. The data released by the ABS found that 39% of businesses expect to increase their prices more than usual over the next three months. Businesses are claiming that the pricing pressure is coming from non-staff related operating expenses including rising fuel and energy costs and increases to the cost of goods and services used by the businesses. In addition, 40% of all businesses reported increases in operating expenses over the last month, compared to 24% in March 2021.

At an industry level, retail trade reported 59% of businesses expect their prices to increase more than normal over the next three months, with construction closely following at 58% and manufacturing at 55%.

Increase in Operating Expenses – Actual and Expected

Portfolio Management Commentary

The release of the Federal Budget presented some interesting incentives for SMEs to act on. The introduction of programmes designed to reduce the administrative and financial burden on SMEs, as well as the reduction in red tape, will allow further opportunity to invest in the future growth and success of their respective businesses. With inflationary pressures inhibiting SMEs from fully recovering from the harsh effects of the COVID-19 pandemic, the additional support is welcome news.

The ABS data released this week on business conditions and sentiments further reiterated the need for budgetary support as SMEs are facing increasing pricing pressures with inflation driving the adjustment. Inflation is a major consideration for SMEs and is also a major consideration for the investment team, with respect to the monetary response to the pressure of price increases across the board.

Ongoing dialogue with our lenders has us placed to fund a strong pipeline of assets next month. We are in the process of finalising the legal documentation for two of our new lenders and look forward to working with them.

1 Budget 2022-23

2 BDO Australia – The Australian Federal Budget 2022

3 ABS – Business Conditions and Sentiment – March 2022

This information is for accredited, qualified, institutional, wholesale or sophisticated investors only and is provided by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887). Aura Funds Management Pty Ltd is the Trustee of all the Funds mentioned and a subsidiary of Aura Group Pty Ltd. 

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