Thinking | 29 July 2020

The economy and COVID-19: extensions and future predictions

By David Dickens, Jacqui Barrett, Benjamin Wilson and Katelyn Cant

As the scale of the second wave of the COVID-19 pandemic in Victoria threatens to cast the nation into a relapse, the Federal Government’s announcements over the past week that it will extend critical government measures are welcome news.

In this article, we summarise the recent changes and provide our predictions for the rest of this financial year.

What has changed?

We mentioned in our 9 July 2020 update that many of the critical government measures were due to expire in less than three months. Last week, the Federal Government published the July Economic and Fiscal update, outlining its plan to extend a number of programs including the JobKeeper Scheme.

The JobKeeper Scheme, initially earmarked to issue a final round of payments on the fortnight beginning 27 September 2019 has been extended until 28 March 2021.

Our detailed article on JobKeeper 2.0, explains that:

  • the JobKeeper Scheme will continue in its current form for the full six months originally planned until 27 September 2020; and
  • from 27 September 2020, there will be significant changes to the JobKeeper Scheme.

We outline what’s to come – from 27 September 2020 – and explain the complex changes to the payment amounts and eligibility requirements.

The Government also plans to extend the Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme. Under the Scheme, the Government guarantees 50% of new loans issued by eligible lenders to SMEs.

Initially planned to end on 30 September 2020, the Government has announced that a second phase of the SME Guarantee Scheme will start on 1 October 2020 and will be available for loans made until 30 June 2021. The Term Funding Facility also encourages lending to businesses through incentives, with the greatest incentives for lending to SMEs.[1] The Government is still working to finalise the details of the second phase, however, we expect a further announcement in the coming weeks.

Temporary safe harbour

A key outlier from this wave of extensions is the temporary safe harbour protections against personal liability of directors for insolvent trading, which is still set to end on 25 September 2020.

Considering the Government’s willingness to extend similar business associated measures, we anticipate that the Government is giving serious consideration to extending the temporary safe harbour protections. It is notable though that the Government’s recent announcements regarding other extensions for programs expiring in September did not deal with the temporary safe harbour.

Similar to JobKeeper, we query whether the government is looking to gradually wind back the temporary safe harbour protections, although there is no obvious way to do this. There has been market speculation that the Government is being lobbied to suspend the preference payment recovery laws as part of an extension of the temporary safe harbour protections.

Other programs

Additionally, the Government announced in the Economic and Fiscal update that the following programs will continue or be extended:

  • The Government will provide temporary cash flow supports for eligible entities, which will automatically receive payments of between $20,000 and $1,000,000 for March to September 2020.[2]
  • The Government has increased the instant asset write off threshold to $150,000 from $30,000. The Government plans to expand access to the instant asset write off scheme to business with an aggregated annual turnover of less than $500 million (up from $50 million).
  • The Backing Business Investment (BBI) provides incentives for business with aggregated turnover of less than $500 million to deduct 50% of cost of new eligible assets plus normal depreciation on the balance in the year of acquisition. There is no cost limit for the asset.
  • The Supporting Apprentices and Trainees Wage Subsidy, provides employers with 50% of the apprentice/trainees wages for nine months, up to $7,000 per quarter. The Subsidy has been extended for an additional six months to 31 March 2021, and will include medium sized businesses from 1 July 2020.[3]

Separately, the Economic and Fiscal update announced that the commencement of recent reforms to the deductable gift recipient governance systems have been further delayed until three months after the date of Royal Assent of the enabling legislation.[4]

State Governments are also continuing to review their own support packages.

Banking sector support

Finally, earlier in July the Australian Banking Association (ABA) announced that as customers approach the end of their six-month loan repayment deferral period (circa. September 2020), Australia’s major banks will implement a new phase of support to assist customers to get back to making their repayments.

In this next phase, customers who can restart paying their loans will be required to do so at the end of their six-month deferral period. The ABA considers it to be in the long-run best interest for the financial wellbeing of individuals, families and businesses to return to full loan repayments and pay off their debt.

‘Those who are able to repay their loans will resume doing so, which is in the best interests of those customers and allows support to be directed to those who need it. Encouragingly, many customers have already chosen to resume making repayments,’ said ABA CEO, Anna Bligh.

What does the future hold?

The Commonwealth Government had little choice but to extend the JobKeeper scheme. It has been successful in saving many jobs and ensuring money is in the hands of those best placed to stimulate the SME economy – consumers. It is helpful the Government announced JobKeeper 2.0 two months ahead of its implementation.

At the time writing, the way COVID-19 is affecting people, nation states and economies is extremely varied, to say the least. In Melbourne, cafés and restaurants can only provide takeaway service and masks are mandatory. Meanwhile in Queensland, no new cases were detected on Sunday and people are socialising in bars and attending work in almost completely normal conditions.

Businesses and governments have moved beyond the initial crisis stage and should now be planning for continual fluctuations in restrictions at each location. For a business, this means being ready for stores and offices to open and close in different areas at short notice. Borders may also open or close at any time which necessitates careful supply chain management. Both the impact of the COVID-19 measures and the recovery will be multi-tracked.

The initial hopes that COVID-19 would be over within six months have unfortunately proven incorrect. Government and businesses are realising that they cannot just ‘hold their breath’ until we get to the other side.

Consistent with this, we think there is a growing view that ongoing stimulus packages and debt deferrals are not the solution, and may in fact cause more harm than good. We think that in the second quarter of FY20/21, there will be less willingness to provide support to businesses such as new credit or ongoing forbearance unless they can demonstrate ongoing viability in the current environment.

Directors must also remember that while their exposure to insolvent trading liability is presently substantially reduced, they continue to be bound by fiduciary and statutory duties to their respective companies and shareholders and, if in the twilight of insolvency, to creditors.

In these circumstances, we predict a gradual but noticeable increase in the number of companies using informal or formal restructuring or wind-down mechanisms. Whether there will be a surge of distressed businesses in the fourth quarter of FY20/21 will depend on Australia’s ability to control the pandemic and willingness of government and major financiers to keep extending the existing measures.

[1] Economic and Fiscal Update, July 2020 by Josh Frydenberg and Mathias Cormann, Page 80 (‘Economic and Fiscal Update’), page 12

[2] Economic and Fiscal Update, page 10

[3] Economic and Fiscal Update, page 11

[4] Economic and Fiscal Update, page 80

Contact

David Dickens

David is a commercial litigator with extensive expertise in banking and finance, restructuring and turnaround, property disputes, insolvency and...

Jacqui Barrett

Jacqui Barrett

Partner & Head of US Practice

In the corporate space, Jacqui regularly advises and assists client with mergers and acquisitions, corporate structuring, corporate compliance and...

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