Rolling Updates From Australia and New Zealand

When we talk about the COVID-19 pandemic in the future, you can be sure conversation will turn to the pros and cons of working from home. What was a lightly-applied workforce solution has overnight become the norm for many office workers. And as EY Oceania Real Estate, Hospitality and Construction Managing Partner, Selina Short, notes, this shift will have long-standing and far-reaching effects for workers and employers alike.

Crucially, it will also change conversations between landlords and tenants and force them to think about how it will shape their organisations in the long-term. 

“EY clients are already telling us that they are rethinking densification and desk sharing, and are re-examining what the future of work is going to mean for their office strategy,” writes Short.

“After years of ignoring the evidence, companies are now allowing people to experiment with what works for them, and what doesn’t. People are discovering they can write reports better from home but conduct performance reviews better in the office, for instance.

“When people return to the office, armed with the evidence from this experiment, they won’t want to slide back into their old seat. Expect to see more employees want to work half their days at home. And the other half? They’ll want space for collaborative and creative work – and they will need to be with the right people to do that type of work. By using technology to link space use with other factors, like skills, projects, teams or personal interests, we can create clusters of people with complementary profiles to foster collaboration, productivity and engagement.”

The current scenario also gives us an opportunity to put the high-quality data streams available to organisations to good use.

“Technology can play a fundamental role in reconnecting us. But to achieve this, we must pull together all our workplace data to understand what is truly going on in our spaces. Data can help us identify patterns and anomalies, and unearth new opportunities to create connections.”

“Landlords and tenants who work in close collaboration, sharing data, insights and costs, to create safe and healthy buildings will help create workplace communities that leave people feeling happier and healthier, less lonely and more connected than when they arrived.”

To find out more, read the full article here. 

There's been an understandable focus on how schools and school students are grappling with the pandemic distruption. But for the higher education sector, with its revenue streams deeply undermined by the shuttering of Australia's borders, the questions are just as profound.

In fact, as Catherine Friday, EY Oceania Government and Health Sciences Managing Partner, argues, universities that have relied on international students, as well as predominantly parochial intakes and providing broad-based courses will now need to focus if they want to survive. 

"In a post-pandemic world, universities that thrive will have decided what they want to be known for, and have branded themselves accordingly. Forward thinking universities, such as the University of Adelaide, have already gone some way to doing this by focusing their education efforts on the learning and insights valued by strong South Australian industries.

Friday says that specialising will help universities in three key ways.

"One, strong focus areas allows for the recruitment of both academics, advisers and students, who themselves are passionate about these areas. In effect, the university consciously and by design seeks to create communities of shared intellectual curiosity and pursuit.

"Second, it helps the university form key linkages with the industries, businesses and their leaders and luminaries, in the areas that they decide to devote themselves to. As we noted in our 2019 University of the Future report, Australian universities rank last in the OECD for their collaboration with businesses on innovation. Now is the moment that Australian universities should be energetically engaging with industry to co-create course content, collaborate on research and offer work-integrated learning.

"Third, a specialised, national approach relies on universities proving they can offer teaching and learning experiences that are demonstrably better than what students would experience from other domestic players."

To read more, you can find the full article here. 

The Federal Government's JobKeeper package passed in to law this week. We have fielded many questions from clients and interacted with Treasury and the ATO consistently since it was first announced on 30 March.

In our JobKeeper webcast, hosted this morning we attempted to deal with a number of those questions, bringing together our:

• Oceania Government and Health Services Tax Markets Leader, and Mining & Metals Leader Scott Grimley
• Oceania Consumer Tax Markets Leader Peter Janetzki 
• Tax controversy Partner Fiona Moore
• Tax Partner Paul Lombardo
• People Advisory Services Partner Tanya Ross Jones

Nearly 4000 people registered and given the demand, level of detail the session contained, and Q&A at the end, rather than providing a written synopsis we recommend accessing the webinar in full, on demand, here. 

You can read our initial response to the wage subsidy policy, Turning Job Seekers into Job Keepers, here, and the EY Global COVID-19 Stimulus Tracker is a useful tool collating the latest government subsidies and new legislative provisions from around the world. 

The new Mandatory Code of Conduct introduced by the Federal Government this week is intended to help level the playing field between landlords and tenants during rent renegotiations. As retail and commercial office tenants see rapid declines in turnover as a result of isolation measures against the coronavirus landlords are being asked to, amongst other things, reduce rent proportional to the trading loss in the tenant’s business and reduction must be in the form of rent waivers for at least half of the required amount.

Real Estate Advisory Partner Marco Maldonado says there are a few issues at play:

• The intention of  Government to keep a level playing field and get a code agreed quickly, versus the lack of details about how parts of it should be interpreted, which is likely to cause angst for all parties; 
• How landlords will need to consider the impact of implementing the Code on their own asset in the post-COVID re-emergence period, and the increased counter party risk in repaying the deferrals; and 
• How our habits will change both in shopping behaviour affecting retail stores and centre landlords, as well as new working habits affecting everything from how office tenants use their space to demand for city car parking. 

"More needs to be considered around the flow on effects of things like the proportionality rules," Maldonado says. The proportionality rules require landlords to reduce rent by a percentage equal to the fall in the tenant’s revenue as a result of the lockdowns. That means if a tenant has lost 30 per cent of its business, then rent should be dropped by 30 per cent.

“Does the drop in turnover rule apply across the whole of the tenant’s business, or just to that asset? And is the landlord required to pass on the drop in rent to every location? What about online sales? Is it fair for landlords to only consider sales attributed to the physical presence? or will they be able to offset the online sales,” Maldonado says. “Also, if a tenant’s revenue drops, there are other components of input costs that also drop, such as staffing and product. These saving are not being considered."

The challenge for landlords is juggling:

• the need to help tenants stem the immediate bleeding resulting from loss of trading; 
• digesting and accessing the array of Government stimulus being made available; 
• and deciding on a medium term strategy based to execute in an environment of which no-one really knows how it looks. 

“[Retail landlords will] have to work out what their definition of a shopping centre will be and its ongoing role in the community,” Maldonado says, pointing to a growing expectation that once people are allowed out of isolation, there will be a clamour for experiences and re-socialisation. “How will their centres look with the businesses that will re-emerge and will they be the same business coming out of this period as going in?"

Read the full story here. 

Working as a psychologist in the prison system, and in the Army can teach you a thing or two about how humans cope with crisis and respond to high stress situations, especially ones they cant control. As part of our profile series, What I learned, we talk to EY Oceania Markets Leader Jenelle McMaster about why her early career is as relevant now as ever. Read the full profile here.

"There was an inmate at Parramatta who had been a long-term inmate and was really respected and liked by officers and inmates.  He was top of the chain, would sweep the floor of all the offices, that sort of stuff - a really steady pair of hands, and a bit of a “go to” for everybody.

When we were in the process of changing jails, he completely flipped out. It was so uncharacteristic of him. I sat down and said, what’s going on for you? He said, ‘I just don’t want to go, I won’t go’.  I didn’t understand why, I thought it was all upside for him, I couldn’t see anything negative. It was down the road, brand new, great facilities, bigger cells.

He couldn’t articulate the problem, but he was extremely agitated and upset. So I asked him to give me one example of what was freaking him out, and he said: “it’s the taps”. In the old jail he had taps where you turn the handle, and the new facility had taps where you lift the lever. I looked at him as if he was insane. But it was at that point I realised it’s not about the taps.

Stress will play out in something like – in this case, the taps because it’s the only thing you can grip on to as an example, but it’s representative of something very different.

What he was freaking out about but didn’t have the words for, was a loss of familiarity, routine and control.  A loss of the “world” as he knew it. He knew his place in the current jail, he knew the system, he relished the power of being the go-to point and now he was the same as everybody else, just figuring out this new space, not knowing the answers."

Toilet rolls. Bleach. Now, it's flour and packet mix cakes being stripped off supermarket shelves. Thanks to COVID, we're all getting a look at supply chain disruption up close and personal.

For many of our clients, though, supply chain disruption is part and parcel of daily business. From protests interrupting copper supply to large events like earthquakes halting car production, the linkages that deliver our goods require constant management. But the unthinkable geographic scale and pace of the COVID-19 crisis is starting to threaten the capacity and viability of many organisations. And questions are being asked about reimagining local production to improve supply chain resilience.

Nev Power, the handpicked leader of the head of the National COVID-19 Coordination Commission, sees a silver lining in the crisis. He told the AFR that disrupted supply chains represented an opportunity for rekindling Australian manufacturing.

As EY Oceania Partner and supply chain expert, Nathan Roost outlines here, he expects there will be a trend in many countries to bring back more local production. But it needs to be done intelligently and with an eye to future capabilities.

No-one knows for sure whether supply chains will simply weather the shock and return to normal or whether advances in localising production will happen in time for companies to see them as a feasible alternative. If onshoring and near-shoring is to be a long-term solution, the availability of and capabilities in technology such as advanced manufacturing and robotics, will be crucial.

In the interim, Roost says organisations are looking at whether 3D metal printers might work to print critical parts as a short-term solution. Manufacturing at a scale any larger than that, however, will have a much different ROI.

“As a small and relatively expensive market globally, we will need to think carefully about what we bring back,” says Roost, “There might be nation-critical parts in defence, some chemicals or critical spares for power and utility companies that we start to manufacture ourselves.”

“I think there will be a structural change in the next few years to develop local production capability,” he says. “But it will take time and investment and effort to develop supply chains, manufacturing and distribution centres closer to home.” 

Some of our most popular posts have been about how to manage workforces, from the personal and economic perspective. Clients are commonly asking:

• what happens in the event there is a rapid recovery and they've stood people down, and whether standing someone down is the same as temination; 
• whether it's worth applying for JobKeeper if you're not sure you're eligible, and what's going on with superannuation; 
• key markers and considerations for workforce performance and behaviour in a Work From Home situation; and 
• questions around how best to manage the leadership teams managing the crisis response. 

To that end, we've brought workforce specialists Sonia Sharp and Kate Hillman (who is on EY Oceania's own crisis response team), employment tax specialist Kylie Rusten, and EY Oceania Chief Economist Jo Masters together for a webcast today (registration link here), to work through some of those issues. 

Our People Advisory Service team has also released a Practical Guide to protecting your people operations, which includes the below crib chart.  

As for when the adrenaline stops? EY Executive Consultant Jono Nicholas explains that there is likely to be three primary phases that organisations will experience with their people, precis below: 

Right now: We - society - are in the change phase. Part of that will feel like the same stages as grieving, and that grief is for the end of what we know and can control and how we operate. People have a high amount of energy which is going in to making the adjustments we need to, to work from home, organise children and family, adjust to new behaviour patterns etc. This is the adaption phase and will last for another month or so. 

Reality kicking in: This phase will see energy ebbing away as the novelty of adjusting to so many new processes and ways of living wears off and reality kicks in. There will be real grief about real redundancies in the broader workforce, and real fatalities in larger numbers. For organisations looking to help their people through this very difficult stage, it becomes a time to introduce online tools to help people focus This could include online learning, or resilience training. But, the challenge is to not introduce this too early in order for it to be effective when it needs to be effective. 

Recovery and renewed optimism: When recovery comes there will be a huge amount of work to do, but people will be depleted. The previous two phases will have been quite hard hitting, so organisations need to plan for how they will keep workforces motivated and engaged, as well as ensure that those who have been working throughout the crisis aren't burnt out.

Australia is going in to debt to cope with the economic ramifications of the this health crisis. It might look like an eyewatering amount, but we've been here before. Sort of. 

Preliminary estimates suggest the government will need to borrow $400 billion to cover the two stimulus packages and the $130bn JobKeeper package, and that doesn’t include what will need to come out of state and territory coffers. Australia currently has one of the lowest national debt levels in the world, so we are in a good place to be able to do this. At the moment, net Federal Government debt is just shy of 20 per cent. Once we add the $400bn of debt, it will take debt to about $1 trillion, or around 50 per cent of GDP.

But, whilst this debt level seems eye-watering and quite confronting, we also want to leave our children with an economy that is functioning and has enough economic fabric for there to be jobs and for economic opportunity for our children.

There is a lot of talk of this current crisis being unprecedented. It’s not comparable because by definition all crises are different, but it’s not true to say we haven’t had this degree of government support before. Even if we do a superficial comparison with the past three big economic crises for Australia, we find the expected debt to GDP ratio is not unprecedented. 

Read Jo's full post for a comparison with the GFC, WWII and the Great Recession; what options we have for getting Australia out of debt; and when we have to choose. 

Talking with clients, we are hearing that organisations are conscious of a need to prepare for the recovery period. But for many, the shock to the economy means they are still in survival mode. In light of that, we thought this worth revisiting, in case you missed it on our launch day:

In a rapidly evolving situation such as COVID-19, there’s a clear delineation that businesses need to make between their crisis responses and their business continuity. 

Our EY APAC Leader, Claims & Dispute, Forensic & Integrity Services, Campbell Jackson, says that the best thing companies can do is to take a step back and apply a risk and opportunity lens to the situation. Each business will find strengths and weaknesses in the scenario. They then need to test where their risks and opportunities lie in three key areas: finance and cashflow; operations; and communications and reputation. 

Businesses then need to interrogate each of those areas, carefully model the scenarios and determine what measures need to be taken in the short and medium-long term.

“Remember: There is no playbook. A crisis is unique. And your response to the crisis is often more scrutinised than the event itself.” 

You can access the rest of Campbell's insights here. 

The New Zealand Tax Team has pulled together an overview of key government relief measures here, with a focus on wage subsidies and specific tax-related measures. The round-up includes:

• Financial reporting impacts of building depreciation
• Customs and indirect tax
• Privacy law
• Corporate and contractual matters; and
• Estate and succession planning

You can also see what other countries, including Australia are doing here, with our EY Global COVID-19 Stimulus Tracker.

And, as well as tax our broader New Zealand team has put together a comprehensive crib sheet of what companies need to consider as they work through the logistics of economic lockdown. While survival depends on a slew of factors - the set out how to prioritise your people for a strong and responsive workforce when the recovery comes, engaging boards, and questions around customer and supplier interactions, tech, and financial frameworks.

Treasury has released clarification of the JobKeeper program by introducing revised impairment-measurement rules. The initial announcement indicated the impairment-measurement would be based on a comparison with 12 months ago. That has been changed to a flexible measurement including capacity for the ATO to determine additional rules. There is also a slight rewording about which employers are eligible.

"We are very pleased with the change which follows feedback from EY to Treasury that the originally described eligibility rules left many gaps," EY Oceania Tax Policy Leader Alf Capito said. The Government noted at the Monday release of the policy, that it was working through the details of the policy, which will require various elements, as above, to be articulated for the draft legislation, ahead of Parliament being recalled this month. This will likely see further updates to the Fact Sheets released by Treasury. 

The most significant of the edits ([removed words in italics], new wording in bold), relating to updated eligibility rule, is as follows:

“Employers will be eligible for the subsidy if:

• their business has a turnover of less than $1 billion and their turnover [will be reduced] has fallen by more than 30 per cent [relative to a comparable period a year ago] (of at least a month); or 
• their business has a turnover of $1 billion or more and their turnover [will be reduced] has fallen by more than 50 per cent [relative to a comparable period a year ago] (of at least a month); and
• the business is not subject to the Major Bank Levy.”

It now also adds:

"To establish that a business has faced the requisite fall in turnover, most businesses would be expected to establish that their turnover has fallen in the relevant month or three months (depending on the natural activity statement reporting period of that business) relative to their turnover a year earlier.  

Where a business was not in operation a year earlier, or where their turnover a year earlier was not representative of their usual or average turnover, (e.g. because there was a large interim acquisition, they were newly established or their turnover is typically highly variable), the Tax Commissioner will have discretion to consider additional information that the business can provide to establish that they have been adversely affected by the impacts of COVID-19. 

The Tax Commissioner will also have discretion to set out alternative tests that would establish eligibility in specific circumstances (e.g. eligibility may be established as soon as a business ceases or significantly curtails its operations). There will be some tolerance where employers, in good faith, estimate a greater than 30 per cent fall in turnover but actually experience a slightly smaller fall."

The updated fact sheets are on the Treasury website here. 

As most of us adjust to the new reality of life in lockdown, it’s worth thinking about the things we might be taking for granted, such as water and power. For the utilities industry, COVID-19 has brought profound operational, customer, stakeholder and employee challenges. Our EY Lead Partner, Oceania Power and Utilities, Matt Rennie, has outlined here some of those questions that utilities companies need to address, especially as they navigate the first 30 days of an entirely new world.

Some of those questions, he asks include:

• Where will the customer volume spikes be and how will they evolve?
• How will customer and employee behaviours and expectations change over a prolonged period of stress?
• How will we reliably identify those customers in need and target those experiencing financial strain?
• What will be the sustained impact on workforce availability and productivity?
• Will there be an adverse impact on channels, tools, infrastructure and data protection protocols?

Rennie believes that “responsiveness needs to start with ‘command centre’ mindsets with senior task-force governance. Under each of the scenarios for COVID-19 – whether early recovery, extended intervention, or under the third scenario of a later resurgence – the first three months for those running utilities companies are daily tests of prioritisation, consideration and measure.”

What should we be doing now?

In these critical first 12 weeks, Rennie says that the questions faced by utilities are principally based on urgent and arising tactical issues:

• How do we run our operations with a largely distributed and remote workforce?
• How do we proactively serve our customers facing immediate financial hardship?
• What interim policies are required to protect reliability, safety, security, and employee well-being?
• How do we prioritise other inflight projects and priorities?

Rennie details first order priorities including employment issues, management and operational issues, customer issues, and supplier and business partner issues. “Through all of this first phase, utilities need to pay particular care to stakeholders. This means actively engaging with suppliers and business partners in what will need to be a streamlined supply chain, and rapidly available inventory and logistics support.”

“Successfully moving through these times allows a focus on more strategic and less tactical functions and changes in end-to-end operations to improve weak points exposed during lock-down. Before long, we will be asking how we maintain momentum in our digital and decentralised journey, and what did we learn?”

Eligible businesses can expect help in paying up to six million employees, with the Federal Government guaranteeing $1500 per person, per fortnight, between now and the end of September. 

We asked some of our Australian team for their initial observations, based on the information to hand at launch. You can read the full story here: 

EY Chief Economist Jo Masters:  “Being stood down and paid some income, as opposed to losing your job, implies there is a job on the other side, that there will be a job ready and waiting rather than having to hunt and compete for one, which in turn helps with confidence levels.”

EY workforce specialist Matt Lovegrove: "What it might do is make employers reconsider stand downs and focus on re-training their employees for the 'new normal', effectively subsidising the reskilling of their people for the 'Next' and 'Beyond' horizons. That would be a win for all - individual businesses, industries and the nation as a whole.”

EY empolyment tax specialist Frank Klasic: "The employer just gets a subsidy from the Federal Government, so other on-costs such as payroll tax and WorkCover may also need to be budgeted for by employers unless those specific on-costs are legislated by the States to exclude this payment, which is unlikely."

EY Oceania Tax Policy Leader Alf Capito: "The eligibility rules require careful attention, and we expect the ATO to do integrity checks on employer eligibility."

New Zealand

New Zealand launched its own 12-week wage subsidy scheme two weeks ago, but was forced to amend the program after confusion about how much of the subsidy had to be paid through to employees. Unlike Australia, the New Zealand program is not administered through its Tax Office although its roll out is instructive for Australia. NZ Private Client Team leader Darren White says he saw 95 per cent of his clients sign up immediately.

“Right from the get go we were receiving quite genuine enquiries from clients who were perplexed about whether they were obliged to pay the full subsidy through to employees, particularly where some employees were ordinarily earning less than the subsidy amount on a weekly basis.

“They also wanted to know if they were they able to use any funds they received that was beyond that employee’s wage, to help other employees who would normally get more." 

Enforced lockdowns are wreaking havoc on near term cash flow. But it’s one thing to say, ‘be sure about where your funding is coming from’, and another thing altogether to know where to start. Especially when fast decision making may be the difference between coming out on top or not.

The ultimate scale and ambit of the COVID-19 pandemic is more difficult to predict than was the case with the Global Financial Crisis. That’s not to say companies can't find lessons from that experience, not just about who survived, but how.  

According to EY Partners Jason Lowe and Sebastian Paphitis, the longer this crisis takes, the tougher debt market conditions will become and the more limited the options for business will be, even with the Federal  Government’s support of the lending markets. “We expect coming increases in the cost of debt and possible credit rationing,” Lowe, who helped establish EY’s Capital and Debt Advisory team says.

EY M&A Partner Duncan Hogg, who spent more than two decades in investment banks, says that while the GFC can be considered a slow burn compared to current events, it's the  immediacy of the impact of COVID-19 on a company’s near-term prospects that is playing out in the equity markets, although increased volatility doesn’t mean there’s not cash available for companies with good fundamentals.

They responded on today’s webinar, (you watch the replay here), about how they’re seeing the market - and clients - respond. 

Their top lessons to be heeded from the GFC, (detailed in full here) are:

1. Act fast. If you don’t already, ensure that certainty of funding is at the forefront of capital management strategies.
2. Money is available. Australian super funds are still sitting on large pools of capital that needs a home. $100bn was raised from equity markets during the GFC, showing shareholders will support companies they believe have strong fundamentals.
3. Don’t get caught behind if you want to draw down liquidity lines. Companies didn’t focus on rapid moves to do this in the GFC, but should now.
4. Listed and private companies each have equity options available. The key is assessing the options based on a balance of timing, and fairness to all shareholders. PE firms are also sitting on significant dry powder, some will wait for the volatility to stabilise slightly, others are already offering equity injections, convertible notes or alternative debt structures.  
5. If you wait too long, you risk having to discount to get the deal away, and you could face subdued investor appetite if a number of companies pull the trigger around the same time. 

Amid all the uncertainty, it’s good to turn to those who have been through previous periods of crisis periods before. We’re turning to some of our EY people who have experienced the ups and downs, to see what they did to emerge intact and stronger. 

For Ruth Owen, the crisis came a week after becoming Deputy CEO and Chief Operating Officer for the UK’s Jobcentre Plus (equivalent to Australia’s Centrelink). She knew right away that things would be anything but normal.  Read her full account. 

“I started in November 2008 and I’d barely got my feet under the desk when we saw pictures of Lehman Brothers workers walking out of their New York offices with their boxes,” the EY Oceania Human Services lead partner says. 

“When I started, we were almost at an all-time low in terms of people who were unemployed and claiming benefits – around half a million. Within about six months, that number had doubled.” 

“One crucial lesson is that the role of the leader in crisis mode, compared to managers, is to steady the organisation then get on and turn the new way of working into business as usual as quickly as possible, because from a workforce point of view, just dealing with the anxiety of a crisis can eat up all their energy and you never get any work done or help any customers.” 

“I also think that organisations need to talk about finding opportunities in a crisis. Obviously, you really need to deal with the here and now, but always look for things that could move your business forward that you thought was going to take you a lot longer.”