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Aussie equities: Small business changes bring opportunity for Xero

Small businesses are under pressure to shift accounting systems online as a new global regulatory push gathers speed. That’s an opportunity for ASX-listed accounting platform Xero, says Pendal’s Elise McKay

SMALL businesses are under pressure to shift their accounting and reporting systems online as a global regulatory push to real time taxation and e-invoicing gathers speed, says Pendal’s Elise McKay.

McKay, an investment analyst in Pendal’s Australian equities team, recently visited online accounting firm Xero’s annual Xerocon partner conference in the UK. She says a wave of change is sweeping small businesses.

“It’s huge. I spoke to one accounting firm in the UK with more than 3000 clients who are going to be impacted by this change and have to adopt cloud accounting solutions.

“They have to adapt over the next 18 months — educating and changing their clients’ behaviours to adopt new digital solutions.”

Among the biggest changes coming is the UK’s new sweeping new reforms to the taxation system dubbed Making Tax Digital, which applies to businesses, the self-employed, and landlords. 

From April 2024 and will require all businesses and landlords with turnover exceeding £10,000 to report digitally, impacting an estimated 4.2 million taxpayers. 

Pendal equities analyst Elise McKay
Pendal equities analyst Elise McKay

McKay expects this will drive another wave of adoption of cloud accounting solutions in the UK where penetration is estimated to be less than 30%.     

“It changes the way you keep records. Historically, you might have you might have just once a year pulled all your records from a shoebox and taken them to your tax agent.

“Now, you have to update those records digitally on a quarterly basis.”

The goal of Making Tax Digital is to ensure taxation in the UK is more effective and more efficient — and make it easier for taxpayers to get their tax returns right.

“They have a tax gap where avoidable mistakes cost the exchequer GBP 8.5 billion from 2018 to 2019,” says McKay.

The UK moves echo changes to the Australian tax system in recent years, including the single touch payroll system that requires all businesses to report salary, pay-as-you-go withholding tax and super information to the Australian Taxation Office.

Pendal Horizon Fund

A concentrated Aussie equities portfolio aligned with the transition to a sustainable, future economy

More change to come

The sweeping digitisation of small business is not stopping there.

Next up is the global roll out of electronic invoicing — the automated digital exchange of invoice information between companies through secure networks.

E-invoicing replaces posted or emailed PDF invoices and means information is automatically entered into software systems.

The aim of e-invoicing — which is being pushed by the ATO and other regulatory bodies globally — is to reduce security issues and fraud.

It also offers the upside for small businesses of quicker payment. Federal government agencies have agreed to pay e-invoices within 5 days.

McKay says the impact will be felt among service providers as well as small business.

“There are accountants who aren’t digitally savvy at all. Do some potentially bring forward retirement? Do you see a wave of consolidation?”

But she says the changes offer a win for businesses like Xero that supply products to help businesses digitise.

“Regulatory tailwinds are very supportive for cloud accounting adoption,” she says.

ASX-listed Xero is part of Pendal Horizon Sustainable Australian Share Fund and Pendal Focus Australian Share Fund.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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