Syllabus Topic
HSC topic: Finance
role of financial management
influence of government - Australian Securities and Investments Commission, company taxation
INTRODUCTION
Financial management is crucial for business success, influencing budgeting, investing, and resource management. Governments exercise influence, through regulations, taxation, monetary policy, and subsidies, where their actions significantly impact how businesses manage their finances. Understanding these external influences is essential for navigating financial management effectively, ensuring compliance, optimizing profitability, and maintaining stability in a dynamic economic environment.
GOVERNMENT REGULATIONS AND COMPLIANCE
The Public Governance, Performance and Accountability Act 2013 (PGPA Act) establishes governance and accountability standards across Commonwealth entities, setting rules for financial management and broader public sector performance. Although Commonwealth companies mainly follow the Corporations Act 2001, which regulates financial dealings and ensures transparency in financial products, the PGPA Act aligns with the Australian Public Service (APS) Code of Conduct, reinforcing ethical standards for public sector officials.
The Corporations Act 2001 enforces a unified licensing regime for financial products, ensuring consistent disclosure and authorisation procedures. This regulatory framework covers various financial products, including securities, insurance, and superannuation, promoting a transparent financial environment and protecting stakeholder interests. Additionally, the Australian Securities and Investments Commission (ASIC) forms as a regulatory body monitoring and promoting market integrity and consumer protection, and dealing with compliance with the Corporations Act 2001.
TAXATION POLICIES
Taxation policies directly impact financial management decisions. The standard company tax rate is 30%, but eligible base rate entities benefit from a reduced rate of 25% from the 2021–22 income year onwards. To qualify, companies must have an aggregated turnover below $50 million and derive 80% or less of their income from passive sources. This shift from the previous small business entity rate underscores the importance of understanding tax classifications for effective financial planning and compliance.
The Pay As You Go (PAYG) system further influences cash flow management, requiring careful planning to meet ongoing tax liabilities.
GOVERNMENT SUBSIDIES AND GRANTS
The Australian government provides various grant programs to support businesses in funding energy efficiency projects. Eligibility varies, so it’s crucial to review guidelines carefully. In addition to grants, businesses can explore co-financing packages, loans, and tax incentives. Conducting an energy assessment can help identify cost-effective improvements that might cover project costs.
The Clean Energy Finance Corporation (CEFC) facilitates financial flows into the clean energy sector, offering programs and co-financing opportunities for small businesses, manufacturers, and the agricultural sector. Tax incentives, like the Small Business Energy Incentive, provide up to a 20% tax deduction on eligible energy-efficient upgrades. The Research and Development Tax Incentive (R&DTI) also encourages investment in R&D.
Businesses are able to find more grants appropriate to their business needs through applying through business.gov.au and the program GrantConnect.
MONETARY POLICY AND INTEREST RATES
Monetary policy, managed by the Reserve Bank of Australia (RBA), influences business financial management through interest rates. The RBA has kept the cash rate at 4.35% for seven months, reflecting a cautious approach amid economic conditions. With the rate expected to remain steady until at least early August, businesses face a stable borrowing environment. This decision follows a slight increase in the unemployment rate, which impacts economic conditions and the cost of borrowing.
CASE STUDY- SUPERMARKETS
In a recent Senate inquiry, significant recommendations were made regarding the regulation of major supermarkets in Australia, particularly Coles and Woolworths, which together dominate two-thirds of the market. The inquiry, led by Greens senator Nick McKim, highlighted the need for stronger competition regulation to address anti-competitive practices and price gouging. This case study illustrates how government intervention and regulatory changes can impact financial management within a major industry.
The Senate inquiry's report proposes several measures to curb anti-competitive behavior and ensure fair pricing in the supermarket sector. Among the most notable recommendations is the suggestion to forcibly break up major retailers if they engage in anti-competitive behavior. The report argues that such drastic measures should be a last resort, applied only when other regulatory tools have proven insufficient.
Additionally, the inquiry advocates for new rules to prevent price gouging, a practice where businesses exploit their market power to set excessively high prices. Currently, price gouging is not explicitly illegal, but the inquiry recommends amending competition and consumer laws to prohibit this practice and hold corporations accountable for unreasonable price increases.
The report also calls for clearer product unit pricing and less confusing grocery promotions to empower consumers and small suppliers. This aligns with broader goals of enhancing transparency and competition within the retail sector.
For supermarkets, the prospect of forced divestiture or stricter regulations on pricing could necessitate adjustments in their financial planning and risk management approaches. Companies might need to allocate resources to comply with new regulations, reassess their pricing strategies, and potentially restructure their operations to mitigate the impact of any enforced changes. Supermarkets may need to invest in systems and processes to ensure compliance with new rules and demonstrate their commitment to fair market practices.
SOURCES
Investopedia: How Governments Influence Markets
Department of Finance: Governance & compliance
AUSTLII: Corporations Act 2001 (Cth)
ASIC: Financial Services
Business.gov.au: Income Tax for Businesses
Department of Climate Change, Energy, the Environment and Water: Grants and funding
Business.gov.au: Grants and Programs
The Guardian: Supermarkets inquiry: forcibly break up major retailers in cases of anti-competitive behaviour, report says
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