By Peter McRae, CEO Platinum Freight® Management
Our dollar is weak and falling further and SME retailers – indeed, all Australian retailers who import goods for sale – are hurting. Peter McRae, a leading Customs Broker specialising in SME importing, predicts that the hurt will increase in future too, as tax and importing reforms that are designed to protect Australian retailers will also pack a punch to the most exposed: SMEs.
SME retailers who import goods for sale are under threat on so many fronts. Their operating costs are critically high with the fallen Aussie dollar, and in a moment I’ll break down exactly how. But there’s no sign of an easing either. Ironically, the tax and importing reforms under consideration at present are designed to protect. But the pink elephant is that they won’t always protect those who I would say are at high risk – independent retailers offering the market something unique and different, and already struggling under the pressure of local competition. Here’s why.
Let’s look first at the Aussie dollar and its impact across the board for importers:
Today the USD exchange rate is sitting at 0.7378. Six months ago it was 0.7773 and a year ago it was 0.938. We’re looking down the barrel at 0.60 by December 2016.
Retailers are paying more [for the same] in three critical ways in relation to importing:
- 1. Increased AUD value of goods landed
The value of the goods is calculated on the day the stock departs from overseas – which provides uncertainty for small importers (SME retailers). The lower the Aussie dollar equates to a higher value of goods which flows onto higher import duty, GST and an Import Processing Charge [IPC].
- 2. Increased shipping costs
Prices have increased because shipping costs are quoted in USD.
- 3. Increased sea freight Australian port and destination charges
These are charged in Australia when the goods arrive – but more than often these charges are determined and quoted in USD – again they will increase.
If this is happening across the board to any retailer importing their stock from an overseas supplier, why do I say that independents and SMEs are the worst affected? It’s a hunch, but I’ll suggest that it comes down to less wriggle room in their profitability, due to that fine balance between margin, profit and competition. They can’t just increase their prices to meet the added cost, or they will lose customers. So margin suffers. They also can’t negotiate lower costs with suppliers to recoup lost margin because their buying power isn’t strong enough.
What is the outlook? A retail landscape with less colour, less originality, less quirk and raw style. The landscape will suffer the loss of independents the longer the dollar plummets.
BUT, there is a but.
Under current importing laws, independents and SMEs also have some opportunities. With smart importing advice they can find ways to save where their bigger competitors can’t. And it is not entirely dependent on the dollar.
They key ways are three:
- 1. Quantity control
Importing small quantities of stock for samples, or special ranges can keep imports under Australia’s current [and generous] $1000 tax-free threshold. This saves threefold: no duty charges, no GST and no Import Processing Charge [IPC] on the goods. Small players who are very close to their stock might make three or four orders in close succession, via separate shipments, effectively drip-feeding their stores with stock to save 5% duty, 10% GST and an IPC of between $40.20 – $73 on each occasion. That’s smart importing.
- 2. GST-free for the smallest of the fray
If an enterprise has a GST turnover (gross income minus GST) of $75 000 or less they are not required to register for GST. They don’t pay it and they don’t charge it. So, being very small can cost less and it can reflect in slightly lesser price tags on goods. Of course if their imports are still over $1000 then they must pay GST on their import, which I should then refer back to my first point.
- 3. Negotiate Australian port charges with your supplier before the cargo departs.
This is not advice for small operators alone. It is an issue across the board. International suppliers have pre-existing deals with preferred freighters which, if not negotiated before the stock leaves the factory, can cost the importer significantly. (This month we saved one client $2200 one port costs for one shipment alone).
Change is imminent: the background
Small enterprises who employ smart importing behavior, such as outlined above, are the greatest retail benefactors of Australia’s high tax-free threshold. To put things into perspective, the threshold in competing countries is far lower: $0 in the US, $20 in Canada and £15 the UK.
But the wider retail landscape is under threat from the same tax-free threshold that benefits its SME subset. With it, consumers can shop globally and not incur the same charges that retailers are factoring into Australian prices in store.
Assistant commissioner Josh Frydenberg remarked in June that the number of international mail parcels imported between 2006-07 and 2010-11 doubled to more than 48 million. Since then the number had nearly doubled again. The fastest growth had been in imports under the $1000 threshold. One can safely assume the bulk of these are international purchases by individual consumers, shipping via the postal system, not SME retailers as a rule.
And this is what has led to proposed policy changes to lower the tax free threshold for Australian importing.
The future explained
Reducing the tax-free threshold is viable on world standards. It has been lobbied for by many big retailers. It will level the playing field and ensure that individuals buying internationally pay the same taxes and fees that Australian retailers pay and pass onto the consumer already.
The losers in the system are SME retailers. Because it takes away the advantages they currently enjoy, as I explained earlier. There will be considerably less flexibility for them to manage imports under the threshold. Therefore less opportunity for smaller retailers to sample new ranges at an affordable cost (without duty, GST and importing charges) and less opportunity to drip-feed an indie store with ranges month by month, shipped as separate small orders.
If the threshold lowers to its minimum under the proposal, importers could face import duty, GST and IPC on items with a value as low as $14USD, and this does not include the fact that a parcel may be held in the mail system for up to 14 days before being released.
And this brings us to the other major change on the horizon for Australian retail: proposed GST reform.
Affecting all retailers again, including SMEs, importers will all pay more GST after the reform. We face a reality where each and every import increases by at least 5% duty and 15% GST, plus the IPC.
There will be additional pressure for food and drink importers who under the proposal will go from paying 0% GST to 15% on most food and drink (which is currently exempted as GST-free food) they may be reclassified and divided further into a bracket known as GST-free – FRESH food. But what’s the definition of fresh food?
Similarly for jewellers importing precious metals, which are currently exempt, or medical and disability suppliers importing exempt medical and wellbeing products.
The list of possible changes to exemptions is extensive and still under negotiation, so this is all speculative, but my offering here is a realistic read on what information customs brokers have available at present.
This is the dawning of a new economic age and, specifically, a new retail age. Yes, it is born of necessity, but many parts of the picture have not yet been fully painted, or broadly understood.
It is time to clearly understand the situation, the changes proposed and their far-reaching effects. What is good for one is not good for all, as we all know, so it is my belief that SMEs need brace for change that, for them in particular, is not entirely promising.