Rebecca Archer
Welcome back to Beyond the Numbers with Grant Thornton – a podcast exploring marketplace and business trends.
I’m Rebecca Archer, welcome to our post-budget podcast episode. We’re delving into a recap of the federal budget, tariffs and the impact they could have on all industries, with particular focus on Manufacturing.
The economy is facing structural challenges, including rising costs in defence, aged care, health, and the National Disability Insurance Scheme, coupled with the uncertainty tariffs and geopolitical volatility are presenting for Australian businesses.
Today I’m chatting to Corporate Tax Partner Vince Tropiano, Global Trade Partner Richard Nutt and Innovation Incentives Director Simone Barker about the Australian economy and how tariffs are impacting Australian businesses – and what they can do to mitigate risks.
Welcome, Vince, Richard & Simone!
Vince Tropiano
Hi, Rebecca. Good to be here.
Richard Nutt
Hey, Rebecca. Nice to be here.
Simone Barker
Hi, Rebecca.
Rebecca Archer
Let's start from the bigger picture, if we can… Vince, what's the current economic landscape and how has it changed in the weeks since the Federal Government handed down the budget?
Vince Tropiano
Good question. How much time do you have? It's only been three weeks since the Federal Budget was handed down and it feels like it's been 100 years. There's been so much going on. Let's start with our own budget. We had a deficit of some $27b and forecast 10 years of deficits.
We've got our own issues here with rising costs in defence, ageing population, so aged care and health NDIS is still an issue there. You know, the costs are expected to reach $63b in the next five years. The questions we have around how we're going to pay for all this…So, in terms of major tax reform or revenue sourcing, there's not a lot going on.
Some positives – interest rates seem to be reducing again. Inflation seems to be under control, but we do have cost of living issues at the moment. That's obvious to all of us. Groceries, electricity, consumer goods, GST collections have been declining, so that's a problem for the government as well, and going through the budget scenario, we spent some time talking about, I guess, resetting Australia's future and the government looking to stabilise and strengthen the economy.
It's fair to say that external activity may have caused greater challenges there or there's going to be some rocky, some rocky moments coming forward with the US Government's activities in respect of tariffs, certainly instability amongst the Australian economy and global economy. There are some real issues there in terms of the impact that has on business confidence, confidence to invest, the confidence to undertake any further business activity.
So, there's a whole bunch of things that we need to concern ourselves with and it goes beyond the wild variations in the stock market. That's probably just an example of the general level of nervousness in terms of what's going to happen tomorrow and the next day. So, it's probably a bit of an uncomfortable environment for us to move forward in and then manage all the things like the impact of the tariffs and the like.
Rebecca Archer
You mentioned tariffs there. I wonder if we can have a bit of a look at those, and Richard, can you give us a bit of a sense of the impact that tariffs can have on a Australian businesses and particular industries?
Richard Nutt
If you asked me this question a couple of weeks ago, the initial feedback from clients and in my sense was that it's only going to impact potentially maybe manufacturing companies with overseas supply chains, retailers, you know, who's manufacturing China, but obviously you've probably read in, you know, if you listen or read in the press, we've seen reciprocal tariffs come into play.
So, at the moment that's a minimum of 10 per cent tariff on all goods made in Australia exported into the USA has got a 10 per cent tariff. Fortunately, we're at the lower scale end of the scale of the tariffs, whereby, you know, if it was potentially manufactured in Asia, some of these tariffs could be up to 64 per cent, but remembering they're on pause for 90 days. So, now my take on this. Anybody who's manufacturing physical goods in Australia is going to be worse off by 10 per cent. So, it has increased costs within supply chain by 10 per cent.
But what we're actually seeing, and it's quite surprising is the number of companies who's actually got supply chains that not necessarily manufacturing in Australia but in China, for example, and a lot of retailers and going into the US, they got some major challenges ahead how they manage those costs, are they going to be frozen out of the export market into the US?
The other thing as well, with manufacturing companies, what we're seeing as well, supply chain disruptions, we're expecting increased cost of raw materials to be passed through. So, we're going to see that direct impact and indirect impact and obviously then you know, are we going to be frozen out of export markets, you know, into the US but with that is the opportunity. While I don't see this as a negative or it's all negative. It could actually create some opportunities to explore new export markets.
What has dawned on me as well is Australia could be at an advantage in the manufacturing sector. So for example, if Australia only has a 10 per cent reciprocal tariff or goods manufacturing in Australia going into the USA and say, for example, after the 90 day cooling off period, which is negotiation period, where Trump's positioned this, as if some of these Asian countries was fearing 60 or 50 per cent tariffs if they remain in place or even reduced to 30 or 40 per cent, that potentially opens up some further opportunity for Australia to invest in some key industry sectors and create new export markets into the US which then creates new export markets more globally as well. So, I think there's opportunity from this as well.
You know, the other consideration is it's about the supply chain disruption as well. You know, how can you quickly pivot between supplies as well, you know, because who can afford to absorb some of the tariffs if you're a retailer of 125 per cent on Chinese made goods. There are some challenges there for companies.
Rebecca Archer
And with the complexities of related party transactions and transfer pricing, should companies review their current policies in light of changes to tariffs?
Richard Nutt
Absolutely, Rebecca. Look, and this is where we're feeding a lot of inquiries from companies because what we're finding is some companies haven't looked at the transfer pricing policies for the last ten years or so, but with that they could be outdated, there could be opportunity to do some new benchmarking studies.
An example of this is – and you know – one of the impacts to a retailer and well – a couple of retailers – is, aside from the tariffs, they've actually changed what they call the de-minimis scheme in the US as well. So, China, Hong Kong and Macau manufactured goods have been excluded from the, what they call the de-minimis scheme, which is the 3-2-1 scheme over in the USA.
What this means now… any goods imported into the USA less than US$800 now are subject to tariffs, right. So, I think if the tariffs are, I think it could be anywhere between 125, 154 per cent goods that was duty free have now got this excessive tariff in place. What does that mean? Where is the opportunity? So, if you've not got transfer pricing established on those type of transactions, those low value transactions, now it's time to review it, you could actually mitigate some of the impact of these tariffs. So, that's just one example of how retailers have been impacted as well and the importance of maintaining your transfer pricing documentation.
Rebecca Archer
Thank you for that, Richard.
Simone, given the current economic landscape and the recent budget, what are your thoughts on potential benefits and challenges for the domestic manufacturing industry in particular?
Simone Barker
Yeah, thanks, Rebecca, and like Vince said, I mean, the budget was only three weeks ago, but it feels like almost a lifetime ago now.
So, if we look at the Albanese Government's Budget first, it's shown a real commitment to building Australia's sovereign manufacturing capability, particularly through things like the future Made in Australia agenda and the Future Made in Australia innovation funds.
I think this continuity is really important, especially given the global volatility that we've just been talking about. It provides a stable foundation for businesses focused on growing their manufacturing capabilities and that innovation around clean energy technologies.
Another benefit I see that comes from that stability is that it could be really important for increasing international investment and attracting international investment. Globally, most countries are still focused on that decarbonisation agenda and with the recent shake up in international trade and geopolitics, Australia could become a really attractive destination for businesses looking to invest in green technologies. So, the budget had significant allocations towards green metals, clean energy technology, manufacturing and low carbon liquid fuels.
So, they're all really promising areas for growth in the manufacturing sector. However, there are challenges as well. So, there is uncertainty surrounding the upcoming federal election in May and that does add a layer of unpredictability. Depending on the election outcome, we could see shifts in focus and support for the manufacturing sector. Of course, as we've been discussing, the global economic landscape and geopolitical tensions are going to impact trade and investment decisions as well.
Rebecca Archer
And what specific measures in the budget do you think will have the most significant impact on the manufacturing sector?
Simone Barker
So, the budget did introduce several measures aimed at supporting industrial decarbonisation and like I said, green metal production. For instance, there was a $2b allocation for green aluminium production credits and $1b through a green iron investment fund.
So, these measures are designed to support the transition to greener manufacturing processes in particularly heavy emitting manufacturing industries. We also saw a top up of $2b to recapitalise the Clean Energy Financing Corporation – so, that's a mechanism that will continue to provide financing and concessional loans for renewable energy, energy efficiency and low emissions technology projects. It's Australia's ‘green bank’ and it's a critical resource for businesses and manufacturers looking to innovate in that clean energy space. We also have the Future Made in Australia Innovation Fund that was actually announced in the 2024 budget, but we've been given further detail. So, that included $750m for green metals, $500m for clean energy technology manufacturing, and $250m for low carbon liquid fuels.
These are all allocations that are targeting a fostering of innovation and growth in priority areas of Australia's manufacturing sector.
Rebecca Archer
And so how do you see the coalition's plans impacting the manufacturing sector if they are elected to power?
Simone Barker
Well, the coalition has a different approach, as you might imagine, and we've had a few announcements for plans for funding redeployment. So, I guess one of the significant ones is $14.5b in unspent funds from the National Reconstruction Fund. There are also plans to unwind the recently legislated tax credits for green hydrogen and critical minerals under the Future Made in Australia plan and the Rewiring the Nation fund. It's a $20b off budget measure, but there are also plans for that funding to be reallocated.
We have some information about where the funds will be redeployed. So, a $20b regional Australia Future fund has been announced. But it's important to mention that this fund will focus on regional healthcare, childcare and infrastructure. So, all really important issues, but not supporting manufacturing.
Rebecca Archer
And what about tariffs? Richard, let's come back to you if we can? How do the tariffs affect the manufacturing industry?
Richard Nutt
I think there's a couple of challenges for manufacturing companies because it's fair to say if you're manufacturing in Australia, there's a good chance you're going to be sourcing goods from China or any other Asian countries. Obviously, they've started applying reciprocal tariffs onto USA on iron ore and those type of minerals.
Indirect costs, overall materials will increase, which potentially can make it more costly for exporting goods, manufacturing goods here in Australia, and then make us less competitive when exporting overseas. Again, the general tariffs or reciprocal tariffs of 10 per cent, that's going to hurt some companies. Speaking to one company yesterday, they've got one contract in place and potentially on this contract, they've got over $1m of unplanned customs duties, which are going to have to navigate through with the client. So yeah, it's going to offer some major challenges, and the other thing as well is whilst US might be ruled out as an export market, you can look for alternative markets, and I know we've done...The governments over the last few years have done very well to negotiate a number of bilateral and regional free trade agreement.
The challenge or the issue with a free trade agreement is these non-tariff barriers, which is one of the gripes Donald Trump has raised with Australia about being able to USA being able to import US beef into Australia. Quite rightly we've got strong non-tariff barriers in there about protocols of biosecurity. Countries got these different, the same provisions in there as well, and an easy way out for governments what they've said is reducing tariffs, but in one hand what's the point in reducing a tariff if you can't actually get physically get your goods into the country, and I think that's something governments are going to have to get their heads around across the globe – not just Australia – but also you know it does impact your, your ability to pivot between markets depending what the goods are.
The other thing as well as in costs increase and these tariffs remain in existence, we could remain competitive against the Asian counterparts still because as you as you know for over the last number of years, onshore manufacturing in Australia has decreased. I think I was reading some figures and manufacturing only makes up about 6 per cent of contribution to the GDP. So, how do you encourage that investment in Australia for manufacturers?
Do we have tariffs in place based on key industry sectors based on, you know, we can't manufacture these, we can manufacture these goods to what someone's pointing towards is made in Australia campaign? We're going to try and manufacture certain products here in Australia. Why don't we ring fence and give them some protection to encourage that investment? But on the goods that we, we have no intention of manufacturing, just remove the tariffs on them altogether so we get an equal playing field. I think that's what manufacturers probably need as well.
The other thing, and again you know this was always a topic of conversation was look to change your sourcing of your goods. So, say for example if you're sourcing goods from China and it's going to go into a finished product in Australia, it's not that easy, but what you got to remember, if you are only doing a little bit of assembly and you're sourcing multiple parts from different countries across Asia and doing the assembly here in Australia, exporting out to the US or other, other countries where to put on tariffs, reciprocal tariffs, you're still going to have the same problem that you might still be paying hard tariffs because you guys are off Chinese origin.
I've got one client there was actually moving from China to Vietnam as a result of the China tariffs. Anyway, what they found is when they moved to Vietnam and still getting ahead of this, obviously they're going to be impacted by reciprocal tariffs is when they look at the bill of material where they're sourcing the goods from, they're actually still sourcing the majority of the goods from China. So, they still haven't really fixed the problem. So, it's a challenge, right? So, you've really got to understand exhausting strategy as a manufacturer, even as a retailer as well and assess what is the duty impacts across your supply chain.
Rebecca Archer
Can we have a little bit of a look at some strategies businesses can adopt to mitigate any of the negative impact on their businesses? You know, what are some steps that you would advise or that you currently are advising these clients to do?
Richard Nutt
Yeah, look Rebecca, I mentioned about transfer pricing, so you know, it could be you look at your tax structure or do you, do you actually maybe set up an entity over in the US could be one question we've, we're assisting clients within us from there.
You know, it brings in the likes of tax specialists like Vince and I bring in my transfer pricing colleagues where we'll look at giving them a couple of solutions based on what does a good tax structure look like in order to mitigate some of the tariffs on the transfer pricing model in the U.S. and again, I think this is what Trump is looking at, if you look at the US market, he's wanting that investment into the US raising tax revenues. So, for him it's a perfect fit, and I think Vince can probably touch on that as well as some of that strategy planning as well.
So, understanding where you're sourcing your goods from, what's the impact of the tariffs? You know, can we source goods locally in Australia? You know, is there a way to manufacture these products in Australia? And again, this is for all the negativity to me, this is where, where there's opportunity for Australian manufacturers to do more work in the value chain to make us more attractive as a place to invest in Australia for manufacturing but create new export markets.
You’ve got to remember Australia's got all these critical minerals that actually go into a finished product, and at the moment we seem to be re-importing these products. We could be in the value train creating 30, 40 per cent of that as an input into the finished good and then by virtue of that creating jobs, further investment in Australia and new export markets because you have to remember Australia with reciprocal tariffs came off very lightly compared to most countries, and if 10 per cent is the worst tariff you're going to be facing, that's not a bad result. It could be worse.
Rebecca Archer
I want to take one of the later points that you just made and sort of throw it out to the group in terms of how we can make Australia more attractive for overseas investment. Vince, can I put that one to you first of all?
Vince Tropiano
Thanks, Rebecca. Listen, that's a really important point. The phrase global uncertainty will certainly become the buzzwords for 2025, but we've got to remember that structurally, Australia has a lot of attractive features. What we need to do is kind of tweak that and try to improve it both from a local manufacturing perspective and from an overseas investment perspective.
I mean, we have a skilled workforce here. We've got proximity to a number of other markets. We also have a strong governance and legal system. The government is stable and predictable, and the current government is still committed to global decarbonisation agenda, and we also have strong relationships with Asia, Europe and somewhat with the us. Well, not the worst relationship with the US.
So, we've got to remember that there's probably some great opportunities for Australia to really promote its position. We need to ensure that we take advantage of those opportunities. There's a lot going on around and I think what we need to do is support local manufacturing and local industry and work towards taking advantage of those opportunities. Richard mentioned tax reform. That's a topic which we speak of incessantly. You know, the corporate tax rate in Australia is higher than most of our trading partners.
There's a number of reasons for that. We have a more skilled workforce; we've got a high paid workforce. There's a whole bunch of issues there in terms of how we actually fund our lifestyle vis a vis a number of the other countries, but there's little doubt that quite often the after tax impact that plays a big part in where companies would invest their dollars for manufacturing or development. So that's something we need to think about. There's been a lot of talk in this podcast and Rich been talking about the tariffs and I think he made a good point in there. Where there are products, we don't need to jump to imposing tariffs just because everyone else is. I mean, there are products that we really don't want to focus on.
So, we don't focus on goods we don't want to make simply because of the tariffs, and there might be areas where we won't raise tariffs because there's really no great benefit in us doing so. So, rather than a race to the bottom in that sort of scenario, we should be looking to support local industry.
Simone's spoken about some of the manufacturing incentives and how we should promote that. R&D always gets a mention and an area where we should be looking to become a smarter nation. We're probably not investing as much as we should be in this current environment and more so if we need to rely on ourselves a lot more than we had in the past because of changes in supply chain and the ability to manage our own activities, and a lot of this actually started in COVID days when we weren't getting stuff in from overseas and we had to start looking after ourselves a bit more in terms of manufacturing products and how we get it supplied. Probably the last three weeks, for want of a better word, if we don't talk about the last three months and maybe the next three and a half years will probably put more pressure on us to do more of the same.
Rebecca Archer
And Simone, your thoughts please?
Simone Barker
Yeah, I just want to pick up on what both Vince and Richard have been talking about, just regarding, you know, the critical minerals and the natural advantages we do have in that clean energy and decarbonisation push. You know, we've got an opportunity here with the unwinding of the US Inflation Reduction Act and there was a lot of trepidation in the global market and in Australia as well that the Inflation Reduction Act would bring investment to the US.
Well, that no longer exists there. So, we've got that stable government that Vince was talking about for now anyway. We've still got that decarbonisation agenda, and we've got a lot of natural attributes that would bring players in those sectors and particularly to Australia wanting to invest.
Rebecca Archer
Anything else you wanted to add to that, Richard?
Richard Nutt
Yeah, look, I think Vince hit on some really good points and, you know, I agree with what he was saying there. I think for any company is it's just showing the importance of really understanding your supply chains and the indirect taxes that's potentially embedded in, in your supply chain and where you're sourcing your goods from, because in most cases it's just set and forget, you know, and they don't worry about, you know, how much taxes they're actually paying within the supply chain.
So, it's something you should monitor closely. You know, this is what we always tell clients now with who's got inbound supply chains into Australia. You know, understand your customs user liabilities, you know, a lot of other countries as well, they've got indirect taxes in around plastic packaging, ethical sourcing taxes coming in and stuff like this is you got to stay ahead of what these indirect taxes look like, whether it's customs duties, VAT, GST, plastic packaging taxes and obviously all these additional taxes in the US because there is a strategy and something, you can always do something about it to minimise the impact by just staying on top of things and planning… better planning.
Rebecca Archer
And with all this being said, we've delved into quite a lot of depth on these issues today, but where to from here? And I guess a second part of that question is some advice that you might have for businesses in Australia on tariffs and of course more broadly businesses from an economic, tariff and industry specific perspective.
Richard Nutt
Yeah, good question, Rebecca. I mean it's like anything is if you're exploring new export markets, understand where there's free trade agreements available, understand where the non-tariff barriers exist before you're trying to access those markets because you know we're just about to sign a free trade agreement with the UAE. So, that's going to create some new export opportunities as well to take away the pain of what's happening within the US.
Diversification as well. Expanding what we're doing in Australia. I think that's the key thing is as Vince touched on, we've got so many valuable assets and skill sets in Australia, we need to maximise it, right? And then plan the fact we've got existing trade relationship even with the USA, with Asia, with the Middle East and with the UK play to those strengths because we can negate the impact of tariffs, and also, you know, where you source new goods from, really look at where you source new goods from and the flowing effect of those indirect costs which you're going to see as a result of the tariffs from the US you know, because there is other countries who's moved away from China and you know, manufacturing, say Vietnam or Thailand.
Rebecca Archer
Vince and Simone?
Vince Tropiano
I guess one thing, I've been thinking about is that speaking to clients, there's a lack of confidence at the moment because of all the uncertainty, and I know we keep saying the same thing for the last 20 minutes; it keeps coming again and again. The hard part I think moving forward is to play the long game, like to encourage business to be confident in their business making decisions and not to get too caught up in the 24 hour cycle of markets or tariff announcements or political announcements, you know, from regardless of wherever they may come from, have confidence in designing their business plan and work towards being confident in developing those business plans because as we've talked about, despite everything that's going on, there are opportunities here for Australia and there's a need for Australia to take advantage of those opportunities moving forward.
Rebecca Archer
And Simone?
Simone Barker
The final point I would make is, yes, we've got the federal election coming up, but it's, you know, it's coming up pretty quickly. We'll have an outcome quite quickly and we'll know where we stand, but, you know, even if there is a shift in policy at that level, we have state governments that are supporting industry and particularly the manufacturing sector.
Queensland and WA are very focused on supporting local manufacturing. New South Wales and Victoria are very focused on promoting innovation and homegrown innovation and commercialising new and interesting products. So, I think that we've got a really great foundation for businesses to look at what opportunities are out there and take advantage of them.
Rebecca Archer
So, Vince, Richard and Simone, thank you so much for being part of today's episode, and for those people listening who would really love to connect with you and maybe delve deeper into the work that you do and perhaps even excel, explore potential ways that you could assist them. What's the best way for them to reach out and to find you?
Vince Tropiano
Rebecca, LinkedIn is fine. If you go to our website, you'll find all our details. Happy to chat. Somebody just drop us a line email or reach out on LinkedIn and all three of us would be happy to talk about any of these matters or anything else that might be of interest.
Simone Barker
I'm very active on LinkedIn and I post quite frequently regarding grant opportunities or updates on government policy in relation to support and incentives. So, if you want to keep across those aspects, please just connect with me on LinkedIn.
Rebecca Archer
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