ASX Announcement Appendix 4E and 2020 Annual Report Release date: 24 February 2021 In accordance with the ASX Listing Rules, Smartgroup Corporation Limited (ASX: SIQ) encloses for release to the market: • Appendix 4E, and • 2020 Annual Report. For further information, contact: Tim Looi Managing Director and Chief Executive Officer 1300 665 855 Sophie MacIntosh Chief Legal Officer and Company Secretary 1300 665 855 This announcement was authorised for release by the Board of Directors of Smartgroup. Smartgroup Corporation Ltd | ABN 48 126 266 831 | GPO Box 4174, Sydney NSW 2001 Level 8, 133 Castlereagh Street, Sydney NSW 2000. T: 1300 665 855 | F: 02 9299 4669 Appendix 4E Preliminary Final Report 1. Company details Name of entity: Smartgroup Corporation Ltd ABN: 48 126 266 831 Reporting period: For the year ended 31 December 2020 Previous period: For the year ended 31 December 2019 2. Results for announcement to the market Revenues from ordinary activities Profit from ordinary activities after tax attributable to the owners of Smartgroup Corporation Ltd Profit for the year attributable to the owners of Smartgroup Corporation Ltd Dividends Final dividend for the year ended 31 December 2019 (paid 16 March 2020) Interim dividend for the year ended 31 December 2020 (paid on 16 September 2020) down down $’000 33,503 20,124 13.4% to 32.7% to $’000 216,332 41,325 down 20,124 32.7% to 41,325 Amount per security Franked amount per security Cents 21.5 17.0 Cents 21.5 17.0 On 24 February 2021, the Directors declared a fully franked final ordinary dividend of 17.5 cents per ordinary share. The final dividend will be paid on 23 March 2021 to shareholders registered on 9 March 2021 with an expected total distribution of $23,240,000. On 24 February 2021, the Directors also declared a total fully franked special dividend of 14.5 cents per ordinary share, comprised of a final special dividend of 9.0 cents per share in respect of the year ended 31 December 2020, and an interim special dividend of 5.5 cents per share in respect of the current year. The special dividend will be paid on 23 March 2021 to shareholders registered on 9 March 2021 with an expected total distribution of $19,259,000. There is no dividend reinvestment plan. Comments The profit for the Group after providing for income tax amounted to $41,325,000 (31 December 2019: $61,449,000). Refer to the ‘Chairman’s report’ and ‘Managing Director and CEO’s report’ for detailed commentary of the results. Appendix 4E Appendix 4E (continued) Preliminary Final Report 3. Net tangible assets Net tangible assets per ordinary security Reporting period Previous period Cents (30.76) Cents (41.85) Net tangible assets per ordinary security is total net assets, excluding intangible assets, deferred tax assets, and right-of-use lease assets, divided by the number of ordinary shares on issue. 4. Control gained over entities There were no changes to control over entities in the period. Detail of joint ventures Health-e Workforce Solutions Pty Ltd 1 Reporting entity’s percentage holding Contribution to profit after tax 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 % 50% % 50% $’000 45 $’000 8 1 Excludes impairment of investment of $5,118,000 (note 25). 5. Independent auditor’s review The financial report for the year ended 31 December 2020 has been audited by PricewaterhouseCoopers and an unqualified opinion has been issued. 6. Attachments Additional Appendix 4E requirements can be found in the attached Directors’ Report and the Financial Report. Appendix 4ESmartgroup2020Annual ReportAccountability Care Team Smartgroup Annual Report 2020 ACCOUNTABILITY. CARE. TEAM. VALUING ALL OUR RELATIONSHIPS DOING RIGHT BY THOSE WE SERVE COVID-19 has generated a lot of questions for businesses across many sectors. Ways of working, supply chains, financial models and so much more have all come under scrutiny. It’s been a time of deep instability for many. Our key concerns this year have been the health and wellbeing of team members and the strength and stability of our client relationships. We’ve long recognised that our ability to service our customers rests with having a workforce that is thorough, disciplined and highly committed to helping them understand and realise the benefits of salary packaging. Our ability to do good for others starts with ensuring we are doing everything we can to support our own team members. For more than 20 years, we’ve worked with organisations with extensive workforces to take the complication out of their compensation. We’ve helped teachers, community workers, nurses, public servants and many others to easily and quickly save money through salary packaging. In the process, we have helped our clients retain, engage and reward the talented individuals they depend on. This year, we did everything we could to be there for those who continue to trust us. Our results speak to the strength of those relationships, the stability they bring and the reputation we’ve built in supporting the communities we serve. 20+ YEARS OF TAKING COMPLICATION OUT OF COMPENSATION 5 We have a proven track record in working with organisations and their employees to ensure salary packaging is as straightforward as possible. Contents 6 At Smartgroup, we simplify salary packaging, fleet management and a range of other employee management services for organisations across Australia. 16 Managing Director and CEO’s report 12 Our performance for investors 2 Doing right by those we serve 14 Chairman’s report 4 20+ years of taking complication out of compensation 8 Our relationships with our customers Azubuike (Zubby) Okwanma from Mosaic Community Care. Read Zubby’s story on page 11 – one of several valued relationships we feature in this report 22 Our achievements with our people Further focus on strengthening our culture Contents 7 42 70 Corporate sustainability scorecard Financial report 44 126 Governance and risk management Shareholder information 47 128 Directors’ report Five-year summary 51 129 Remuneration report Glossary 66 130 Auditor’s independence declaration GRI content index 133 Corporate directory For more information on our annual results, please visit smartgroup.com.au 30 Our actions in communities Finding smart ways to support others 36 Our commitment to the environment Actively managing our impacts Smartgroup2020Annual ReportAccountability Care Team Our relationships with our customers 8 OUR CUSTOMERS ARE AT THE CENTRE OF EVERYTHING WE DO We are in a unique position to support our employer clients and employee customers with industry-specific expertise and experience. This year, as everyone grappled with the challenges and complexities of COVID-19, our team members worked tirelessly to help our customers. Salary packaging enables employees to increase their income at no cost to their employer. The makeup of each salary packaging benefit has different rules and requirements under the relevant tax legislation. Part of our role is helping employees and employers to navigate through these benefits and ensure they are administered in a compliant and simple way for each organisation we serve. A rewarding salary packaging program is crucial for many organisations across Australia. Every year, we partner with thousands of employer clients to deliver benefits to over 360,000 employee customers across a full range of sectors. Salary packaging represents a cost-effective way to attract and remunerate employees. This year, we continued to offer our client organisations access to services that include salary packaging and novated leasing, fleet management, payroll, share plan administration and workforce optimisation services. Not-for-profit sector We are one of the leading providers of outsourced salary packaging to the not-for-profit sector in Australia, having helped hundreds of thousands of employees, such as community and charity workers, to utilise the salary packaging benefits specific to their industry. We provide services to over 1,600 not-for-profit organisations in every state and territory of Australia. Many of our relationships are long- standing, with over 100 not-for-profit clients having partnered with us for over 10 years. Our tailored fleet management solutions are delivered via Smartfleet and include fully outsourced or inhouse fleet management programs. Our payroll business, Smartsalary Payroll Solutions, also provides organisations with payroll administration services. The outbreak of COVID-19 meant many not-for-profit organisations had to change the way they worked without compromising on providing high-quality services to the most vulnerable people in our society. We responded by quickly moving our full client-facing workforce to remote working arrangements and rolling out webinars, phone appointments and enhanced online information so that our not-for-profit employee customers could easily access and fully utilise their benefits throughout this time. Healthcare Healthcare has been in the spotlight this year of course, with all parts of the sector under pressure to help keep Australians safe from COVID-19 at the same time as they deal with their already high workloads. Healthcare is a challenging sector at the best of times with complex staffing recruitment and rostering arrangements, unpredictable demand and the need to access highly specific skill sets. We are trusted by some of Australia’s largest healthcare providers (public and not-for-profit) to deliver industry-specific salary packaging benefits for nurses, clinicians and auxiliary staff. We also help hospitals with innovative workforce modelling and workforce optimisation and provide a fully flexible and cost-effective fleet management solution for healthcare providers. Those fleet management solutions include Pool Vehicle Booking, a fleet car-sharing system that can save time and money and reduce the environmental impact of the cars in our clients’ fleets. Our relationships with our customers 9 Smartgroup & UnitingCare Procurement Group A UNITED APPROACH TO FLEET EFFICIENCY The UnitingCare Procurement Group represents agencies of the Uniting Churches across Australia and is one of the largest providers of human-related services in Australia, apart from government, so when it released a tender for Uniting’s national fleet management, our Smartfleet team were excited to get involved. Since winning the business, our Smartfleet team have implemented a Pool Vehicle Booking platform and electronic keybox into Uniting Communities’ new head office premises. “We have been a carbon certified company since 2015 – the first Australian Registered Charity and the first SA organisation to do so. Our fleet does 2 million kilometres and another 1 million in grey fleet (journeys using privately owned cars), so saving on journeys also saves us having to procure offsets. 98% of our company vehicles are hybrid petrol/electric vehicles, which reduce emissions and fuel by one-third compared to a full petrol vehicle.” Changing suppliers is always a worry, says Lee, and this year, the complications of COVID-19 and moving into new headquarters at the same time as Smartfleet came on board only increased that. “We didn’t need to be concerned at all,” says Lee. “Smartfleet made the changeover straightforward and implementation of the online pool booking and integrated key box has progressed well, with Smartfleet being highly responsive throughout.” Outside of his role at Uniting Communities, Lee is also the President of the Australasian Fleet Management Association (AfMA) – a member based, not-for-profit peak industry body throughout Australia, New Zealand and South East Asia. Lee Sauerwald, Executive Manager Corporate Services, Uniting Communities. “It’s had an immediate impact on how we see, manage and control our fleet movements,” says Lee Sauerwald, Executive Manager Corporate Services, Uniting Communities “Pooling our company vehicles during the day is enabling us to maximise their use. A sophisticated online booking system enables us to allocate cars specifically and to integrate each journey with an auto key box. “Increasing our visibility around utilisation has helped with car sharing/pooling and with co-ordinating shared journeys as well as keeping down costs by allowing us to run fewer vehicles. Smartgroup2020Annual ReportAccountability Care Team Our relationships with our customers 10 This year, we worked with the administrators and staff of over 930 primary and secondary care facilities across Australia. Traditionally, our people have worked largely on site, engaging with people face-to-face, but with COVID-19, we were forced to move to virtual interactions. Just as we did for our not-for-profit sector customers, we shifted to telephone and video appointments and running information webinars. We combined these initiatives with extended operating hours to better support our healthcare workers. The COVID-19 pandemic has reminded us all of the importance of taking care of our healthcare workers, who play such an important role in caring for our community. We are pleased to report that we have been able to do this while maintaining high service levels, with our client organisations telling us that they were thankful we implemented alternative methods to engage and educate their employees. Corporate We work with almost two thousand corporate organisations to manage their employee salary packaging and novated leasing programs, fleet requirements, employee payroll arrangements and employee share plans. Few businesses have our industry knowledge or resources to manage the complexities of effective salary packaging and a comprehensive novated leasing program. We manage both for a wide range of small, medium and large corporates, along with employee share plan administration for private, public and start-up companies. This year was far from easy for our teams, with lockdowns and restrictions preventing people from having face-to-face meetings and large numbers of people continuing to work from home. People now want the flexibility of mixed office-based working and working from home. We’ve adapted to these changes by working virtually with our clients and managing effective remote working capabilities for team members. Government We have long-standing relationships with local, state and federal government departments and agencies and work closely with them to meet their salary packaging needs. Some of Australia’s largest government agencies, including the Department of Defence and the Australian Taxation Office, trust us to ensure they comply with their complex administrative requirements. We are deeply proud of these relationships. Working closely with those who want to do best by others lies at the heart of who we are and what we value. This year has been a particularly challenging one for government departments as they have looked to implement government measures across a range of fronts. Our clients have been at the frontline of the state and federal governments’ health and economic responses to the pandemic. For their people, that has meant both a change to the way they work and, in some instances, the duties they perform. That has required us to increase our channels for customer communication to make them aware of how salary packaging can assist in the transition from office-based working to working from home. Education In the fast-moving education sector, we work with a full range of public, private and faith- based educational institutions. We manage a wide range of benefits for teachers, administrators and support personnel in individual schools, universities, state education departments and dioceses who trust us to organise their salary packaging needs. We’re proud to have helped tens of thousands of teachers, education administrators and other school staff over the years with their salary packaging requirements. The outbreak of COVID-19 has affected educational institutions in a range of ways, most notably the move from face-to-face learning to online learning and needing to quickly respond to health and government advice and requirements. We’ve responded by finding alternative communication channels including webinars, phone appointments and virtual meetings. Overall, our business activity in the education sector was down. However, we expect this will change as restrictions are reduced and access to school and education facilities resumes. Recognised again for our service In the light of all these changes, it was particularly pleasing that we have maintained the highest-ever audit score from the Customer Service Institute of Australia for the fifth consecutive year – a testament to the skills and motivation of our people who have worked through so many challenges this year to continue to do their best for our clients and customers. Our relationships with our customers 11 Smartgroup & Mosaic Community Care SUPPORTING THOSE WHO MAKE A DIFFERENCE Azubuike (Zubby) Okwanma has been a disability support worker for 15 years. Structuring his pay to include salary packaging benefits has made a significant difference to his take-home pay – a difference he’s been happy to share with his friends and colleagues. Zubby arrived in Australia with a passion for helping people with disabilities to live independently. “I’ve always wanted to support people who struggle so that they can do more things for themselves. It excites me to see people making the most of their lives and being as independent as they can.” Salary packaging has meant that Zubby has been able to pursue his dream of becoming a qualified social worker in the future. This year, he has been studying Social Work at Curtin University. The way his salary is structured means that he has been able to do this part-time and still support his family. “It’s been great,” he says. “I really, really recommend it.” Azubuike (Zubby) Okwanma Zubby has worked at Mosaic Community Care for three years. Before that, he was a support worker in the northern part of Western Australia. He and his wife Juliet have four young children, so when he found out about the option of salary packaging in his current job, he called AccessPay. “They’ve been really helpful,” says Zubby. “I gave them my details and they took care of everything. My take-home pay went up, and was able to save money that I would never have saved otherwise.” Zubby says he has recommended AccessPay to many people, especially those doing casual work and living pay to pay. Smartgroup2020Annual ReportAccountability Care Team Our performance for investors 12 GOOD RETURNS IN A UNIQUE YEAR The following highlights represent the financial performance of Smartgroup for the year ended 31 December 2020. NPATA1 2019 $81.0m STATUTORY NPAT 2019 $61.4m REVENUE 2019 $249.8m EBITDA2 2019 $118.2m $65.2m 20% $41.3m 33% $216.3m 13% $95.4m 19% 2020 financial highlights 13 OPERATING CASH FLOW3 AS A PERCENTAGE OF NPATA 2019 110% DIVIDENDS DECLARED4 2019 63.0cps NET CASH (DEBT)5 2019 ($21.0m) 63.0 41.5 43.5 35.0 44.0 26.2 24.8 16.6 115% +5pts 43.5cps $2.5m 77.8 81.0 64.1 65.2 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 cents per share $ million DIVIDENDS PER SHARE DECLARED (FULLY FRANKED) AFTER-TAX PROFITS (NPATA) The 2020 financials are presented on an adjusted basis and have been reconciled to the statutory 2020 financial report. 1. NPATA is Net Profit After Tax, adjusted to exclude the non-cash tax-effected amortisation of intangibles and significant non-operating items. 2. EBITDA is Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for significant non-operating items. 3. Operating cash flow excludes receipts and payments from customers’ salary packaging accounts and significant non-operating items. 4. 2019 includes a special dividend of 20.0cps paid in May 2019. 2020 includes a 9.0cps special dividend declared on 24 February 2021. In addition, a special interim dividend of 5.5cps was declared on 24 February 2021 in respect of the 2021 year. 5. Net Debt is cash and cash equivalents less corporate borrowings adjusted to exclude capitalised borrowing costs and vehicle borrowings. Smartgroup2020Annual ReportAccountability Care Team Chairman’s report 14 HOLDING TRUE IN A CHALLENGING YEAR The Board is proud of the business resilience that our company has shown and the individual resilience of our people, our clients and their employees, many of whom have been at the front line of the challenges throughout this difficult year. WORKING FOR OUR CUSTOMERS & OUR PEOPLE WGEA Employer of Choice for Gender Equality Recognised as an Inclusive Employer by Diversity Council Australia for 2019–2020 Chairman’s report 15 Smartgroup 2020 – Chairman’s report Smartgroup remains a strong and customer- focused organisation. This year, we have managed our way through the business and community challenges brought on by the global COVID-19 pandemic. The Board is proud of the business resilience that our company has shown and the individual resilience of our people who have continued to support our clients and their employees, many of whom have been at the front line of the challenges throughout this difficult year. In a year when many businesses had to rely on government assistance and/or raise further equity, Smartgroup has been able to stand strong. However, we could not fully escape the impacts of the deterioration in economic conditions nor the pandemic-related restrictions on normal business activities. Revenue of $216.3 million represents a reduction of 13% on our CY2019 results. Operating Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) also reduced 19% to $95.4 million. Net Profit After Tax and Amortisation (NPATA) reduced 20% to $65.2 million, and Statutory Net Profit After Tax was down 33% to $41.3 million. Notwithstanding the reduced levels of financial performance, the Board is pleased to announce a fully franked final dividend of 17.5 cents per share. The Board has also declared a fully franked special dividend of 14.5 cents per share, comprised of a final special dividend of 9.0 cents per share in respect of the year ended 31 December 2020 and an interim special dividend of 5.5 cents per share in respect of the current year. Like so many other businesses, we have had to incorporate flexibility into how we work. Our ability to do that, while maintaining good customer service, is a testament to our culture of innovation and our inclusive workplace. Our efforts in these areas have seen us awarded a WGEA Employer of Choice for Gender Equality as well as being one of a select group of companies as an Inclusive Employer by Diversity Council Australia for 2019–2020. At the start of this year, Tim Looi was appointed Managing Director and CEO, having worked alongside Deven Billimoria, Smartgroup’s previous Managing Director and CEO, who retired in February 2020 after 19 years with the organisation. Tim has developed a detailed knowledge of the business in his role as Chief Financial Officer over the previous 10 years. He has shown the drive and insight to manage this business through an unprecedented year while laying the foundations for us to continue to build business success through ongoing focus on our customers, improving our digital capabilities and simplifying Smartgroup’s activities. On behalf of the Board, I’d like to thank our many clients and shareholders for their ongoing support and the management team and all of our employees for their focus and commitment in a year that has tested all of us. I would also like to thank Deven for his entrepreneurship and dedication to Smartgroup and express my gratitude to my fellow Non-Executive Directors who have provided invaluable support and wise counsel during these unprecedented times. Looking forward to 2021 and beyond, we know that we will continue to face challenges and not just from the pandemic. However, we are confident that, with our flexible and inclusive working environment and high-quality products supported by outstanding service, we will continue to deliver financial returns for our shareholders while playing a key role in the support of Australian workers and communities. Michael Carapiet Chairman Not surprisingly, given the trading environment, we saw a reduction in our financial results. However, the Board is pleased that we have been able to deliver investors a strong fully franked final dividend as well as an additional fully franked special dividend. Delivery of this dividend reinforces the confidence that the Board has in the core business and our commitment to continue to support all those who have invested in Smartgroup and what we do. Smartgroup2020Annual ReportAccountability Care Team Managing Director and CEO’s report 16 MOVING FORWARD TOGETHER We finished 2020 with a good set of results within the context of the challenges that the COVID-19 pandemic has presented to our business, our team members, our clients and customers. We are all well aware of the broad impact the pandemic had on the Australian economy and indeed Australian society. Like most businesses in the country, we have had to deal with the operational challenges and financial impacts of this crisis. So it is with great pride that Smartgroup has been able to deliver a good set of results for the year without having to apply for the JobKeeper Payment. We have a business and a business model that has proven its ability to withstand the challenging economic conditions presented in 2020. The pandemic meant that our business operations had to quickly pivot to accommodate our workforce moving to remote working while also adjusting to changes for our clients and our customers. As different states moved in and out of lockdown at different times, face-to-face visits with our clients and customers were no longer possible and our teams shifted their interactions to phone, video, webinars and email. Across Smartgroup, we worked closely with our clients to communicate changes, adapting our way of doing business and helping remove uncertainty during unpredictable times. Financial results In spite of these challenges, the number of salary packaging customers remained steady at 360,500 (2019: 358,500), and we saw 4% growth in our fleet vehicles under management to 24,900, while the number of novated leases under management reduced by 3% to 66,700. A fall in novated lease volumes of 14% was the key driver of revenue reduction this year. April saw a sharp fall in volumes, and lease activity continued to be lower than historical levels throughout the rest of 2020. Tim Looi Managing Director and CEO Novated lease yields were 6% lower than 2019, resulting from both the previously announced insurance price reductions that came into effect on 1 July 2020 and an increase in customers choosing to refinance their existing leases, rather than starting a lease on a new vehicle. While the proportion of lower-yielding refinanced leases spiked in April and remained higher than historical levels, we saw a shift back towards new vehicle leases in the later months of the year. As the pandemic-induced business downturn hit, Smartgroup responded with a cost containment program. The value attributed to one-off savings measures in 2020 is around $4 million. In May 2020, Smartgroup also completed an operational restructure. The ongoing annual savings associated with this restructure are expected to be around $4 million. 2020 NPATA includes several individually significant items, including (all stated pre-tax): • $1.0 million provision for short-term fleet products where counterparty fulfilment is uncertain; • $1.5 million redundancy costs from the operational restructure. Our business model again enabled us to generate high operating cash flows, at 115% of NPATA (2019: 110%), which saw us achieve a net cash position by the end of 2020. Managing Director and CEO’s report 17 COVID-19 has tested us all, but we are very happy with how the Smartgroup team has come together and worked tirelessly to continue looking after our clients and customers. Revenue EBITDA1 300 250 200 m $ 150 147.1 84.7 100 50 62.4 205.4 107.9 97.5 241.8 119.2 249.8 124.0 216.3 104.9 122.6 125.8 111.4 2016 2017 2018 2019 2020 0 H1 H2 48% 47% 46% 58.4 59.4 49.0 44.6 56.6 58.8 43% 37.7 25.6 44% 47.0 48.4 50% 45% 40% 35% 30% 25% 20% 15% 2016 2017 2018 2019 2020 m $ 140 120 100 80 60 40 20 0 H1 H2 NPATA1 Dividend (fully franked) m $ 90 80 70 60 50 40 30 20 10 0 H1 H2 77.8 39.4 81.0 40.5 38.4 40.5 65.2 33.1 32.1 64.1 33.8 30.3 44.0 25.4 18.6 120 100 ) m $ ( 102% 100% 89% t u o y a p d n e d v D i i 80 60 40 20 0 68% 69% 70% 26.3 27.4 28.3 26.9 28.3 12.0 23.2 22.6 24.2 20.4 18.2 11.9 80% 60% 40% 20% 0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 121.5 123.2 130.9 131.7 132.8 Shares on issue (m) H1 H2 Special Dividend % of NPATA % A D T B E I A T A P N f o % d n e d v D i i 1. Adjusted to reflect one-off impact on adoption of AASB 16 Leases from January 2018. Impact is to increase 2018 EBITDA by $1.6m in each of H1 and H2 and reduce 2018 NPATA by $0.1m in each of H1 and H2. Smartgroup2020Annual ReportAccountability Care Team Managing Director and CEO’s report 18 Novated leases under management 2,000 3,500 500 2,750 65,250 (2,250) 68,500 (1,500) 67,500 (800) 66,700 s e s a e L 75,000 70,000 65,000 60,000 62,500 55,000 50,000 45,000 40,000 CY2017 CY organic growth CY2018 2019 acquisitions Two VIC health contracts not renewed CY organic growth CY 2019 H1 2020 acquisitions H1 2020 organic growth H1 2020 H2 2020 organic growth CY 2020 Fleet vehicles under management 30,000 25,000 20,000 15,000 17,500 2,600 2,800 22,900 1,100 500 400 24,000 24,500 24,900 l s e c h e v i t e e F l 10,000 5,000 – CY2017 Fleet West acquisition CY2018 CY organic growth CY 2019 CY organic growth H1 2020 H1 2020 organic growth H2 2020 organic growth CY 2020 WORKING WITH AND FOR OUR CUSTOMERS Within the business, we have continued to focus on ensuring strong governance as the increased expectations on the Australian financial services industry continue to flow from the Banking Royal Commission. Managing Director and CEO’s report 19 A focus on good governance Within the business, we have continued to focus on ensuring strong governance as the increased expectations on the Australian financial services industry continue to flow from the Banking Royal Commission, including the roll out of enhancements to our sales and disclosure practices and preparing for compliance with the deferred sales model for the sale of add on insurance products introduced by the government into legislation in December 2020. As a member of the National Automotive Leasing and Salary Packaging Association (NALSPA), we continue to support initiatives to communicate the macro-economic benefits arising from the existing Fringe Benefits Tax (FBT) policy settings. Customer experience and simplification Despite the challenges of remote working, our team continued to make good progress in improving our customer experience, enhancing our digital capabilities and simplifying our operations. One example of this is our online leasing quote tools, which enable the whole process to be managed easily and securely online. Continued enhancements to our websites and systems included the use of ‘Sam’, our automated chatbot, to deliver a better customer experience. We completed the transition of Selectus clients in July 2020, six months ahead of schedule. Clients and customers are now benefiting from more automation and higher levels of service within the core platforms. This transition is a continuation of the workstream embarked upon 24 months ago. As a result of our simplification program, we are now supporting fewer processes and platforms, lowering our costs and enabling us to deliver a better customer experience. In 2020, we also refreshed our Company wide values to reflect our One Company, One Team culture. The new values – Accountability, Care, Team – will help us to build our culture, foster working relationships and give clear direction on what we stand for, across all the geographies in which we operate. Our customers and clients Our client base represents a high proportion of organisations that support the communities and people of Australia, including hospitals, nursing homes and not-for-profit organisations through to numerous state and federal government departments. The salary packaging services we provide deliver benefits on a daily basis to all these important Australian workers. Customer service remains at the core of the Smartgroup DNA, and we take great pride in Smartsalary once again receiving the highest- ever audit score from the Customer Service Institute of Australia – a ranking we have maintained for five years. At the same time, we remain mindful that customer needs and expectations continue to evolve, particularly in the digital arena, and we remain committed to adapting and evolving to meet these changes. Customer Net Promoter Score (NPS) was introduced within the Smartsalary brand almost a decade ago, and we extended this to the bulk of our acquired businesses in late 2019. NPS scores can range from -100 to +100 and are designed to measure the net percentage of customers who are promotors of a brand. Since late 2019, we have seen NPS in the acquired businesses rise from around 15 at inception to more recently reaching a level of 44, a healthy result given the short timeframe for implementation and improvements. NPS across Smartsalary and Smartleasing has continued to be strong, maintaining an average monthly score of 44 throughout 2020. Our people Our strength as a business comes from the diversity, experience and skills of our employees. In 2020, Smartgroup joined a select group of Australian companies recognised as an Employer of Choice for Gender Equality by the Workplace Gender Equality Agency (WGEA). This accreditation reflects an elite standard of equality across seven key focus areas including leadership, accountability and gender pay equity – all issues we consider incredibly important. The strength of our workplace diversity is also reflected in our rating as an Inclusive Employer by the Diversity Council Australia for 2019–2020. Smartgroup2020Annual ReportAccountability Care Team Managing Director and CEO’s report 20 Salary packaging customers 24,700 500 358,500 (3,500) 355,500 5,000 360,500 18,000 3,000 343,000 (12,200) s e g a k c a p y r a a S l 375,000 355,000 335,000 315,000 325,000 295,000 275,000 CY2017 CY organic growth CY2018 2019 acquisitions Two VIC health contracts not renewed CY organic growth CY 2019 H1 2020 acquisitions H1 2020 organic growth H1 2020 H2 2020 organic growth CY 2020 Top 20 clients by number of contract renewals Relationship length of Top 20 clients 5%5% 10% 25% 25% 1 Term 2 Terms 3 Terms 4 Terms 5 Terms 6 Terms 5% 10% 20% 35% 3-5 years 6-10 years 11-15 years 16-20 years 20+ years 30% 30% Top 20 client revenue profile Dec 2020 $216.3m 60% 40% Top 20 Other Salary packaging client and customer profile 4% 10% 14% Dec 2020 360,500 packages 43% 29% PBI non-hospitals1 PBI hospitals2 Government Education3 Corporate 1. ‘PBI non-hospitals’ includes charities and other not-for-profit organisations registered as a public benevolent institution (PBI) and recognised by the ATO as eligible for FBT exemption, excluding PBI hospitals with hospital employees having a different tax status to employees of all other PBI organisations. 2. ‘PBI hospitals’ includes public and private not-for-profit hospitals. 3. ‘Education’ includes public and private not-for-profit educational institutions. Managing Director and CEO’s report 21 Supporting our communities We also play an important part in the broader community. In 2020, we expanded our Carbon Offset Program, growing it to three partners – Greenfleet, Carbon Positive Australia and The Nature Conservancy. Since our Carbon Offset Program began, it has contributed to the removal of 699,408 tonnes of carbon from our environment. The Smartgroup Foundation plays a further role in connecting our organisation and team members to the community we serve. In 2020, the Foundation continued into its second year, and supported 11 organisations with grants totalling over $179,000. These funds go to charities all across Australia, supporting grassroots projects in our communities. 2020 began with the Black Summer of bushfires all across Australia. Smartgroup was proud to support the relief recovery efforts of the Red Cross, the Foundation for National Parks & Wildlife, RSPCA South Australia, Anglicare NSW and Anglicare Victoria. Customer service remains at the core of the Smartgroup DNA, and we take great pride in Smartsalary once again receiving the highest- ever audit score from the Customer Service Institute of Australia – a ranking we have maintained for five years. The continued success of our business relies on customer focus, flexibility and hard work by our people and teams. Never has that been more tested than by what 2020 has thrown at them. It would have been impossible to foresee the kind of challenges that the business would face in my first year as CEO, and yet we can say with confidence that the company is in a position of strength to move forward from here. What we have achieved this year would not have been possible without our dedicated and committed team members continuing to provide strong levels of service to our loyal customers. I want to thank our team members, our Board of Directors, our loyal customers and, of course, our shareholders for their continued support this year. We look forward to the opportunities and the challenges that the coming year presents. WORKING FOR OUR CUSTOMERS & OUR PEOPLE Expanding our customer Net Promoter scoring and feedback across Smartgroup As a result of our simplification program, we are now supporting fewer processes and platforms, lowering our costs and enabling us to deliver a better customer experience Tim Looi Managing Director and CEO Smartgroup2020Annual ReportAccountability Care Team Our achievements with our people 22 FURTHER FOCUS ON STRENGTHENING OUR CULTURE We have continued to communicate through every channel and means possible to keep our team members informed about COVID-19 issues and how Smartgroup is responding to safeguard our customers and business. We conducted wellbeing pulse surveys to ensure we identified and addressed issues that mattered to our team members across Australia. Care packs were sent to Melbourne team members (twice) and Adelaide colleagues. These were sourced, packed and sent by Smartgroupers for interstate colleagues in need. High performance and strong engagement stem from continuing investment in the capabilities of our people and how we work and win together. This year, we supported our team to navigate the difficulties of COVID-19 and successfully found new ways to deliver our services. We ended the year with 666 full-time equivalent permanent and temporary team members across Australia, nearly 70% of whom are utilising flexible remote working arrangements. Our teams Our strong culture and courageous leadership have helped us navigate the uncertainty and changes generated by COVID-19. Our priority this year has been to support our team members to stay safe and thrive. Like many organisations, the outbreak of COVID-19 affected our people in different ways. Teams navigated working apart from one another and adjusted to the realities of working from home for an extended period. To support this transition, we implemented new collaborative ways of working supported by technological tools and agile people practices to help everyone work effectively and be their best. What we particularly noticed during this time was our team continued to exhibit incredible levels of service and care for customers, many of whom were impacted by circumstances resulting from COVID-19. Conducting mental health refresher training for people leaders and introducing a new Mental Health Policy has enabled us to demonstrate our commitment to wellbeing for our team members. Other supportive initiatives this year have included a resilience training pilot for people leaders, wellbeing initiatives like R U OK Day and the introduction of an annual wellness allowance for each team member. Our achievements with our people 23 666 Full-time equivalent team members across Australia 70% Of Smartgroup team members are utilising flexible remote working arrangements 40% A gender balance of 40% female and male at all levels of the organisation below Board level Engagement remains a key focus for us. In particular, we pride ourselves on being an inclusive and diverse employer. Highlights Some 2020 achievements: • Recognised as an Employer of Choice for Gender Equality by WGEA • Recognised as an Inclusive Employer by Diversity Council Australia • Launched new values • Mental health refresher training for people leaders • New Mental Health Policy • Significant people policies introduced Challenges • COVID-19 saw teams needing to work apart from one another • We recognised the need to actively protect the mental wellbeing of our employees • Our leaders needed to adjust to new ways of leading and running their teams • We looked to find new ways to support parents and carers Smartgroup2020Annual ReportAccountability Care Team Our achievements with our people 24 The feedback we received was overwhelmingly enthusiastic: “I had been having the worst day, when my care pack arrived. I was so surprised and grateful, I started to cry! The tea bags, the masks, the puzzle, everything was just so great, Thank you so much for caring.” “Thank you for thinking of us in Melbourne! It brightened my day so much and it was so nice to know I work for such a caring organisation. My husband was really jealous!” Significant people policies introduced this year have included our updated Parental Leave Policy to award paid parental leave to team members from day one of employment with Smartgroup. Our Diversity Policy was also revised to give additional support to team members with caring responsibilities for elders and disabled family members. We also introduced fortnightly Lunch and Learn webinars, chaired by our CEO, to effectively share and build our collective knowledge and functional expertise. These came about from our 2019 Beyond Further working groups that saw Smartgroupers from different geographies and teams contribute ideas and initiatives to bring new ideas to life. This demonstration of learning and capability aligns with our employee value proposition of increasing each team member’s personal equity. Fostering a love of learning and sharing of knowledge and ideas between teams has demonstrated our culture of care and connection. We also launched customer excellence training for our vehicle sales team to further enhance our service culture and continuously improve our customer experience. This program will continue to be rolled out and embedded across customer-facing teams in 2021. Leadership and learning Diversity and inclusion Our leaders faced particular challenges this year. To help address these, we introduced people leader monthly webinars led by the CEO to answer questions and share information and inspiration. Capability building at every level of Smartgroup remains our primary people focus. We want our people to thrive in our environment and to have opportunities to achieve their fullest potential within our group. Our strong history of identifying talent and promoting internally has continued in 2020. Encouraging our people to acquire skills, particularly in the area of customer obsession, and change agility has helped us create talent pipelines, ensuring we have a future-ready team to deliver on our strategic imperatives. This year, we have conducted Real Talk Leadership training to further invest in leadership effectiveness and role modelling our values. We specifically chose the Real Talk Leadership program because of its focus on teamwork, transparency and individual accountability. Belonging and valuing each team member for the unique contribution they make to our business remains a cornerstone of Smartgroup culture. In particular, we pride ourselves on being recognised as an inclusive and diverse employer. In recent years, we have proudly championed flexible work and raised awareness about difference and diversity to ensure everyone can contribute to their full potential within our organisation. As well as improving the working experiences of our people, this has helped us build a stronger culture with empathy, respect and care as its foundation. Our diverse workforce includes gender- balanced teams, over 70 cultures and strong representation of women in senior leadership positions. We continue to pioneer in the field of gender equality and are passionate about recognising and appreciating diversity in all forms. In 2020, we were one of the select group of 119 Australian companies recognised as an Employer of Choice for Gender Equality by the Workplace Gender Equality Agency (WGEA). This accreditation reflects an elite standard of equality across seven key focus areas including leadership, accountability and gender pay equity – all issues we consider incredibly important. Our achievements with our people 25 As a diverse employer, we are committed to playing an active and ongoing role in providing equal employment opportunity to all people. Our Reconciliation Action Plan includes practical actions that will drive Smartgroup’s contribution to reconciliation ... WORKING FOR OUR CUSTOMERS & OUR PEOPLE Over 70 cultures are represented in our diverse workforce Recognised as an Inclusive Employer by Diversity Council Australia for 2019–2020 We were also recognised as a 2019–2020 Inclusive Employer by Diversity Council Australia. In awarding us this recognition, we achieved a number of benchmarks pertaining to recognising and celebrating culture and faith and gender diversity as well as embracing the LGBTQI+ community and challenges associated with mental health in our teams. In addition to this, we were proud to develop a Reconciliation Action Plan, providing Smartgroup with a framework to support the national reconciliation movement. As a diverse employer, we are committed to playing an active and ongoing role in providing equal employment opportunity to all people. Our Reconciliation Action Plan includes practical actions that will drive Smartgroup’s contribution to reconciliation, both internally and in the communities in which we operate. It is designed to contribute to advancing the five dimensions of reconciliation Smartgroup2020Annual ReportAccountability Care Team Our achievements with our people 26 WORKING FOR OUR CUSTOMERS & OUR PEOPLE Relationships are at the heart of our business The Diversity Speaks programme inspires and celebrates diversity and difference by supporting Smartgroup to develop respectful relationships and create meaningful opportunities with Aboriginal and Torres Strait Islander peoples. Parents and carers represent almost half of our workforce. We want all people who work here to feel supported and valued through every stage of life. For parents and carers, we recognise the ongoing and changing challenges of being a carer and believe information, empathy, flexibility and support are equally valued by Smartgroup and our team members. In 2020, we were proud to launch Circle In – our Smartgroup parents and carers portal to help support Smartgroup team members who have caring responsibilities with a range of tools, information, easy access to relevant policies and stories shared by other team members. As a result of doing this, parents and carers have told us some myths have been busted through the sharing of stories of other Smartgroup carers, and sensitive topics have been addressed. We first introduced our Diversity Speaks programme in 2019 to inspire and celebrate diversity and difference. Every year, we choose a number of speakers to share their experiences with us – the goal being to help raise awareness and care. Whilst our usual array of Smartgroup events was constrained this year due to the impacts of the pandemic, we were proud to host two significant events during the year with remarkable guest speakers who shared their inspirational stories with us. Australian Olympic and World Champion hurdler Sally Pearson presented to us on International Women’s Day, and Australian Paralympic and Commonwealth Games champion Kurt Fearnley presented to us on International Day of People with Disability. We chose Sally and Kurt because their stories of overcoming obstacles and adversity to achieve world- class excellence whilst remaining humble, kind and quintessentially Australian-speaking to the very values that Smartgroup is proud to embody. Their experiences resonate as we seek to navigate change and continuously improve our practices for the betterment of our customers and clients. Our achievements with our people 27 Smartgroup & relationships EVERYTHING STEMS FROM STRONG RELATIONSHIPS Born in the north-east of England, with a background in nursing, Danielle was working for a not-for-profit as a development manager when she was approached by the owner of AccessPay because he liked the way she related to people. She joined the company 10 years ago as State Manager for Western Australia, looking after the employees of not-for-profits based in Western Australia. The drawcard, she says, was working with people who did so much good for others and making sure that they received what amounted to a pay rise through packaging their salaries. In time, Danielle became General Manager Client Services. “People who work in not-for-profits are entitled to specific benefits, and our job is to make sure they are able to make informed decisions about those arrangements,” says Danielle. “Relationships drive everything we do. When that’s right, everything else happens. For example, where we have healthy relationships with companies, we can work together to lift participation. That becomes a win-win for everyone. It helps the organisation keep its workforce, it rewards people for their work and we earn returns for our investors. “Success is about partnership, not just sales. We want every single person in each client organisation to understand salary packaging and to be aware of their eligibility, regardless of what they choose to do with that information. That way, they know their options and they can do what feels comfortable for them. They can then get in touch when they are ready to make the most of what they are entitled to.” Danielle Crawford, General Manager Client Services enjoys the relationship focus we maintain at Smartgroup. Three years ago, when the business was acquired by Smartgroup, Danielle was initially concerned that they could lose the personal feel that made the work so valuable and rewarding. Instead, she says, she found that Smartgroup brought the same ethos to the work but on a larger scale. Not only did Smartgroup believe in partnership, but the size of the business meant she was now working with a large section of the not-for-profit sector across Australia in her role as General Manager Client Services. Smartgroup2020Annual ReportAccountability Care Team Our achievements with our people 28 Our purpose is to break through – to discover different and better ways to help service our customers. New values launched as part of our Beyond Further initiative Our purpose is to break through – to discover different and better ways to help service our customers. We’ve always said that the roles of our people are not defined by policies or job descriptions but rather by our actions and our behaviours in dealing with colleagues and customers and our broader community, day in and day out. We encourage everyone who works here, individually and as a team, to do what it takes to make a real difference at work. This year, we refreshed our values to reflect our one company, one team culture and as an outcome and reflection of our brand harmonisation strategy. We chose to do that this year with the appointment of our new CEO, Tim Looi. These new values will ensure that, across all geographies, our team will demonstrate and celebrate behaviours that enable us to go Beyond Further. Our new values are: We own it: Accountability We care: Care We think of we not me: Team We continue to evolve our structure Our successful acquisition of businesses across our different service areas in recent years has resulted in a complex operating model that was product focused and in need of a refresh. We’ve recognised that we need to simplify our business to capture opportunities by shifting to a more customer-centric model – one that provides us with a single view of the customer, service offerings that cater to different customer journeys and platforms that provide seamless customer engagement and enable us to deliver our customers the outcomes they are looking for. To bring this alive, we have realigned our organisation to focus on our customers even more, using a front-to-back approach that seeks to better understand our customers and then embed those insights into our operational model and structure. In arriving at these new values, we wanted to put much more emphasis on how we work together and act and to signal to our staff and to our customers the standards, service and sentiment you can expect from Smartgroup going forward. Beyond Further expresses our commitment to going the extra mile in everything we do. It forms the frame of our culture and values and describes the essence and DNA of Smartgroup. Each week, we celebrate Beyond Further behaviours and story telling throughout our business. Doing this enables us to share, celebrate and inspire as we embrace our #onecompany #oneteam vision. We also took the opportunity, through team member feedback from engagement surveys and benchmarking, to ensure we are continuing to nurture and keep our talented team members and attract new ones. To that end, we refreshed our perks to include Making a Difference Days, Summer Days leave, service awards and paid parental and carers leave. We chose these because they align with our focus on wellbeing and life/work balance as well as community support. The great response and take-up of these initiatives have been pleasing. Already, we’ve seen great feedback and uptake of our new perks. Our achievements with our people 29 Profile 666 70 Full-time equivalent team members across Australia. Over 70 cultures represented by our workforce. 70% Of Smartgroup team members are utilising flexible remote working arrangements. 2019-20 119 Recognised as an Inclusive Employer by Diversity Council Australia. In 2020, one of the select group of 119 Australian companies recognised as an Employer of Choice for Gender Equality by the Workplace Gender Equality Agency (WGEA). As an Employer of Choice for Gender Equality, we actively work to meet our targets: Gender pay equity across the group. Recruitment activity is always proactively seeking to address gender balance in Smartgroup’s workforce. A gender balance of at least 40% female and 40% male at all levels of the organisation below Board level. All Smartgroup team members have access to the same training, development, promotions and career- enhancing opportunities regardless of gender. We continue to make progress towards our targets. Achieve gender balance (40M/40F) in Group Executives by 2022 Achieve gender balance (40M/40F) in senior managers by 2022 Maintain gender balance (40M/40F) at front line manager and Team Member level Achieved Achieved Achieved Smartgroup2020Annual ReportAccountability Care Team Our actions in communities 30 FINDING SMART WAYS TO SUPPORT OTHERS We pride ourselves on being good corporate citizens and therefore we have always had a philosophy of supporting clients and the community. Many of our clients operate in the public benevolent institutions sector, so it makes sense for us to align ourselves with their interests and objectives. This year, we continued to support community and charity organisations through direct sponsorships and also through the Smartgroup Foundation. Smartgroup’s community sponsorship initiatives this year spanned four areas: sport, the arts, indigenous programs and advocacy for women. We’ve chosen to support these four areas because we see each of them individually as being important to the successful functioning and improvement of our society. Sadly, COVID-19 affected a number of our partnerships this year. Our fourth year of partnership with the Queensland Reds was interrupted, although the team were able to play in a domestic competition in which they were the runners up. Equally, the second year of our partnership with Opera Australia came to a halt when all three tiers – major performances, regional tour and schools tour – were shut down. Nevertheless, we are very proud to be supporting the arts community during this very difficult time and pleased that our partnership will continue in 2021. Things went a little more smoothly for our third year of partnership with women’s rugby in Australia through the Wallaroos and Super W competitions. These partnerships advance the professionalism of women’s rugby, allowing these talented women to pursue their athletic ambitions. While the Wallaroos season was also cancelled for 2020, the Super W season was all but complete before the COVID-19 pandemic struck. The third year of our partnership to support PCYC Indigenous programs was also one of mixed fortunes. COVID-19 saw the cancellation of the Bunburra Corroboree Education Workshop and Touch Football Tournament on the Gold Coast, but PCYC QLD was able to restart the Catch Me If You Can program in Hervey Bay in term 4. This will be expanded in term 1 2021 with new programs in Cherbourg, Yarrabah and Napranum. We are very proud to support such positive programs for both the Indigenous young people of these communities and the QLD Police officers delivering the program. Our support of the UN Women National Committee Australia went ahead without interruption, with Smartgroup hosting tables at UN Women’s International Women’s Day Breakfasts in Sydney, Melbourne, Brisbane, Perth and Canberra. Our actions in communities 31 11 We’ve supported 11 deserving projects run by community organisations over two rounds of grants in 2020. 5 Charities supported with donations in 2020 to assist with the bushfire recovery efforts across Australia. 2021 COVID-19 caused significant disruption to many activities planned for 2020, and we’re optimistically looking forward to 2021. Smartgroup is committed to giving back to the community in which we live and operate. In 2020, we were proud to continue our community sponsorships and work by the Smartgroup Foundation, notwithstanding the challenges of COVID-19. Highlights Some 2020 achievements: • We continued to fund important community sponsorship activities notwithstanding the challenges of COVID-19 • In its second year, our Smartgroup Foundation provided funding for deserving community projects run by 11 not-for-profit organisations • We enjoyed our third year of partnership with women’s rugby through the Super W competition • We supported the restart of the PCYC Queensland Catch Me If You Can programs in the second half of the year • All the UN Women National Committee Australia events went ahead without interruption Challenges • The impacts of COVID-19 saw many planned events by our sponsorship partners needing to be delayed or cancelled for the year Smartgroup2020Annual ReportAccountability Care Team Our actions in communities 32 The Smartgroup Foundation Established in 2019, the Smartgroup Foundation was created to give back to grassroots charities in areas selected by Smartgroup employees. We surveyed our team members to ask them the areas that they would like the Foundation to support, and they nominated the following six areas: Animal welfare Children and families at risk Children’s illnesses and disabilities Cancer Mental illness The environment This year, we provided funding for deserving projects run by 11 organisations through two rounds of grants. The projects were chosen because they were grassroots initiatives to improve our community working across the areas nominated by our team members, and in each case, they met the selection criteria required for approval. Our actions in communities 33 The work done by the Smartgroup Foundation this year reinforces our commitment to supporting the not-for-profit sector and the communities that we work with and service. Organisation The project we supported Child Abuse Protection Services (NSW) MacKillop Family Services A Safe Arrival program for refugee and migrant mothers in two NSW communities. PawPals program – a canine assisted learning program to help re-engage young people and get them back into the classroom and back to school. Chris O’Brien Lifehouse The purchase of two pieces of equipment to enable training in specialised radiation therapy techniques. United Way South Australia Imagination Library – an early literacy program that gifts a monthly book pack to children aged 0 to 5 years living in disadvantaged communities in South Australia. Zoe Support Australia The Banksia Project Zoe Support Centre for Growing and Learning project – funding the lease of one centre in Mildura in North West Victoria, a region with significant entrenched poverty, for 12 months so that young mothers (age 13–25) can continue their education pathways. Rural Growth Rooms expansion – funding the opening of two new Growth Rooms in Gippsland and rural Victoria to support rural men. The Growth Rooms are free, peer-to-peer sessions that provide an opportunity for men to come together, connect and support one another. Berry Street Participating in funding for a Multisystemic Therapy program for 50 families and 270 young people entering care over three years. Sir David Martin Foundation – Triple Care Farm Aftercare program – funding four young people to participate in the six-month aftercare program after completing their substance addiction rehabilitation at the Triple Care Farm. Eastern Health Seabin Foundation The purchase of two Smileyscope Virtual Reality headsets and the upgrade of an existing headset for use in paediatric emergency rooms in hospitals. Funding two Seabins at a Sydney-based marina. Seabins act as a floating garbage bin in the ocean skimming the surface of the water and collecting marine debris. One Eighty Funding for Lifeline Accidental Counsellor training and Mental Health First Aid training for a number of young people. Smartgroup2020Annual ReportAccountability Care Team Our actions in communities 34 CONTRIBUTING TO BRIGHTER FUTURES Smartgroup sponsors two PCYC Queensland programs that are helping young indigenous girls and boys gain new perspectives and experiences. Smartgroup & PCYC Queensland “It’s a very effective program,” says Phil Schultz, CEO, PCYC Queensland. “The kids leave the program with a newfound respect for Police and authority. It’s been very successful.” Each year, around 100 boys and girls take part – many of them from remote communities in Northern Queensland – with each program catering for 12–15 young adults. Smartgroup funds several of the programs. This year, lockdowns in Queensland meant programs in the first half of 2020 were affected because no-one could come in or out of communities. But Catch Me If You Can resumed in the second half of the year, and Phil Schultz is confident it will continue running in 2021. We also contribute to Bunburra, an annual touch rugby event for indigenous boys and girls held at Surfers Paradise. 200 young people from all over Queensland come to the event and play in the competition which is held on the beach. “To get to the event, kids need to have attended school and worked very hard,” says Phil Schultz. “The reward for all that hard work is that they get to have exciting new experiences – from travelling to and staying in Surfers Paradise to the opening and closing ceremonies, the games themselves and the celebrations and fireworks afterwards. They then take that positivity back to their communities, acting as strong role models for those around them.” The event, which has been running for five years now, was cancelled this year because of COVID-19 but is expected to return next year. “Smartgroup are an important member of our sponsorship family for this event,” says Phil Schultz. “Events like this couldn’t happen without sponsorship, and Smartgroup’s involvement contributes both to the success of the event and to the further development of indigenous youth in Queensland. We are very appreciative of the funding – it makes a big difference for these kids and their futures.” Phil Schultz, CEO, PCYC Queensland PCYC Queensland first got involved with Smartgroup when we organised salary packaging for their staff. Later, we did a fleet review when the organisation decided to shift from owning to leasing their fleet. But through that relationship has come a deeper association that has seen us take on sponsorship for two major PCYC programs: Bunburra touch rugby league and Catch Me If You Can. Catch Me If You Can is a program for young Aboriginal girls and boys. The program pairs young adults with local mentors from business, Police and sports teams in group and one-on-one mentoring sessions. The goal is to help them find their way forward and form a relationship with people in authority. Our actions in communities 35 “Nearly everyone I know has experienced some type of domestic violence … I personally experienced it at the age of 14 and know how difficult it can be to report the abuse and access the various support services available,” says Montana. “What inspires me the most is that I am in a role where I am able to support victims and educate the community on family violence … I am honoured to have been given this opportunity. I’m excited about furthering my education and developing my skills in my field of work as it will teach and help me improve the way I communicate and educate others about domestic violence.” Our two inaugural Regional South Training Scholarships were awarded to two invaluable Anglicare WA staff members in the South West of Western Australia. Deborah Fitzgerald of Albany will be undertaking training in treating PTSD and complex trauma, and the skills and knowledge she receives will support her appointment in her role of Child and Adolescent Counsellor. Libby Coatsworth from Bunbury has also been given a scholarship and will be undertaking a certificate of play therapy to support her current diploma studies and her passion for working with children. Congratulations to all three winners this year. It is a pleasure to continue to work alongside Anglicare WA, as they do so much good in the community, and for these scholarships to make it possible for Montana, Deborah and Libby to further extend their skills. LIFE-CHANGING OPPORTUNITIES FOR THOSE WHO CHANGE LIVES Anglicare WA is one of the largest social service providers in Western Australia. With 55 locations across the state, 620 staff, hundreds of volunteers and 88 services, the organisation works relentlessly to address a full range of social needs. We’ve been working with Anglicare WA for more than 18 years. Today, we assist them with salary packaging and novated leasing for more than 60% of their people and help them manage their vehicle fleet. It’s a strong relationship and one Smartgroup & Anglicare WA Scholarship winner and domestic violence worker, Montana, based in Kununurra in the East Kimberley. where our people are deeply involved on a day-to-day basis. Recognising that their frontline teams are critical to the success of their services, last year, we introduced a scholarship to help regional and remote Anglicare WA staff access educational opportunities that would not normally be available to them. This scholarship was so well received that this year we added two more regionally based scholarships to make a true difference for these people who do such amazing work. The first scholarship this year was awarded to Montana, an inspiring Aboriginal woman who is a domestic violence worker in the North West. Montana is based in Kununurra in the East Kimberley and provides a critical response service to people in her community. Her training and development scholarship greatly enhanced her professional knowledge, and as a direct consequence it now benefits the clients she connects with each day. Smartgroup2020Annual ReportAccountability Care Team Our commitment to the environment 36 ACTIVELY MANAGING OUR IMPACTS Exciting expansion of our Carbon Offset Program Smartgroup has partnered with Greenfleet since 2008 to provide a Carbon Offset Program to novated leasing customers. This year, we expanded our program into South Australia and Western Australia with the introduction of two new partners – The Nature Conservancy and Carbon Positive Australia. These new environmental partners increase our presence nationally and diversify the environmental projects we are involved with. To date, our Carbon Offset Program, Purple Meets Green has contributed to 699,408 tonnes of carbon being removed from the environment. As an ASX200 listed organisation and a good corporate citizen, we are committed to playing our part in improving communities and our environment. This year, we expanded our Carbon Offset Program and continued to enhance our other conservation activities by working with our clients to increase their fleet efficiencies and by further streamlining our own operations. Our direct carbon impact is relatively low Our novated leasing and fleet management services provide clients and customers with convenient and cost-effective ways to own and operate vehicles. However, whilst our business is connected to cars, our direct environmental impact is low because we do not own the vehicles, or direct or influence the purchase decision around the choice of vehicle by our customers. Title to the vehicles is almost always held by the financier or by the customer, so we generally have very few vehicle assets on our balance sheet. That said, we recognise that we have a unique ability to help contribute to lowering Australia’s carbon load, particularly in our novated lease management offering, and we continue to do this through our innovative Carbon Offset Program and other measures. Our commitment to the environment 37 Contributed to 699,408 tonnes of carbon being removed from the environment since inception of the Purple Meets Green Carbon Offset Program 86.4% Reduction in carbon emissions from air travel per FTE from 2019 to 2020 2 New environmental partners added in 2020 to the Purple Meets Green Carbon Offset Program We continue to look for ways to do right by the environment through our partnership programs and sponsorships and monitoring and adjusting our own operations to minimise our impact. Highlights Some 2020 achievements: • We expanded our Carbon Offset Program into South Australia and Western Australia with the introduction of two new Purple Meets Green partners – The Nature Conservancy and Carbon Positive Australia • We continued to improve our fleet efficiencies via smart vehicle allocation, car sharing and telematics by Smartfleet • Our air travel was significantly reduced this year, and all carbon from air travel was offset • We continued to increase our use of video technology for our office-based and remote staff • We continued to reduce our energy consumption • We continued to reduce the waste created by paper forms and documents Challenges • Our ability to influence the vehicle choices of our novated leasing and fleet management customers is limited, but we continue to look for ways in which we can assist customers to manage their carbon impact • We continue to look for ways to more effectively manage our electronic waste Smartgroup2020Annual ReportAccountability Care Team Our commitment to the environment 38 Our partnership with the Adelaide Coastal Wetlands Restoration Project through The Nature Conservancy will enable Smartgroup customers to offset the carbon emissions of their leased vehicles and contribute to the restoration of the coastal wetland. WORKING FOR OUR CUSTOMERS & OUR ENVIRONMENT Working closely with The Nature Conservancy Saltmarsh, mangrove and seagrass beds capture and store carbon at a rate 30 to 50 times higher than vegetated habitat The Nature Conservancy is a global conservation organisation dedicated to conserving the lands and waters on which all life depends. This highly trusted organisation works in 79 countries on innovative solutions to our world’s toughest challenges so that nature and people can thrive together. The Nature Conservancy has been working with the Government of South Australia and coastal ecologists on the Adelaide Coastal Wetlands Restoration Project – a project that will have a significant impact for the local environment as well as delivering carbon capture and storage. The site adjoins the Adelaide International Bird Sanctuary, a critically important habitat for many Australian and migratory birds. Around 15,000 shorebirds gather here for up to six months each year before migrating to breeding grounds in China, Siberia and elsewhere in East Asia. Expanding the habitat available to these birds will strengthen global conservation efforts along one of the world’s three great migratory bird flight paths. Over the next two years, the team will restore natural tidal flow to a stranded wetland, which will expand the area where mangroves and saltmarsh can grow. Our partnership with the Adelaide Coastal Wetlands Restoration Project* through The Nature Conservancy will enable Smartgroup customers to offset the carbon emissions of their leased vehicles and contribute to the restoration of the coastal wetland. Normally, carbon capture projects involve planting trees, but The Nature Conservancy is demonstrating that coastal ocean ecosystems also capture carbon dioxide from the atmosphere – putting it at the forefront of “blue carbon” in Australia. That is significant because saltmarsh, mangrove and seagrass beds capture and store carbon at a rate up to 40 times higher than vegetated habitat. We will also be supporting an important restoration project in the Eurardy Reserve in Western Australia through our partnership with Carbon Positive Australia, where 1,350ha of previously cleared bushland is being restored to its former natural glory. * No tradable or third-party certified carbon credit will be produced from the Project, and the Project will not result in any carbon rights or carbon ownership for either voluntary or compliance offset purposes. Our commitment to the environment 39 Carbon Positive Australia has worked on some of the largest native tree planting projects in Australia including the Yarra Yarra Biodiversity Corridor Project and the Gondwana Link. Since 2006, it has planted almost 6 million native trees across 5,000 hectares. Eurardy Reserve is owned by Bush Heritage and forms a crucial ecological linkage between the Kalbarri National Park to the west and the Toolonga Nature Reserve to the northeast. This area contains at least 12.6% of the world’s rare flora and fauna and is of great cultural and biological significance. Eurardy is also located within what is known as the South Western Botanical Province. The Reserve protects more than 700 plant species, including five nationally endangered or vulnerable species. Provincial plants are special because they only grow in specific ecosystems determined by climate and vegetation type. Eurardy’s yellow soils, for example, are home to kwongan heathland, which is recognised globally as a significant threatened ecosystem. Smartgroup customers who choose to offset the carbon emissions of their novated leased vehicles are now contributing to planting native trees at Eurardy Reserve. On average, offsetting the carbon emissions of a small car will equate to 27 trees being planted each year. For a medium-sized car, it’s 32 trees, and for a larger car, 36 trees a year will be planted. Projects like this not only provide carbon sinks but also provide much-needed protection to threatened species and ecosystems. After last year’s fire season and the colossal loss of natural habitat, flora and fauna, expanding our environmental programs to include nature-based solutions such as tree planting is a positive and practical way for our Smartgroup community to help contribute to vital local restoration projects. Helping to recycle tyres Every year in Australia, owners of motor vehicles dispose of 56 million used tyres. We recognise that our customers are contributing to this significant landfill issue and the adverse environmental impact it creates. From late 2018, we’ve partnered with Tyre Stewardship, an Australia Competition and Consumer Commission-accredited recycling program working with major tyre retailers throughout Australia to recycle tyres for uses that include road resurfacing and children’s playground ‘safe’ surfaces. Promoting sustainable and ethical supply chain management A majority of our annual supplier spend is in relation to our contracted providers of facilities, IT, facilities, contractors and temporary staff, consulting and specialist advice, business development and marketing. These make up our largest supply agreements and are overseen by the relevant Executive and by our Procurement Manager and Finance team. The remaining supplier spend is in relation to smaller, regular products and services or one-off requirements. In 2019, we implemented a Group Procurement Policy, overseen by Finance to govern our procurement decisions for third party supplied products and services at a group level. The key objectives of the policy are to achieve value for money; encourage sustainable competition; demonstrate probity, ethical behaviour and accountability; make efficient and effective use of resources and mitigate supplier risk. Smartgroup does not tolerate or support the use of forced or compulsory labour, and we extend this approach through all areas of our supply chain. Smartgroup has a structured approach to Modern Slavery, as follows, that ensures both Smartgroup as well as our suppliers, operate a sustainable and ethical supply chain and to help protect against Modern Slavery. We are working with our employees and our suppliers to extend our Modern Slavery obligations and impact in the following areas: 1. Policy – incorporation of Modern Slavery obligations into our policies and work practices. 2. Education – Working with our staff and our suppliers to educate them on the impacts of modern slavery. 3. Assurance – defining the risk profile in our supply chain, prioritising risk areas and proactively engaging with our suppliers to confirm their compliance. To date, Smartgroup has incorporated Modern Slavery into our Group Procurement Policy, conducted a detailed risk assessment across our supplier network, rolled out Modern Slavery training across all senior team members and has defined standard compliance terms and conditions that are incorporated into all our new supplier contracts and existing supplier contracts upon renewal. We are required by the Modern Slavery Act in Australia to issue a Modern Slavery Statement and our first report will be issued in June 2021 and will cover the 2020 financial year. Smartgroup2020Annual ReportAccountability Care Team Our commitment to the environment 40 Fleet efficiency initiatives The vehicles that we allocate through our fleet business travel many millions of kilometres collectively every year. Our Smartfleet business is committed to facilitating the efficient use of vehicles in workplaces. The following example shows the impact that Smartfleet made for one of our government clients after taking over their fleet management services: SINCE COMMENCEMENT: Number of vehicles dropped from: 1,180 To 916 18.6% Reduction in number of vehicles WITHIN THE FIRST TWO YEARS: Fuel usage dropped 16.01% Combined CO2 emissions reduced by 15.42% Access to rental cars tightened with total vehicle rental days falling from. 6,000 2,100 to Distance travelled by all vehicles down 10.41% delivering savings the equivalent to six full-time vehicles. Three initiatives are reducing unnecessary vehicle utilisation and contributing to a reduction in our clients’ environmental footprints: • Smart vehicle allocation – Pool Vehicle Booking is a powerful online module that maximises the usage and availability of vehicles, reducing trip duplication and identifying excess vehicles, saving time and money and, ultimately, reducing the environmental impact of the fleet. • Car sharing – Smartfleet has partnered with DriveMyCar to provide a simple on-demand car-sharing service to help organisations meet short-term vehicle requirements, reducing both the cost and carbon footprint associated with running a fleet. • Telematics by Smartfleet – We have partnered with FleetComplete to offer telematics to clients. Telematics helps ensure driver safety and helps reduce inefficiencies in driver behaviour and vehicle use, which can otherwise increase both the costs to maintain vehicles and fuel consumption (and therefore emissions). Our commitment to the environment 41 We have reduced our operational offices from seven to six, which reduced our electricity usage and carbon emissions. This year, we continued to invest in rolling out enhanced video conferencing technology and reduced our carbon emissions from air travel by 396 tonnes. Low Glow project – Barolin Nature Reserve, Bundaberg QLD Of course, carbon is not the only form of pollution that is adversely affecting environments. The Low Glow project is a long-term project aimed at protecting endangered turtles in an environmentally sensitive area impacted by artificial light from a nearby city and involves forming a green curtain to shield the sea turtle hatchery. We’ve supported Greenfleet’s Low Glow project since it began in 2016. To extend the project, Bundaberg Regional Council received a Smart Cities grant, which they are managing to build a “light map” and find more ways for the community to reduce light pollution to protect the local sea turtle population. Air and land travel Our air travel was significantly lower this year. Flights generated 57.95 tonnes of carbon dioxide, which is 396 tonnes less than in 2019. Once again, we offset 100% of the annual carbon emissions from work-related air travel. We had already increased our use of video conferencing technology to connect our office-based and remote staff in 2019, giving us greater flexibility and workplace efficiency. This was further rolled out throughout 2020. In April, we moved swiftly from onsite activities with customers to virtual working, delivering over 30,000 one-on-one phone and webinar sessions to clients and customers throughout the year. Greater virtual connectivity across all our sites will have a positive and permanent impact on our travel-related spend and carbon footprint. Reducing our energy consumption Last year we also reduced our operational offices from seven to six, which reduced our electricity usage and carbon emissions. This year, we again engaged BidEnergy to measure our electricity usage and emissions for all offices around Australia. Our electricity emissions are reported in the corporate sustainability scorecard on page 42. Responsible environmental management in our day-to-day operations We continue to optimise processes by improving our online offering and making it easier for our customers to interact with us digitally, reducing the waste created by paper forms and documents. We also facilitate waste separation and recycling in each of our offices nationally. Last year, we continued the implementation of initiatives to reduce the amount of paper and by-products used to print, with all paper used for printing in our offices made from recycled paper or from sustainably sourced forests. Opportunities to improve the environments we all share are many and varied. Our approach continues to be one of doing what we can to set the right example internally, while leveraging our relationships and forging sponsorships that enable us to have the most positive effect we can. Smartgroup2020Annual ReportAccountability Care Team Corporate sustainability scorecard 42 Corporate sustainability scorecard People Headcount Full-time equivalents (FTEs) (excluding temps) Number of permanent employees Permanent employees who are female (%) Number of full-time permanent employees Full-time employees who are female (%) Number of part-time permanent employees Part-time employees who are female (%) Number of fixed-term/temp/casual employees Fixed-term/temp/casual employees who are female (%) Employee engagement score (%) Employee participation in the engagement survey Eligible employees receiving annual performance reviews (%) Team members eligible to participate in training and development (%) 2020 2019 2018 697 630 605 54% 547 50% 58 88% 92 52% 54% 69% 100% 100% 762 689 661 51% 594 47% 67 90% 100 55% 52% 79% 100% 100% 752 695 670 50% 605 46% 65 83% 82 60% 55% 76% 100% 100% Safety incidents per FTE (total) <0.01 (2) 0.07 (45) 0.08 (59) Lost-time injury frequency rate (injuries/million hours worked) Absenteeism (%) Risk culture score (risk awareness, values and behaviours) (%) Parental leave Number of employees who took parental leave Number of employees who returned to work after leave Employee share ownership Employee share plan participation rate (% of eligible employees) Number of employee shareholders (via share plan) Employee gender diversity Board Executive Senior management All employees Environment Electricity – total consumption (kWh) Electricity (tonnes CO2-e per FTE) Air travel (tonnes CO2 per FTE) Land travel (tonnes CO2-e per FTE) Printed material (tonnes CO2-e total) Customers Net Promoter Score (average monthly score) – Smartsalary and Smartleasing only Net Promoter Score (average monthly score) – Smartgroup* 3.35 2% 80% 3.24 2% 74% 2.83 2% 66% F 18 M 18 F 13 M 17 F 31 M 20 F 40 M 11 F 21 M 19 F 28 M 5 49% 325 54% 422 63% 422 F 25% M 75% F 25% M 75% F 14% M 86% F 50% M 50% F 43% M 57% F 38% M 62% F 46% M 54% F 47% M 53% F 46% M 54% F 53% M 47% F 51% M 49% F 51% M 49% 402,922 557,707 690,207 0.50 0.09 0.13 0.79 44 38 0.65 0.66 0.25 2.44 46 – 0.78 1.00 0.31 2.07 47 – Customer complaints (as a percentage of total customers) 0.32% 0.74% 1.02% * Average monthly NPS for Smartsalary, Smartleasing, AccessPay and Advantage. Corporate sustainability scorecard 43 SNAPSHOT: Gender diversity targets of 40/40/20* achieved at Executive, Senior Management and All Employee levels. Gender targets of 40/40/20* set for our Board to achieve by the end of 2023. 56,738 tonnes of carbon offset through our Carbon Offset Program, Purple Meets Green, throughout 2020. $179,000 Donated to 11 worthwhile projects through the Smartgroup Foundation in 2020. 2 new partners introduced to Purple Meets Green in 2020. 100% of carbon from air travel by Smartgroup team members was offset in 2020. 40/40/20 targets describe a target gender representation of at least 40% female, 40% male and 20% either gender. Smartgroup2020Annual ReportAccountability Care Team Governance and risk management 44 Governance and risk management Smartgroup believes that good corporate governance is key to maximising company performance and delivering high returns to shareholders. Smartgroup has a strong corporate governance framework in place, which is reported in the Corporate Governance Statement (available at http://ir. smartgroup.com.au/Investors/?page=Corporate-Governance). Smartgroup operates in a dynamic environment and is exposed to risks associated with operating in the salary packaging and novated leasing industry. Smartgroup recognises risk management as an integral part of good corporate governance and as fundamental in achieving its strategic and operational objectives. The Board is responsible for: • reviewing, ratifying and monitoring management’s framework and systems of risk management, internal controls and compliance; • approving policies relating to and overseeing the management of financial and non-financial risks, including economic, environmental and social sustainability risks; and • setting the risk appetite within which the Board expects management to operate. A Risk Management Policy (available at http://ir.smartgroup.com. au/Investors/?page=Corporate-Governance) and a Risk Management Framework are in place to identify, assess, manage and report risks on a consistent and reliable basis in accordance with the risk appetite and tolerances set by the Board. Accountability for risk management is structured as: • management is responsible for managing all risks, where possible; • a dedicated risk function (under the Chief Risk Officer) provides risk management expertise and oversight for business risk management activities; and • an internal audit function provides independent assurance regarding the adequacy and effectiveness of Smartgroup’s system of internal controls and risk management procedures. The Board regularly discusses the economic, environmental and social sustainability risks (including risks relating to the COVID-19 pandemic) that it considers are likely to have a material effect on Smartgroup’s financial performance or enterprise value. Relevant risks are reported on Smartgroup’s risk register and are closely analysed by the Board and the Audit and Risk Committee. Additional information in relation to risk management can be found throughout the Annual Report and in the Corporate Governance Statement that is available on the Smartgroup website. Material risks The material risks that could adversely affect Smartgroup’s future business, operations and financial performance are outlined below. Risks and opportunities How we respond Australian private new car market The success of Smartgroup’s novated leasing business is driven by a buoyant Australian private new car market. New car sales have been in steady decline in recent years. There remains uncertainty around the impact of COVID-19 on consumer spending and the supply of new cars and, consequently, the new car sales market. Regulatory environment The salary packaging and novated leasing industry has been subject to regulatory scrutiny following the Hayne Royal Commission. There are regulatory proposals to address a perception of customer detriment from the sale of certain add-on insurance products. These changes are likely to impact Smartgroup’s operations and the demand for some of our products and services. • Continue to promote the advantages of novated leasing to customers who wish to acquire a car. • Where an existing customer does not wish to acquire another car, Smartgroup is focusing on maximising customer retention through refinancing of existing cars. • Smartgroup has a large dealer panel across the country that supports our ability to source new cars. • We continue to explore new product and service offerings whilst developing new distribution channels to drive business growth. • We monitor and proactively engage with regulatory and industry bodies on proposed changes to prevent unintended consequences and improve customer outcomes. • We evaluate the requirements of new regulations, legislation and industry practices and implement the control environment required to comply with them. Fringe benefits tax The provision of products and services within salary packaging administration and novated leasing is underpinned by the associated benefits permitted under fringe benefits tax (FBT) legislation. Changes to these laws may adversely impact the salary packaging benefits administered by Smartgroup and could render any of Smartgroup’s product offerings less profitable or obsolete. • Through our membership of NALSPA, we support initiatives to communicate the macro-economic benefits arising from the existing FBT policy settings, including the significant role salary packaging plays in the financial wellbeing of many everyday Australians. • We continue to explore growth opportunities aligned to our core business but outside the scope of FBT legislation. Governance and risk management 45 Risks and opportunities Cyber security/data privacy Cyber attacks may compromise technology platforms used by Smartgroup to store confidential information of clients and customers. It is possible that measures taken by Smartgroup do not prevent or detect unauthorised access to or disclosure of confidential information. Any successful cyber attack could result in the loss of information or assets, breaches of data privacy laws and/or client agreements and extended outages of technology platforms and potentially, client losses. How we respond • A dedicated IT security team monitors, assesses and continues to enhance our resilience to cyber threats. • A number of policies govern the management of information security across Smartgroup. • The Privacy Policy governs how we collect, use, disclose and hold personal information. • A training program continually raises team members’ awareness on privacy and cyber security threats. Business interruptions Similar to other companies, Smartgroup is exposed to the risk of business disruption caused by loss of key team members, failure of IT systems and cyber attacks. Any systemic failure or sustained interruption could impair Smartgroup’s operations and customer service levels and client retention. Furthermore, disaster recovery plans may prove to be ineffective and insurance policies may fail to cover all damages and losses suffered. • The Business Resilience Policy and Framework guide Smartgroup’s response to major incidents and our recovery plans. • We periodically test our ability to respond effectively to interruptions. • We continually monitor and refresh our investment in our IT infrastructure and systems to support the continuity of our operations. Business transformation The execution of Smartgroup’s strategy and focus on continuous improvement may introduce changes to our business operations (including processes, systems, team members, capability and capacity). Change and transformation projects that are not well executed have the potential to cause significant disruptions, resulting in client losses, customer dissatisfaction and team member disengagement. People/Team members A stable and experienced management team is key to the success of Smartgroup. The management team has deep knowledge of the business and the industry and strong relationships with key clients. The loss of key personnel may adversely affect Smartgroup. Suppliers Smartgroup is dependent on a number of key suppliers to provide services and products, such as technology, insurance and salary packaging cards. The availability, performance and reliability of their services and products are critical to the continuity of Smartgroup operations. Funding Smartgroup depends on financial institutions to provide funding for our novated leasing customers. Any loss of access to funding or material changes to the terms of funding for our customers could adversely affect Smartgroup’s ability to attract or retain novated leasing customers. Workplace health and safety Smartgroup is committed to providing a safe and healthy environment for our team members. The current COVID-19 pandemic has also required us to embrace new ways of working that carry heightened risks relating to safety, health and wellbeing. Key client contracts Most of Smartgroup’s contracts with clients are for fixed terms and are subject to renewal or tender processes. In addition, some contracts can be terminated by the client without cause, prior to the end of the contract term. The loss of multiple key clients through termination or failure to renew is likely to affect Smartgroup’s financial performance. • A dedicated Project Management Office (PMO) resourced with senior project managers governs and manages change and transformation activities. • Project management methodologies and prioritisation guide the initiation, approval, prioritisation and management of projects. • Post-implementation reviews are conducted to ensure lessons learned are incorporated into future projects. • A talent development program and capability assessments of key people leaders are in place to support ongoing succession planning. • Short-term and long-term incentive plans support the retention of key personnel and the successful execution of our strategy. • We negotiate contracts with strong terms and contingencies to facilitate the continuity of services and products from key suppliers. • We work to diversify our exposure to key suppliers where appropriate to reduce the risk of single-supplier dependency. • We have formal contractual agreements to govern our funding arrangements with financial institutions. Multi-year contractual agreements ensure continued access to funding at competitive terms. • Smartgroup has relationships and established funding arrangements with multiple financial institutions. • The Work Health and Safety (WHS) Policy sets out our commitment to providing a work environment that ensures the health and safety of team members. • Mental health awareness training, tools and support are delivered to managers and team members. • Processes are in place for team members to report safety hazards and incidents. • Our priority has been to protect the health, safety and wellbeing of our team members during COVID-19. We have regular communication with team members to promote awareness of physical and mental wellbeing and actively monitor relevant indicators to identify areas to address. We have implemented COVID-19 safety protocols in our offices. • Business growth continues to reduce the revenue concentration with key clients. The 10 largest contracts now represent a smaller percentage of total revenues compared to prior years. • We monitor client and customer satisfaction through Net Promoter Scores (NPS) and customer feedback. • Refer also to the “Competition” section. Smartgroup2020Annual ReportAccountability Care Team Governance and risk management Risks and opportunities Competition The salary packaging and novated leasing industry is subject to increasing competition in respect of pricing, products and services and delivery platforms. Competition may also increase from mergers between existing competitors or the entry of new competitors. Smartgroup’s competitive position in the market may deteriorate as a result of these factors or by failure of Smartgroup to respond to changes in market conditions, customer demands or technology advancement, with possible consequences for client retention and profitability. 46 How we respond • We continue to transform our business operations to be more customer-centric and digitally enabled. Anticipated improvements to our cost to serve and maintaining our recognised position as an industry leader in customer care and innovation provide us with a competitive advantage. • We are focused on how we engage with our customers and improve our understanding of their needs and expectations so that products and services can be tailored and delivered accordingly. • We continue to focus on creating exceptional experiences for our customers and using innovation to drive process efficiency. Sustainability • Refer to the sustainability report (p. 36). Smartgroup recognises that our long-term success relies upon the governance and sustainability of our business. Whilst Smartgroup has a relatively small environmental footprint (team member travel, energy usage and office material consumption), our actions could deliver negative environmental outcomes. Climate change Smartgroup is exposed to climate change risks associated with the ownership of vehicles. Any climate change legislation or changes in customer preferences that affect private car ownership or vehicle types (e.g. increased adoption of electric/hybrid) could in turn have an impact on Smartgroup’s future financial performance. Modern slavery Smartgroup does not tolerate or support the use of forced or compulsory labour, and we extend this approach through all areas of our supply chain. Our main supply chain activities relate to engaging with providers of IT, facilities, contractors and temporary staff, consulting and specialist advice, business development and marketing. We recognise the risk of not meeting our modern slavery obligations should our suppliers operate in a manner that is contrary to these obligations. • We monitor and assess developments relating to the impact of climate change on our strategy and operations. • Refer to the sustainability report (p. 36). • Smartgroup has incorporated modern slavery provisions into our Group Procurement Policy and has defined standard compliance terms and conditions that will be incorporated into all our new supplier contracts and existing supplier contracts upon renewal. • Our first Modern Slavery Statement report will be issued in June 2021 and will cover the 2020 financial year. • Refer to the sustainability report (p. 36). Directors’ report 47 • Andrew Bolam • Carolyn Colley • Deborah Homewood • Timothy Looi (appointed 29 February 2020) • John Prendiville • Ian Watt Principal activities During the financial year, the principal activities of the Group consisted of outsourced employee benefits and administration services, being primarily salary packaging, novated leasing, fleet management, share plan administration, payroll administration and workforce optimisation services. Directors’ report The Directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the Group) consisting of Smartgroup Corporation Ltd (referred to hereafter as the Company or parent entity) and the entities it controlled at the end of or during the financial year ended 31 December 2020. Directors The following people were Directors of the Company during the financial year and up to the date of this report. Each Director held that position from the start of the financial year until the date of this report, unless otherwise stated: • Michael Carapiet • Deven Billimoria (retired 28 February 2020) • Gavin Bell Dividends Dividends paid during the financial year were as follows: Consolidated Final dividend for the year ended 31 December 2019 of 21.5 cents (2018: 21.0 cents) per ordinary share Interim dividend for the year ended 31 December 2020 of 17.0 cents (2019: 21.5 cents) per ordinary share No special dividends were paid during the financial year (2019: 20.0 cents per ordinary share) Total 2020 $000 28,272 2019 $000 27,446 22,579 28,305 – 50,851 26,300 82,051 On 24 February 2021, the Directors declared a fully franked final dividend for the year ending 31 December 2020 of 17.5 cents per share. The final dividend will be paid on 23 March 2021 to shareholders registered on 9 March 2021 resulting in a total distribution of $23,240,000. On 24 February 2021, the Directors also declared a total special dividend of 14.5 cents per share, comprised of a final special dividend of 9.0 cents per share in respect of the year ended 31 December 2020, and an interim special dividend of 5.5 cents per share in respect of the current year. The special dividend will be paid on 23 March 2021 to shareholders registered on 9 March 2021 with an expected total distribution of $19,259,000. The financial effect of dividends declared after the reporting date is not reflected in the 31 December 2020 financial statements and will be recognised in subsequent financial reports. Review of operations The Group’s profit after income tax expense for the year amounted to $41,325,000 (2019: $61,449,000). Refer to the Chairman’s report and the Managing Director and CEO’s report for further commentary. from 29 February 2020 following Deven Billimoria’s retirement on 28 February 2020. The deterioration in economic conditions, as a result of the COVID-19 pandemic, resulted in a significant reduction in revenue in 2020. In response to the disruption, short and long term savings measures were put in place in order to ensure that earnings margins were maintained at acceptable levels. There were no other significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year No matter or circumstance has arisen since 31 December 2020 that has significantly affected or may significantly affect the Group’s operations, the results of those operations or the Group’s state of affairs in future financial years. Likely developments and expected results of operations Likely developments in the operations of the Group and the expected results of those operations are contained in the Managing Director and CEO Report on page 16. Business objectives and cash use The Company has used cash and cash equivalents to fund its day-to-day operations and to pay down debt. Environmental regulation The Group is not subject to any significant environmental regulation under Australian Commonwealth or State law. Significant changes in the state of affairs of the Group As announced on 18 October 2019, Timothy Looi commenced as Smartgroup’s new Managing Director and CEO with effect Smartgroup2020Annual ReportAccountability Care Team Board of Directors Board of Directors 48 The following people were directors of Smartgroup Corporation Ltd during the financial year and up to the date of this report, unless otherwise stated. Former directorships (last three years) quoted below are directorships held in the last three years for listed entities and exclude directorships of all other types of entities unless otherwise stated. Qualifications: Michael holds a Master of Business Administration from Macquarie University. Experience and expertise: Michael has more than 30 years’ experience in the financial sector. Michael is the Chairman of Link Group (ASX: LNK), a global provider of share registry, corporate market data analytics and asset management services and the largest provider of administration services to the Australian superannuation sector. He is also Chair of Adexum Capital Ltd, a private equity fund manager. Michael was previously Chair of SAS Trustee Corporation and a Director of Southern Cross Media Group Ltd, and has also served on several Commonwealth Government boards including Infrastructure Australia, Clean Energy Finance Corporation and Export Finance Insurance Corporation. Former directorships (last three years): Michael was formerly Chair of Insurance and Care NSW (iCare NSW), a role that he held from August 2015 until September 2020 Special responsibilities: Member of ARC, HRRC and ITIC Interests in shares: 2,381,412 Interests in options: None Former directorships (last three years): None Special responsibilities: None Interests in shares: 73,242 Interests in options: 965,790 Qualifications: Tim holds a Bachelor of Economics from Sydney University and is a Member of Chartered Accountants, Australia and New Zealand. Experience and expertise: Tim has worked for Smartgroup since 2009 and throughout that time has held responsibilities as the Chief Financial Officer in addition to the management of group operations, client relationships and sales and marketing. Prior to Smartgroup, Tim held senior positions at Aristocrat Leisure in strategy and finance. He commenced his career with PricewaterhouseCoopers in 1994. Qualifications: Andrew holds a Bachelor of Commerce from the University of Tasmania and is a Certified Practising Accountant (CPA). Experience and expertise: Andrew has more than 20 years of experience in financial and general management. He is currently an Executive Director and the Chief Financial Officer of Media Innovations Holdings Pty Ltd, the operator of the Fetch TV business in Australia. Andrew previously held several senior roles in the Usaha Tegas Group of Companies including Benaris International Pty Ltd (oil & gas), Usaha Tegas Sdn Bhd (diversified investment), Bumi Armada Berhad (offshore oil & gas services) and Astro All Asia Networks plc (pay TV). Andrew’s earlier career included senior roles with the Shell Group of Companies in Australia and Malaysia. Former directorships (last three years): None Special responsibilities: Member of ARC and ITIC Interests in shares: 257,760 Interests in options: None Qualifications: Deborah completed her registered nurse training at St Andrews Hospital (QLD) and also holds a Master of Management from Macquarie Graduate School of Management. Sales, South Asia. Deborah is a current member of Chief Executive Women and chaired the Membership Committee of that organisation from 2010 to 2012. Experience and expertise: Deborah has many years of management experience in various sectors, including retail, the medical industry and communications. She is currently Managing Director of MAX Solutions and was formerly CEO of Pacnet, Australia and New Zealand, an Asian-headquartered telecommunications carrier. Deborah was with Pacnet for 10 years and held various other senior roles including Vice President Former directorships (last three years): None Special responsibilities: Member of HRRC and ITIC Interests in shares: 6,618 Interests in options: None Michael Carapiet Chairman and Non-Executive Director Timothy Looi Managing Director and CEO – appointed 29 February 2020 Andrew Bolam Non-Executive Director Deborah Homewood Non-Executive Director Board of Directors 49 Qualifications: Ian holds a Bachelor of Commerce from the University of Melbourne and a Master of Economics and PhD in Economics from La Trobe University and has completed the Advanced Management Program at Harvard Business School. Experience and expertise: Ian worked for nearly 20 years at very senior levels of the Australian public service. His most recent appointment was as Secretary of the Department of the Prime Minister and Cabinet and head of the Australian Public Service, a position he held from 2011 to 2014. Before that, he was Secretary of the Departments of Defence, Finance, and Communications, Information Technology and the Arts between 2001 and 2011 and Deputy Secretary of the Department of the Prime Minister and Cabinet. Ian is currently the Chair of the International Centre for Democratic Partnerships and the ADC Advisory Council, is on the Boards of Citibank Pty Ltd, the Grattan Institute and the Committee for Economic Development Australia (CEDA) and is a member of the Council of the Australian National Maritime Museum. Ian is a Senior Advisor to Flagstaff Partners. Former directorships (last three years): Non- Executive Chairman of BAE Systems Australia Pty Ltd from July 2016 to February 2019 Special responsibilities: Chairman of ITIC and member of ARC Interests in shares: 106,522 Interests in options: None Qualifications: Gavin holds a Bachelor of Laws from the University of Sydney and Master of Business Administration (Executive) from the Australian Graduate School of Management. Former directorships (last three years): Gavin was formerly a Board member of Insurance and Care NSW (iCare NSW), a role that he held from October 2015 until September 2020 Experience and expertise: Gavin is an experienced director, CEO and lawyer. He is a Non-Executive Director of IVE Group Ltd (ASX: IGL). Before becoming a Director, Gavin was Managing Partner and Chief Executive Officer of law firm Herbert Smith Freehills (formerly Freehills). He was also a partner in the firm for 25 years. Special responsibilities: Chairman of HRRC and member of ARC Interests in shares: 77,650 Interests in options: None Qualifications: John holds a Bachelor of Science (Hons) in Astrophysics from the Royal Military College, Duntroon, and Master of Business Administration from the University of Western Australia and the Institute for International Finance in Japan. Experience and expertise: John has 30 years’ experience in the financial sector. He is currently a Director and a member of the Audit and Risk Committee of the University of Notre Dame Australia. John is also a shareholder and director of GetCapital Pty Ltd, a rapidly growing provider of finance to the SME space in Australia, and a range of other private companies with interests in the technology, property, industrial and fintech space. Previously, John held numerous senior roles at Macquarie Group, where he worked for 20 years until his departure in 2011. Former directorships (last three years): None Special responsibilities: Chairman of ARC and Member of HRRC Interests in shares: 675,000 Interests in options: None Qualifications: Carolyn holds a Bachelor of Economics from Macquarie University and a Diploma of Applied Finance and Investment. She is a Fellow of Chartered Accountants Australia and New Zealand and a Graduate of the Australian Institute of Company Directors. Experience and expertise: Carolyn has more than 30 years’ experience spanning financial services, product development and innovation. Carolyn was most recently Chief Operating Officer and co-founder of Faethm, a global analytics SaaS platform. Previously, she was CEO of Decimal Software Ltd, and before that, she held senior executive roles at Macquarie Bank, St George Bank and BT Financial Group. Carolyn is a Non-Executive Director of CountPlus Ltd (ASX:CUP) and is an Independent Non- Executive Director of OnePath Custodians Ltd and Oasis Fund Management Ltd (IOOF’s superannuation businesses) and of ASX’s Clearing and Settlement Boards. Former directorships (last three years): None Special responsibilities: Member of HRRC and ITIC Interests in shares: 7,000 Interests in options: None Ian Watt AC Non-Executive Director Gavin Bell Non-Executive Director John Prendiville Non-Executive Director Carolyn Colley Non-Executive Director Smartgroup2020Annual ReportAccountability Care Team Board of Directors 50 Deven Billimoria Managing Director and CEO – retired 28 February 2020 Former Managing Director and CEO, Deven Billimoria, also held office as a director during the period from 1 January 2020 to 28 February 2020. Deven worked with Smartgroup for approximately 20 years and held the roles of Managing Director and CEO of Smartgroup Corporation from 2014 and Managing Director and CEO of Smartsalary Pty Ltd from 2001. Deven held no other directorships in listed entities in the 3 years before his retirement. As at 28 February 2020, the date on which Deven retired as a director, he held interests in 2,581,053 shares, and 697,784 options. Company secretaries Sophie MacIntosh was appointed Chief Legal Officer on 7 November 2016 and was appointed Joint Company Secretary on 13 December 2016. Sophie is an experienced legal and governance professional with over 20 years’ experience gained working in global law firms specialising in all aspects of corporate and commercial law. Sophie holds a Master of Laws from the University of Sydney and a Bachelor of Business and a Bachelor of Law from the University of Technology Sydney and is a member of the Australian Institute of Company Directors. Jonathan Swain was appointed as an additional Company Secretary effective 19 August 2019. Jonathan is a Senior Company Secretary with Company Matters Pty Ltd. He has previously worked in a range of legal, company secretarial and management roles. Jonathan is admitted as a solicitor in New South Wales and is a Fellow Member of the Governance Institute of Australia and a Graduate of the Australian Institute of Company Directors. Meetings of Directors The number of meetings of the Company’s Board of Directors and each Board committee held during the year ended 31 December 2020 and the number of meetings attended by each Director were as follows: Director Board Audit and Risk Committee Human Resources and Remuneration Committee IT and Innovation Committee Attended Held1 Attended Held1 Attended Held1 Attended Held1 Michael Carapiet Gavin Bell Andrew Bolam Carolyn Colley Deborah Homewood Timothy Looi2 John Prendiville Ian Watt Deven Billimoria3 15 15 15 14 15 13 14 15 2 15 15 15 15 15 13 15 15 2 4 4 4 – – – 4 4 – 4 4 4 – – – 4 4 – 3 3 – 3 3 – 3 – – 3 3 – 3 3 – 3 – – 3 – 3 3 3 – – 3 – 3 – 3 3 3 – – 3 – 1. The number of meetings held during the time the Director held office or was a member of the relevant committee. 2. Appointed as a Director on 29 February 2020. 3. Retired as a Director on 28 February 2020. Remuneration report 51 The remuneration report describes the remuneration arrangements for the Key Management Personnel of the Group (KMP) for the year ended 31 December 2020. The remuneration report has been prepared in accordance with the requirements of section 300A of the Corporations Act 2001 and has been audited. Introduction from the Chair of the Human Resources and Remuneration Committee Dear shareholder On behalf of the Board, I am pleased to present Smartgroup’s remuneration report for the year ended 31 December 2020. Other key remuneration decisions and outcomes for 2020 affecting KMP were as follows: The 2020 year was significantly affected by the broad challenges presented by the COVID-19 pandemic, and remuneration decisions made during 2020 needed to reflect those challenges as they evolved during the year. At the start of 2020, the Board proposed to set a remuneration framework largely similar to that described in the 2019 remuneration report, which received strong support from shareholders at the AGM held in June 2020, with more than 99% of votes in favour of the resolution to adopt it. Under that framework, up to 50% of Executive KMP short-term incentives were payable on the achievement of financial KPIs based on the NPATA achieved by the Group, with the remaining 50% based on the achievement of other non-financial KPIs. After the impacts of COVID-19 on the Company’s business became apparent during the first half of 2020, the Board approved a modified short-term incentive arrangement for 2020 under which the maximum short-term incentive opportunity for Executive KMP was reduced to 75% of the maximum and adjusted KPIs were set. Further details about these changes are described in more detail later in this remuneration report. The Board considered that these changes were appropriate having regard to the need to deliver during 2020 a series of initiatives to address the effects of COVID-19 and to ensure the longer-term sustainability of Smartgroup’s business performance and shareholder value creation. The aggregate amount of short-term incentive payments paid to Executive KMP in respect of 2020, based on the extent to which the approved KPIs were achieved, was $348,312. The Board considers that these payments are appropriate having regard to the Company’s good overall performance in the context of the COVID-19 pandemic, and the fact that the Company did not claim JobKeeper. Further details of the specific KPIs approved by the Board for 2020 and the extent to which they were achieved, are set out later in the remuneration report. • In January 2020, two Executive KMP received an increase in their fixed remuneration, with one receiving a $20,000 increase and one receiving a $60,000 increase. • As part of the Company’s cost containment plan implemented in response to COVID-19, the Chairman and the Managing Director and CEO each accepted a 50% reduction in fees/fixed remuneration for a period of three months from April 2020, and all other Directors and Executive KMP accepted a 20% reduction in fees/fixed remuneration for the same period. • A one-off cash bonus of $75,000 was approved to one Executive KMP to reflect additional duties undertaken during the year, to be paid in January 2021. • No Executive KMP 2018 long term incentive shares vested in 2020, as earnings per share and relative total shareholder return thresholds were not achieved. • Tony Forward, the Chief Information Officer, is included as a member of KMP with effect from 1 February 2020, the date of his appointment to that role on a permanent basis, and Nigel Underwood, who held the role of Chief Financial Officer from 6 April 2020 to 4 December 2020 was included in Executive KMP for that part of the year. • A new executive service contract with Timothy Looi took effect from 29 February 2020 to reflect his appointment as Managing Director and CEO. Further details of these decisions and outcomes are set out later in the remuneration report. The Board believes that the 2020 remuneration outcomes fairly reflect the performance of the Company and Executive KMP in the context of the year’s events. We thank you for your support and welcome your feedback on our remuneration report. Yours sincerely Gavin Bell Chair of the Human Resources and Remuneration Committee Smartgroup2020Annual ReportAccountability Care TeamRemuneration report 52 Who is covered by the report The names and titles of the KMP during the year ended 31 December 2020 are set out below. Name Non-Executive Directors Michael Carapiet Gavin Bell Andrew Bolam Carolyn Colley Deborah Homewood John Prendiville Ian Watt Continuing Executive KMP Timothy Looi Tony Forward Sarah Haas Sophie MacIntosh Executives who ceased to be KMP during the year Deven Billimoria Nigel Underwood Title KMP for full year or part year Chairman and Non-Executive Director Full year Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Full year Full year Full year Full year Full year Full year Managing Director and CEO1 Full year Chief Information Officer (CIO) Part year – started 1 February 2020 Chief Operating Officer (COO) Chief Legal Officer (CLO) Full year Full year Managing Director and CEO Part year – ceased 28 February 2020 Chief Financial Officer (CFO) Part year – started 6 April 2020, ceased 4 December 2020 1. Timothy Looi became an Executive Director on assuming the role of Managing Director and CEO on 29 February 2020. Mr Looi was a member of the KMP for the period from the start of the financial year until 28 February 2020 in his previous role as Chief Financial Officer. He was therefore a member of the KMP for the full year. Executive KMP remuneration strategy Smartgroup’s remuneration strategy focuses Executive KMP on: • sustained growth in earnings before interest, tax, depreciation and amortisation of intangibles, adjusted to exclude significant non-operating items (EBITDA) and net profit after tax, adjusted to exclude the non-cash tax-effected amortisation of intangibles and significant non-operating items (NPATA); and • risk management and other key non-financial drivers of value. The Board ensures that the remuneration of Executive KMP is: • set in a way that is consistent with the strategy outlined above; • • competitive but reasonable, and acceptable to shareholders. transparent and clearly aligned to performance; and The Board’s Human Resources and Remuneration Committee (HRRC) assists the Board in fulfilling its corporate governance responsibilities, including reviewing and recommending remuneration arrangements for Directors and Executive KMP. The HRRC has structured an executive remuneration framework that is competitive with the market and consistent with the overall remuneration strategy of the Group. The executive remuneration framework: • • • is intended to attract, motivate and retain high-calibre executives who are critical to the organisation’s growth and success; rewards team and individual performance, capability and experience; reflects competitive rewards for contributing to growth in shareholder wealth; and • provides a clear structure for earning rewards. During 2020, aspects of the remuneration framework were adjusted from those in place in 2019 to focus Executive KMP on delivering a series of initiatives to address the effects of COVID-19 and to ensure the longer-term sustainability of Smartgroup’s business performance and shareholder value creation. Further details of these adjustments are set out below. Components of Executive KMP remuneration The Group aims to reward Executive KMP with a level and mix of remuneration based on their position, responsibility and performance. This remuneration has both fixed and variable components. The executive remuneration and reward framework consists of four components: • Total fixed remuneration (TFR) comprising base salary, superannuation and non-monetary benefits; • Short-term performance incentives (STI); • Long-term performance incentives (LTI), and • Other statutory entitlements such as long service leave. In alignment with its remuneration strategy, the Board’s policy is to structure remuneration for Executive KMP so that it includes both a fixed component and an at-risk or performance-based component (comprising a combination of STI and LTI), such that a significant part of the Executive KMP’s total remuneration is at risk. The charts below show the relative proportions of TFR, STI and LTI for: • Tim Looi, as Managing Director and CEO for the period from 29 February 2020 to 31 December 2020; and • the other Executive KMP for the year ended 31 December 20202. 2. This excludes remuneration paid to Deven Billimoria and Nigel Underwood who ceased to be KMP during the year Remuneration report CEO TFR 42% STIP 21% LTIP 37% OTHER EXECUTIVE KMP TFR 54% STIP 14% LTIP 32% The amounts shown above are the amounts that would have been payable to the CEO and to Other Executive KMP if they had each achieved their maximum STI and LTI entitlement for the year (excluding any accelerated vesting and end of service benefits). Further details on the components of Executive KMP remuneration are set out below. Total fixed remuneration Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, is reviewed annually by the HRRC, based on individual and business unit performance, the overall performance of the Group and comparable market remuneration. Short-term incentives Executive KMP are eligible to participate in the Company’s Short Term Incentive Plan (STIP) in a manner determined by the Board. The STIP puts a proportion of each Executive KMP’s remuneration at risk subject to meeting specific predetermined performance measures linked to the Company’s objectives set annually. This aligns employee interests with the Group’s financial performance and the Group’s organisational values. As with fixed remuneration, the Board and the HRRC rely on comparative data from companies of a similar size. Data from competitors is also considered to ensure that the STIP remains competitive and attractive and to incentivise the executive team to stay and to strive for exceptional performance. Participants in the STIP have a target cash payment set every year as a percentage of their total fixed annual remuneration. Payments under the STIP depend on the achievement of a range of financial and non-financial key performance indicators and objectives (KPIs), as approved by the Board. The KPIs set in relation to the STIP are designed to compensate and reward Executive KMP for achieving the Company’s short-term business strategy and are tested annually after the end of the relevant year. 53 Any amount that may be paid to the participants under the STIP is subject to the absolute discretion of the Board, after taking into account performance against KPIs and any other matters determined by the Board to be relevant to its discretion including, without limitation, the conduct of the relevant Executive KMP. Long-term incentives In early 2015, the Board established a Long-Term Incentive Plan (LTIP) for the Managing Director and CEO and other Executive KMP, which was approved for adoption by shareholders at the 2015 AGM. At the Company AGM in May 2018, shareholders approved the issue of shares under the plan for a further three years, in accordance with the ASX Listing Rules. The LTIP aligns reward with shareholder value by tying this component of executive remuneration to the achievement of performance measures that underpin sustainable long-term growth. LTIP grants are usually made once a year. Any grant of LTIP shares to the Managing Director and CEO is required to be approved by shareholders under the ASX Listing Rules. This approval is usually sought at the Company’s AGM. The LTIP is a loan-funded share plan. Shares are purchased by the participant and funded by a loan provided by the Company. The shares are held by the participant until they vest or are forfeited and are eligible for dividends. All dividends paid or distributions made by the Company to the participant are applied to repay the loan and to meet the tax liability on those dividends or distributions. The loan is for five years from issue, is subject to limited recourse and is interest free, as required by ASIC Class Order CO14/1000 and consistent with ASIC’s policy published in Regulatory Guide 49. The loan is repayable in full on the earlier of the termination date of the loan and the date on which the shares are sold. If the vesting/performance conditions are not met and the shares do not vest for any other reason, the shares are acquired by the Company for the value of the outstanding loan. Shares issued under the LTIP are forfeited if the performance hurdles are not met or the participant ceases employment before vesting (subject to the Board’s discretion to permit vesting of shares depending on the circumstances in which employment ceases). Where there is a change of control event, the Board may, at its discretion, determine that some or all of a participant’s unvested shares may vest. From time to time, the Board may consider amending the vesting terms and the performance hurdles to ensure they are aligned to market practice and to safeguard the best outcomes for the Company. Further, the Board has the absolute discretion to replace the LTIP in any one or more years with an equivalent STIP or any other program. 2020 Executive KMP remuneration structure Total fixed remuneration With effect from January 2020, two KMP received increases to their fixed remuneration, with the Chief Operating Officer increasing from $340,000 to $400,000 and the Chief Legal Officer increasing from $340,000 to $360,000. As part of the Company’s cost containment plan implemented in response to COVID-19, the Managing Director and CEO accepted a 50% reduction in fixed remuneration and all other Executive KMP accepted a 20% reduction in fixed remuneration, for a period of three months from April 2020. The total amount of fixed remuneration foregone by Executive KMP over this period was $154,462. Smartgroup2020Annual ReportAccountability Care TeamRemuneration report 54 Long-term incentives Number and price of shares issued Participants in the LTIP are granted a number of shares based on a proportion of the relevant executive’s TFR. For 2020, the LTIP grant to the Managing Director and CEO was 88% of TFR, and the LTIP grants to other Executive KMP was 60% of TFR, as measured by the fair value of the shares on the grant allocation date, that is, when the number of shares to be issued was determined. Under the 2020 LTIP grant: • 670,392 shares were issued to the Managing Director and CEO at an issue price of $6.20 per share, being the 20-day volume weighted average price (VWAP) of shares up to and including the trading day immediately before the date of the 2020 AGM; and • a total of 1,245,905 shares were issued to other continuing Executive KMP at an issue price of $6.67 per share, being the 20-day VWAP of shares up to and including the trading day immediately before the date of issue, with VWAP for the period prior to the cumulative dividend date being reduced by the amount of the declared dividend. A further 164,851 shares were issued to Nigel Underwood, as an incoming member of Executive KMP, at an issue price of $6.20 per share, being the 20-day VWAP of shares up to and including the trading day immediately before the date of the 2020 AGM. Following Mr Underwood’s resignation effective 4 December 2020, these shares will be bought back by the Company in accordance with the terms of the LTIP. Vesting of shares Vesting of 75% of the shares issued under the 2020 LTIP grant is subject to an earnings per share (EPS) performance hurdle. Vesting of the other 25% of the shares issued under the 2020 LTIP grant is subject to a total shareholder return (TSR) hurdle. The performance hurdles are described in more detail below. Shares issued under the 2020 LTIP grant will vest on 31 December 2022 if the performance hurdles are met. The shares awarded under the LTIP are economically equivalent to options. The principal value of the LTIP grant to the Managing Director and CEO and other Executive KMP therefore comes through the increase in market value of the shares over the issue price. This provides further alignment with shareholder interests and further links remuneration with Company performance. Short-term incentives Target cash payments Participants in the STIP have a target cash payment set every year as a percentage of their total fixed annual remuneration. In 2020, this target was 51% of total fixed annual remuneration for Tim Looi, as Managing Director and CEO (2019: 60%), and 26% for each other Executive KMP (2019: 28%). KPIs In 2019, up to 50% of Executive KMP STI payments were conditional on the achievement of financial KPIs based on the NPATA achieved by the Group, with achievement of that NPATA target also acting as a gateway for further STI payments based on the achievement of other non-financial KPIs. After the potential impacts of COVID-19 on the Company’s business became apparent during the first half of 2020, the Board approved a modified STI arrangement for 2020 under which: • • the maximum short-term incentive opportunity for Executive KMP was reduced to 75% of the maximum opportunity originally proposed; the original 2020 KPIs were replaced with new KPIs focused on delivery of organisational change, cost management, risk management and capability improvement initiatives, including several initiatives put in place specifically to address the effects of COVID-19; and • payment of all short-term incentives were made subject to the Board being satisfied that the Company’s overall financial performance was satisfactory in the context of the COVID-19 pandemic and subject to risk management and internal audit remedial actions being closed out on a timely basis. The Board considered that these changes were appropriate having regard to the need to deliver in the balance of 2020 a series of initiatives to address the effects of COVID-19 and to ensure the longer-term sustainability of Smartgroup’s business performance and shareholder value creation. Details of the specific KPIs approved by the Board for 2020, and the extent to which they were achieved, are set out in Table 3 on page 56. Board discretion All payments under the STIP are subject to Board discretion. In 2020, the Board determined that all payments would be conditional on the Board being satisfied that the Company’s overall financial performance was satisfactory in the context of the COVID-19 pandemic. STI payments to individual Executive KMP are also subject to a specific discretion to reduce or withhold payment where risk management and internal audit remedial actions are not closed out on a timely basis. Remuneration report 55 EPS performance hurdle The EPS performance hurdle applies to 75% of the total number of shares issued to each Executive KMP under the 2020 LTIP grant. The EPS performance hurdle is based on achievement of a compound annual growth rate (CAGR) in the Company’s NPATA per share from the 2019 NPATA per share of $0.615 (calculated on the basis of reported 2019 NPATA of $81.0 million and 131.7 million shares on issue) to the NPATA per share for the financial year ending on 31 December 2022, as set out in the table below. Table 1: EPS performance hurdle EPS performance hurdle – applies to a maximum of 75% of the total number of shares issued under the 2020 LTIP grant Measure EPS CAGR Vesting period EPS CAGR EPS target Shares subject to vesting The period of three years ending 31 December 2022* Below 5.0% 5.0% Between 5.0% and 10.0% $0.712 10.0% or greater $0.819 Nil 50% Straight line between 50% and 100% 100% (capped) * Or such other date on which the Board makes a determination as to whether the vesting condition has been met. While COVID-19 has had a significant impact on 2020 earnings, the Board considers that the 2020 EPS performance hurdle is a challenging but achievable target. TSR performance hurdle The TSR performance hurdle applies to 25% of the total number of shares issued to each Executive KMP under the 2020 LTIP grant. TSR measures the growth in the price of the shares plus cash distributions notionally reinvested in shares. Each of the companies in the S&P/ASX 200 Index is ranked from highest to lowest based on their TSR over the performance measurement period, being the three-year period starting on 1 January 2020 and ending on 31 December 2022. For the purpose of calculating the TSR measurement, the relevant share prices are determined by reference to the VWAP over the 20 trading days up to and including 1 January 2020 (the performance measurement period start date) and the 20 trading days up to and including 31 December 2022 (the performance measurement period end date). The TSR hurdle is based on the TSR performance of the Company over the performance measurement period compared to the TSR of other companies in the S&P/ASX 200 Index, as set out in the table below. Table 2: Relative TSR performance hurdle TSR performance hurdle – applies to a maximum of 25% of the total number of shares issued under the 2020 LTIP grant Measure Vesting period Smartgroup TSR performance compared to Index Shares subject to vesting Relative TSR (ranking) The period of three years ending 31 December 2022* 0 to 49th percentile 50th percentile 51st to 74th percentile 75th to 100th percentile Nil 50% Straight line between 50% and 100% 100% * Or such other date on which the Board makes a determination as to whether the vesting condition has been met. The Board believes it is appropriate to have a proportion of the shares awarded under the LTIP to be subject to a TSR performance hurdle to provide a market-based hurdle. Fair value The fair value used for grant allocation purposes was calculated using the black scholes model. Smartgroup2020Annual ReportAccountability Care TeamRemuneration report 56 2020 Executive KMP remuneration outcomes STI – achievement of KPIs and financial outcomes The table below shows the KPIs approved by the Board under the STIP for 2020 for Executive KMP and the Board’s assessment of the extent to which those KPIs were achieved. In addition to this assessment, the Board determined that risk management and internal audit remedial actions were closed out on a timely basis and that the Company’s overall financial performance was satisfactory in the context of the COVID-19 pandemic. Table 3: 2020 KPIs and achievement KPI Relevant Executive How it is measured Actual achievement 1. Manage growth and profitability CEO, CFO, COO, CIO, CLO Delivery of cost savings, operational improvements and contribution of new revenue sources 2. Engage workforce All Team engagement, remote working/back to office transition and operational restructure delivery 3. Improve core operations CFO, COO, CLO, CIO Platform consolidated and renegotiation of all key supplier agreements 4. Customer and digital CFO, COO, CIO 5. Manage risk and engage with regulatory reform All Transition to new salary packaging card product platform, data analytics and unit economics development and improvement in system scalability Delivery of Internal Audit plan and actions, engagement with regulatory bodies and project delivery 63% 61% 63% 67% 79% Under the STIP for the year ended 31 December 2020, a total of $178,664 will be paid to the Managing Director and CEO, and a total of $169,648 to other Executive KMP. The table below shows the actual STIP outcome for each Executive KMP for the year ended 31 December 2020 in absolute terms and as a percentage of their revised maximum STIP opportunity, under the modified STI arrangement approved by the Board. Table 4: 2020 STIP outcomes Name of executive Timothy Looi Tony Forward Sarah Haas Sophie MacIntosh STI amount $178,664 $46,148 $71,750 $51,750 Percentage of revised target STI 51% 51% 72% 52% Neither of the executives who ceased to be members of the KMP during the year received any STI payment. LTI – vesting of shares subject of 2018 grant under the LTIP Shares issued under the 2018 LTIP grant had a vesting period ending on 31 December 2020. The vesting of these shares was subject to the achievement of an EPS hurdle and a TSR hurdle. Shares subject to EPS hurdle The EPS hurdle applied to 75% of the shares issued under the 2018 LTIP grant. It was based on the CAGR in the Company’s NPATA per share from the pro-forma 2017 NPATA per share of $0.52. As at 31 December 2020, the NPATA per share was $0.50, which represents a CAGR of -1% from the pro-forma 2017 NPATA per share. This result means that none of the shares issued under the 2018 LTIP grant that are subject to the EPS hurdle have vested. Shares subject to TSR hurdle The TSR hurdle applied to 25% of the LTIP shares issued under the 2018 LTIP grant. The Company’s TSR performance was measured to be in the 0 to 49th percentile of the S&P/ASX 200 Index. This result means that none of the shares issued under the 2018 LTIP grant that are subject to the TSR hurdle have vested. The Company engaged Minter Ellison to provide external verification of the above calculations. Other Executive KMP remuneration outcomes for 2020 A one-off cash bonus of $75,000 was approved to one Executive KMP to reflect additional duties undertaken during the year. As disclosed in the 2019 Annual Report, upon departure of the previous CEO Deven Billimoria, in February 2020, the Company paid a cash termination benefit of $586,261. Following Mr Billimoria’s departure, all unvested LTIP shares held by Mr Billimoria were bought back and cancelled by the Company in accordance with the terms of the LTIP. Remuneration report 57 Link between 2020 Executive KMP remuneration outcomes and 2020 financial performance In considering the Group’s performance, the benefit to shareholders and appropriate remuneration for the executives, the Board, through the HRRC, has regard to financial and non-financial indices, including the indices shown in the below table in respect of the current financial year and the previous four financial years. Table 5: Indices relevant to the Board’s assessment of the Group’s performance and the benefit to shareholders Index NPATA ($m) EPS (cents) Ordinary dividends declared in respect of the financial year – per share (cents) Special dividends declared in respect of the financial year – per share (cents) Share price – year end ($) Three-year TSR performance compared to index1 (percentile) (%) 2016 44.0 36.2 24.8 – 6.28 N/A 2017 64.1 52.0 35.0 – 10.85 100% 2018 77.82 59.42 41.5 – 8.88 87% 2019 81.0 61.5 43.0 20.0 6.94 71% 2020 65.2 50.3 34.5 9.0 6.89 33% 1. The relevant comparator index for 2017 and 2018 was the S&P/ASX Small Ordinaries Index. The relevant comparator index for 2019 and 2020 was the S&P/ASX 200. 2. Adjusted to reflect one-off impact of adoption of AASB 16 Leases from January 2018. As shown above, the Company’s three-year TSR to 31 December 2020 was in the 3rd quartile of all companies in the S&P/ASX 200. The graph below illustrates the relationship between the Group’s performance and STIP awards in respect of the financial year ended 31 December 2020 and the preceding four financial years. Table 6: Relationship between the Group’s performance and STIP outcomes ) 0 0 0 ’ $ ( A T A P N 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 – 900 800 700 600 500 400 300 200 100 – ) 0 0 0 ’ $ ( i d a p P T S I 2016 2017 2018 2019 2020 EPS STIP Paid The graph below illustrates the relationship between the Group’s performance and LTIP awards in respect of the financial year ended 31 December 2020 and the preceding four financial years. As explained above, the LTIP has two hurdles, the most significant being the growth in NPATA per share. For the year ended 31 December 2020, the three-year CAGR in NPATA per share was less than 15%, and none of the shares issued under the 2018 LTIP grant vested. For the year ended 31 December 2019, the three-year CAGR in NPATA per share was 14%, and 83% of the shares issued under the 2017 LTIP grant were vested. For each of the three previous financial years, the growth in NPATA per share exceeded the relevant hurdles, and 100% of relevant LTIP shares were vested. Table 7: Relationship between the Group’s performance and LTIP outcomes ) s e r a h s / A T A P N ( S P E 0.70 0.60 0.50 0.40 0.30 0.20 0.10 – ) s ’ 0 0 0 ( s e r a h s d e t s e v P T L I 1,200 1,000 800 600 400 200 – 2016 2017 2018 2019 2020 EPS LTIP vested shares Smartgroup2020Annual ReportAccountability Care TeamRemuneration report 58 Non-Executive Directors’ remuneration Fees and payments to Non-Executive Directors reflect the time committed by and the responsibilities of these Directors. The Board decides the total amount paid to each Non-Executive Director as remuneration for their services as a Director. The total amount of fees paid to all Directors for their services (excluding, for these purposes, the salary of any Executive Director) must not exceed the amount fixed by the Company in general meeting. The aggregate sum includes any special and additional remuneration for special exertions and additional services performed by a Director as determined appropriate by the Board. The limit on the aggregate remuneration for Non-Executive Directors was increased from $1,150,000 to $1,300,000 by a resolution passed at the AGM in May 2019. Any further increase to the aggregate annual sum referred to above would require further approval by shareholders. The fees (exclusive of superannuation) paid to the current Non-Executive Directors are: • $230,000 per annum for the Chairman; and • $100,000 per annum for each Non-Executive Director. In addition to the above: • the Chair of the Audit and Risk Committee is paid $25,000 per annum; • each other member of the Audit and Risk Committee (other than the Chairman of the Board) is paid $12,500 per annum; • the Chair of the Human Resources and Remuneration Committee and the Chair of the IT and Innovation Committee are paid $20,000 per annum; and • each other member of those committees (other than the Chairman of the Board) is paid $10,000 per annum per committee. The Chairman does not receive a separate fee for acting as a member of the Board committees on which he serves. In addition to the fees, superannuation contributions and GST, if applicable, are paid in each case. There are no retirement benefit schemes for Non-Executive Directors other than statutory superannuation contributions. As part of the Company’s cost containment plan implemented in respond to COVID-19, the Chairman accepted a 50% reduction in fees, and all other Non-Executive Directors accepted a 20% reduction in fees for a period of three months from April 2020. The total amount of fees foregone by Non-Executive Directors over this period was $66,083. Detailed remuneration disclosures Statutory remuneration details for 2020 and 2019 Details of the remuneration of the KMP of the Group are set out in the following tables in accordance with the Corporations Act and the Accounting Standards. The KMP are set out on page 52 above. The amounts disclosed as cash salary and fees in the 2020 remuneration table are net of the three-month reductions in Executive KMP fixed remuneration and Non-Executive Director fees referred to above. Remuneration report Short-term benefits Post- employment benefits Long-term benefits Cash salary and fees $ Bonus $ Superannuation $ Annual and long-service leave1 $ LTIP expense (net)2 $ 201,250 126,146 116,562 114,167 114,167 128,250 125,875 687,222 576,261 328,119 359,702 321,702 254,940 – – – – – – – – 178,664 46,148 71,750 51,750 – 19,119 11,984 11,073 10,846 10,846 12,184 11,958 3,508 21,370 19,598 21,370 21,370 16,098 – – – – – – – 8,587 61,611 32,310 35,406 31,662 23,410 – – – – – – – (96,765) 75,291 75,168 45,215 (7,496) – 59 Total $ 220,369 138,130 127,635 125,013 125,013 140,434 137,833 602,552 913,197 501,343 533,443 418,988 294,448 3,454,363 348,312 191,324 192,986 91,413 4,278,398 Table 8: 2020 remuneration Non-Executive Directors Michael Carapiet Gavin Bell Andrew Bolam Carolyn Colley Deborah Homewood John Prendiville Ian Watt Executive Directors Deven Billimoria3 Timothy Looi4 Other Executive KMP Tony Forward5 Sarah Haas Sophie MacIntosh Nigel Underwood6 Total 1. The amounts disclosed in this column represent the accrued leave expense for the period. 2. LTIP expense (net) can be negative where there are forfeitures resulting from termination of employment and/or the reversal of LTIP expense in relation to EPS hurdles that are not met. 3. Deven Billimoria retired as an Executive Director on 28 February 2020. The amounts in this table reflect remuneration paid to Mr Billimoria up until his retirement on 28 February 2020, and includes the cash termination benefit of $586,261 paid as disclosed in the 2019 Annual Report, as well as the payment of $13,261 in accrued employee entitlements. The LTIP expense attributable to Mr. Billimoria in 2020 relates to loan funded shares that did not vest, but for which accelerated LTIP expense was recognised. 4. Timothy Looi became an Executive Director on assuming the role of Managing Director and CEO on 29 February 2020. Mr Looi was a member of the KMP for the period from 1 January 2020 to 28 February 2020 in his previous role as Chief Financial Officer. Therefore, he was a member of the KMP for the full year. The amounts in this table include all remuneration paid to Mr Looi from 1 January 2020 to 31 December 2020 in both roles. 5. Tony Forward was designated as a member of the KMP on 1 February 2020. The amounts in this table comprise all remuneration paid to Mr Forward from 1 February 2020 to 31 December 2020. 6. Nigel Underwood became a member of the KMP on 6 April 2020 and ceased to be a member of the KMP on 4 December 2020. The amounts in this table comprise all remuneration paid to Mr Underwood from 6 April 2020 to 31 December 2020 and includes an end of service payment of $19,476. Smartgroup2020Annual ReportAccountability Care TeamRemuneration report 60 Total $ 251,850 145,088 134,137 96,989 131,400 147,825 145,088 Short-term benefits Post- employment benefits Long-term benefits Cash salary and fees $ Bonus $ Superannuation $ Annual and long-service leave1 $ LTIP expense (net) $ 230,000 132,500 122,500 88,968 120,000 135,000 132,500 579,272 398,808 319,272 364,272 319,254 151,029 – – – – – – – – – 39,000 25,000 – – 21,850 12,588 11,637 8,021 11,400 12,825 12,588 – – – – – – – – – – – – – – 20,746 54,188 879,617 1,533,823 20,746 20,746 18,230 20,746 1,711 37,463 29,855 29,855 29,851 2,453 260,107 97,825 172,132 62,217 – 717,124 506,698 609,489 432,068 155,193 Table 9: 2019 Remuneration Non-Executive Directors Michael Carapiet Gavin Bell Andrew Bolam Carolyn Colley2 Deborah Homewood John Prendiville Ian Watt Executive Director Deven Billimoria3 Other Executive KMP Timothy Looi Sarah Haas Sophie MacIntosh Dave Adler4 Clarence Yap5 Total 3,093,375 64,000 193,834 183,665 1,471,898 5,006,772 1. The amounts disclosed in this column represent the accrued leave expense for the period. 2. Carolyn Colley commenced as a Non-Executive Director on 15 March 2019. 3. As disclosed in the 2019 Remuneration Report, the reported LTIP expense and total remuneration for Deven Billimoria for 2019 was accelerated across a shorter vesting period resulting in an increase of $268,562 in connection with his retirement as Managing Director and CEO. 4. Dave Adler ceased to be a member of KMP on 1 August 2019. The amounts in this table include all remuneration paid to Mr Adler from 1 January 2019 to 31 December 2019. 5. Clarence Yap ceased to be a member of KMP on 31 January 2019. The amounts in this table include all remuneration paid to Mr Yap from 1 January 2019 to 31 December 2019 and include an end of service payment of $124,823. Other transactions with key management personnel $7,463 in cost reimbursements were paid to key management personnel in 2020 (2019: $10,085). Reimbursements to key management personnel 2020 2019 Non-Executive Directors: Michael Carapiet Gavin Bell Andrew Bolam Carolyn Colley Deborah Homewood John Prendiville Ian Watt Executive Directors: Deven Billimoria Timothy Looi Other Key Management Personnel: Tony Forward Sarah Haas Sophie MacIntosh Nigel Underwood Total – – – – – – – – – – – – 1,186 9,647 4,392 400 – – 1,485 7,463 207 70 161 – – 10,085 Additionally, 4,000 shares were held by related parties of Timothy Looi, an executive director (2019: 4,000 shares). There were no other transactions with key management personnel in the period. Remuneration report Proportion of remuneration linked to performance The proportion of remuneration paid to the KMP of the Group that is linked to performance is set out in the table below. Table 10: Proportion of remuneration 61 Non-Executive Directors Michael Carapiet Gavin Bell Andrew Bolam Carolyn Colley Deborah Homewood John Prendiville Ian Watt Executive Directors Deven Billimoria1 Timothy Looi2 Other Executive KMP Tony Forward3 Sarah Haas Sophie MacIntosh Nigel Underwood4 Dave Adler5 Clarence Yap6 Fixed remuneration At risk – STIP At risk – LTIP 2020 2019 2020 2019 2020 2019 100% 100% 100% 100% 100% 100% 100% 116% 72% 76% 79% 90% 85% – – 100% 100% 100% 100% 100% 100% 100% 43% 64% – 73% 68% – 86% 100% – – – – – – – 0% 20% 9% 13% 12% 0% – – – – – – – – – 0% 0% – 8% 4% – 0% 0% – – – – – – – (16%) 8% 15% 8% (2%) 15% – – – – – – – – – 57% 36% – 19% 28% – 14% 0% 1. Deven Billimoria retired as an Executive Director on 28 February 2020. Figures for 2019 include $268,562 accelerated LTIP expense, as disclosed in the 2019 remuneration report. 2. Timothy Looi became an Executive Director on assuming the role of Managing Director and CEO on 29 February 2020. Mr Looi was a member of the KMP for the period from 1 January 2020 to 28 February 2020 in his previous role as Chief Financial Officer. He was therefore a member of the KMP for the full year. The amounts in the 2020 column of this table include all remuneration paid to Mr Looi from 1 January 2020 to 31 December 2020 in both roles. 3. Tony Forward was designated as a member of the KMP with effect from 1 February 2020. The amounts in this table comprise all remuneration paid to Mr Forward from 1 February 2020 to 31 December 2020. 4. Nigel Underwood became a member of the KMP on 6 April 2020 and ceased to be a member of the KMP on 4 December 2020. The amounts in this table comprise all remuneration paid to Mr Underwood from 6 April 2020 to 31 December 2020. 5. Dave Adler ceased to be a member of the KMP on 1 August 2019. 6. Clarence Yap ceased to be a member of the KMP on 31 January 2019. Smartgroup2020Annual ReportAccountability Care TeamRemuneration report 62 Service agreements Non-Executive Directors Non-Executive Directors do not have fixed-term contracts with the Company. On appointment to the Board, all Non-Executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation. Executive Directors Remuneration and other terms of employment for Executive Directors are formalised in service agreements. Details of these service agreements in place during the financial year are as follows: Name: Role title: Timothy Looi Managing Director & Chief Executive Officer Commencement date: 29 February 2020 Term of agreement: No fixed term. Mr Looi’s employment will continue until terminated by either party in accordance with the agreement. Remuneration: During his employment Mr Looi is entitled to: • receive fixed annual remuneration of $680,000 inclusive of superannuation contributions; and • participate in the STIP with target participation under the STIP capped at a maximum of $350,000 inclusive of superannuation and payments under the STIP in any given year dependent on the achievement of a range of financial and non-financial KPIs as approved by the Board on an annual basis. Mr Looi is also eligible to participate in the LTIP. The issue of shares under the LTIP and the terms on which they are issued is at the discretion of the Board. The employment contract may be terminated by either party giving 12 months’ written notice or, in the case of termination by the Group, by payment in lieu of notice. The Group may terminate the employment contract immediately and without payment for notice or payment in lieu of notice in the event of serious misconduct or other specified circumstances. There is no contractual entitlement to termination payments in the event of termination. Termination: Post-employment restrictions: Mr Looi has agreed to certain post-employment restrictions that apply for up to 12 months from the date of termination of employment. The enforceability of these restrictions is subject to all usual legal requirements. Name: Role title: Deven Billimoria Managing Director & Chief Executive Officer Commencement date: 1 June 2014 Termination date: 28 February 2020 Remuneration: At the time when his employment ceased, Mr Billimoria was entitled to: • receive fixed annual remuneration of $605,000 inclusive of superannuation contributions; and • participate in the STIP with target participation under the STIP capped at a maximum of 60% of fixed annual remuneration and payments under the STIP in any given year dependent on the achievement of a range of financial and non-financial KPIs as approved by the Board on an annual basis. Mr Billimoria was also eligible to participate in the LTIP. Post-employment restrictions: Certain post-employment restrictions apply for up to 12 months from the date of termination of employment. The enforceability of these restrictions is subject to all usual legal requirements. Other Executive KMP Other Executive KMP have employment agreements setting out the terms and conditions of their employment. The agreements are not of a fixed duration. These agreements provide for: total compensation inclusive of a base salary and superannuation contribution; • • eligibility to participate in the STIP, with target participation in the STIP capped at a maximum of 30% of total fixed annual remuneration; • termination by either party giving three months’ written notice or, in the case of termination by the Group, payment in lieu of notice; • • no entitlement to termination payments in the event of termination; and • certain post-employment restrictions that apply for up to six months from the date of termination of employment, and the immediate termination by the Group without payment in lieu of notice in the event of serious misconduct or other specific circumstances; enforceability of these restrictions is subject to all usual legal requirements. Remuneration report 63 Share-based compensation Bonus shares and cash offers No bonus shares were issued or cash offers made to Directors or other members of the KMP as part of compensation during the year ended 31 December 2020. LTIP As described above, the Company has established an LTIP for the Managing Director and CEO, other Executive KMP and other senior management. The LTIP is in the form of a loan funded share plan. The securities issued under the LTIP are ordinary shares that are held subject to escrow until vesting. The terms of the LTIP are therefore, such that the benefits to participants are similar to the benefits that would be received had the participant been granted options – that is, the participant benefits from the increase in the market price over the issue price of the share. Accordingly, for the purposes of compliance with the Corporations Act in relation to the disclosure of details of options, the Company provides a summary below of the terms of the shares issued under the LTIP during the year ended 31 December 2020, with the terms of the shares issued under the LTIP for 2019 reflected in the 2019 Annual Report. The terms and conditions of each LTIP grant affecting remuneration in the current or a future reporting period are disclosed in Table 11 and Table 12 below. Table 11: Terms and conditions of the shares granted under the LTIP in 2020 Grant date 3 March 2020 10 June 2020 Performance period Three years to 31 December 2022 Three years to 31 December 2022 Earliest exercise date Expiry date Exercise price Number of shares issued Fair value price at grant date Total fair value at grant date 1 January 2023 2 March 2025 1 January 2023 11 June 2025 $6.67 1,245,905 $1.25 $1,557,381 $6.20 835,243 $1.40 $1,171,428 Performance achieved To be determined To be determined As noted above, shares issued under the LTIP are not options. However, for compliance with the Corporations Act, the Company provides a summary below of the vesting of shares issued under the LTIP in 2018 that have a vesting period ending on 31 December 2020. Table 12: LTIP shares with a vesting period ending on 31 December 2020 Number of non- forfeited shares1 Fair value price at grant date Exercise price Performance achieved 79,807 $10.89 $1.96 0% 17,212 $10.84 $1.67 0% Number of shares vested at 31 December 20202 % vested at 31 December 20202 Nil Nil 0% 0% Grant date 28 March 2018 4 May 2018 Performance period Exercise date Expiry date Three years to 31 December 2020 Three years to 31 December 2020 1 January 2021 1 January 2021 27 March 2023 3 May 2023 1. Prior to performance determination by the Board. 2. As determined by the Board on 17 February 2021. Smartgroup2020Annual ReportAccountability Care TeamRemuneration report The following table sets out details of shares granted to Executive KMP under the LTIP in 2020 and the vesting profile of long-term incentives granted to Executive KMP as remuneration. There were no options over ordinary shares issued to Directors and other KMP as part of compensation as at 31 December 2020. Table 13: 2020 LTIP grants and vesting profile of long term incentives granted as remuneration 64 Balance at start of year – unvested Granted as compensation Vested in year Name Timothy Looi Tony Forward Sarah Haas Sophie MacIntosh Deven Billimoria1 Nigel Underwood2 348,892 – 182,056 204,831 697,784 670,392 204,537 223,464 201,118 – – 164,851 Total KMP 1,433,563 1,464,362 1. Deven Billimoria ceased to be a member of the KMP on 28 February 2020. 2. Nigel Underwood ceased to be a member of the KMP on 4 December 2020. Director and Executive KMP shareholdings Balance at end of year – unvested Balance at end of year – vested but unexercised Balance at end of year – vested and unvested 862,216 204,537 336,672 314,326 – – 103,574 – – – – – 965,790 204,537 336,672 314,326 – – Forfeited (157,068) – (68,848) (91,623) (697,784) (164,851) (1,180,174) 1,717,751 103,574 1,821,325 – – – – – – – The number of shares in the Company held during the financial year by each Director and other members of the KMP, including their personally related parties, is set out in the table below. These numbers exclude unvested shares issued under the LTIP and shares issued under the LTIP that are vested but unexercised as at 31 December 2020. Table 14: Director and Executive KMP shareholdings Balance at start of year including vested LTIP Received as part of remuneration Additions Disposals Michael Carapiet Gavin Bell Andrew Bolam Carolyn Colley Deborah Homewood John Prendiville Ian Watt Timothy Looi Tony Forward Sarah Haas Sophie MacIntosh Deven Billimoria1 Nigel Underwood2 Total 2,201,956 77,650 257,760 3,000 6,618 655,000 83,522 574 – – 347 2,300,000 – – – – – – – – – – – 88,376 281,053 – 5,586,427 369,429 179,456 – – 4,000 – 20,000 23,000 72,668 – – 168 10,000 309,292 – – – – – – – – – – (88,376) See note 1 See note 2 Balance at end of year 2,381,412 77,650 257,760 7,000 6,618 675,000 106,522 73,242 – – 515 1. Deven Billimoria ceased to be a member of the KMP on 28 February 2020. As at that date, Mr Billimoria held a balance of 2,581,053 shares (excluding unvested shares issued under the LTIP). Acquisitions or disposals by Mr Billimoria since that date are not recorded by the Company. 2. Nigel Underwood ceased to be a member of the KMP on 4 December 2020. As at that date, Mr Underwood held no shares (excluding unvested shares issued under the LTIP). Acquisitions or disposals by Mr Underwood since that date are not recorded by the Company. This concludes the remuneration report, which has been audited. (88,376) 3,585,719 Remuneration report Other disclosures Shares under option As at 31 December 2020, there were 1,717,751 unvested shares held by employees under the LTIP (being shares issued under the 2019 and 2020 LTIP grants). The LTIP shares are legally held by the employees. However, they cannot deal in the shares until the vesting conditions are satisfied and the loan is fully repaid. These have been treated as options in accordance with AASB 2 Share-based Payment issued by the Australian Accounting Standards Board. Shares issued on the exercise of options There were no ordinary shares of Smartgroup Corporation Ltd issued on the exercise of options during the year ended 31 December 2020 and up to the date of this report. Indemnity and insurance of officers The Company has indemnified the Directors and executives of the Company for costs incurred in their capacity as a Director or executive for which they may be held personally liable except where there is a lack of good faith. During the financial year, the Group paid a premium in respect of a contract to insure the Directors and executives of the Company against a liability to the extent permitted by the Corporations Act. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act for leave to bring proceedings on behalf of the Company or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 39 to the financial statements. The Directors are satisfied that the provision of non-audit services during the financial year by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act. Other disclosures 65 The Directors are of the opinion that the services as disclosed in note 39 to the financial statements do not compromise the external auditor’s independence requirements under the Corporations Act for the following reasons: • All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor. • None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Officers of the Company who are former partners of PricewaterhouseCoopers There are no officers of the Company who are former partners of PricewaterhouseCoopers. Rounding of amounts The Company is of a kind referred to in ASIC Legislative Instrument 2016/191 relating to the ‘rounding off’ of amounts in the Directors’ report. Amounts in the Directors’ report have been rounded off in accordance with the instrument to the nearest thousand dollars or, in certain cases, the nearest dollar. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is set out on the following page. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act. Resolution of Directors This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act. On behalf of the Directors Michael Carapiet Chairman 24 February 2021 Sydney Smartgroup2020Annual ReportAccountability Care Team Auditor’s independence declaration 66 Auditor’s Independence Declaration As lead auditor for the audit of Smartgroup Corporation Ltd for the year ended 31 December 2020, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Smartgroup Corporation Ltd and the entities it controlled during the period. Joe Sheeran Partner PricewaterhouseCoopers Sydney 24 February 2021 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Reconciliation of Statutory Results to Adjusted Results For the year ended 31 December 2020 Reconciliation of Statutory Results to Adjusted Results 67 $ million Revenue Operating EBITDA Joint venture contribution EBITDA Depreciation Amortisation Impairment of joint venture investment Net finance costs PBT Income tax expense NPAT Add back: Amortisation of acquired intangibles (tax-effected) Cash tax benefit NPATA Shares (# millions) NPATA per share (cents) Statutory Financials: CY 2020 Reclassify: Equity share of investments Add back: Acceleration of LTIP expense Add back: Impairment of joint venture investment 216.3 95.0 – 95.0 (3.2) (22.1) (5.1) (3.1) 61.5 (20.2) 41.3 14.8 3.4 59.5 – – 0.3 0.3 – (0.3) – – – – – 0.2 – 0.2 – 0.4 – 0.4 – – – – 0.4 – 0.4 – – 0.4 – – – – – – 5.1 – 5.1 – 5.1 – – 5.1 Adjusted CY 2020 216.3 95.4 0.3 95.7 (3.2) (22.4) – (3.1) 67.0 (20.2) 46.8 15.0 3.4 65.2 132.8 49.1 Smartgroup2020Annual ReportAccountability Care Team Financial Report 68 FINANCIAL STATEMENTS Financial Report Financial Report 2020 Smartgroup Corporation Ltd 31 December 2020 ABN 48 126 266 831 Financial Report 69 70 Consolidated Statement of Profit or Loss and Other Comprehensive Income 71 Consolidated Statement of Financial Position 72 Consolidated Statement of Changes In Equity 73 Consolidated Statement of Cash Flows 74 Notes to the Consolidated Financial Statements For more information on our annual results, please visit smartgroup.com.au Smartgroup2020Annual ReportAccountability Care Team 70 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 31 December 2020 Consolidated Revenue Share of profits from joint venture accounted for using the equity method Note 8 2020 $’000 2019 $’000 216,332 249,835 45 8 Expenses Product costs Employee benefits expense Administration and corporate expenses Occupancy expenses Advertising and marketing expenses Depreciation expense Amortisation of acquired intangible assets Amortisation of contract rights Other expenses Operating profit Impairment of joint venture investment Finance costs Acquisition transaction costs Onerous lease costs Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in fair value of cash flow hedges taken to equity, net of tax Other comprehensive income, net of tax Total comprehensive income Basic earnings per share Diluted earnings per share (5,970) (80,299) (29,009) (1,428) (1,843) (3,173) (8,059) (89,654) (27,865) (1,366) (3,397) (3,521) (21,089) (21,221) (1,024) (2,769) 69,773 (5,118) (3,113) (11) (11) 61,520 (20,195) 41,325 (459) (1,573) 92,728 – (3,019) (561) (438) 88,710 (27,261) 61,449 26 26 (160) (160) 41,351 61,289 Cents 31.9 31.9 Cents 47.7 47.6 9 9 9 9 25 9 9 10 17 17 The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. Financial Report Consolidated Statement of Financial Position As at 31 December 2020 Consolidated ASSETS Current assets Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables Income tax receivable Other current assets Total current assets Non-current assets Investments accounted for using the equity method Deferred tax assets Right-of-use assets Property and equipment Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Customer salary packaging liability Income tax payable Provisions Lease liabilities Other current liabilities Total current liabilities Non-current liabilities Provisions Derivative financial instruments Lease liabilities Borrowings Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Reserves (Accumulated loss) / Retained earnings Equity attributable to the owners of Smartgroup Corporation Ltd Total equity 71 Note 2020 $’000 2019 $’000 11 38 19 10 21 25 10 40 34 7 35 38 10 36 40 23 37 22 40 12 13 14 27,368 48,111 15,881 851 1,869 39,639 65,402 25,649 – 2,621 94,080 133,311 827 12,247 9,143 1,742 290,402 314,361 408,441 29,892 48,111 – 13,989 3,738 5,782 6,400 8,333 11,592 1,369 311,904 339,598 472,909 35,273 65,402 1,474 11,056 3,629 5,733 101,512 122,567 2,596 47 8,678 24,673 35,994 137,506 270,935 1,684 10 11,543 60,392 73,629 196,196 276,713 262,522 259,115 8,776 (363) 270,935 270,935 8,435 9,163 276,713 276,713 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. Smartgroup2020Annual ReportAccountability Care TeamFinancial Statements Consolidated Statement of Changes in Equity For the year ended 31 December 2020 Consolidated Note Balance at 1 January 2019 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs and tax Share-based payments Dividends provided for or paid Balance at 31 December 2019 13 14 16 Consolidated Note Balance at 1 January 2020 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs and tax Share-based payments Dividends provided for or paid Balance at 31 December 2020 13 14 16 2,428 – 5,856 – (160) (160) 2,739 – 8,435 Share capital $’000 256,687 – – – – – 259,115 Share capital $’000 259,115 8,435 – – – 3,407 – – 262,522 – 26 26 – 315 – 8,776 72 Reserves $’000 (Accumulated loss)/ Retained earnings $’000 Total equity $’000 Reserves $’000 (Accumulated loss)/ Retained earnings $’000 29,765 61,449 – 61,449 – – (82,051) 9,163 9,163 41,325 – 292,308 61,449 (160) 61,289 2,428 2,739 (82,051) 276,713 Total equity $’000 276,713 41,325 26 41,325 41,351 – – (50,851) (363) 3,407 315 (50,851) 270,935 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. Financial Report Consolidated Statement of Cash Flows For the year ended 31 December 2020 Consolidated Cash flows from operating activities Receipts from customers Payments to suppliers and employees Transaction costs relating to business acquisitions Interest received from cash held on behalf of customers Interest and transaction costs paid on borrowings Interest paid on lease liabilities Income taxes paid Net cash inflow from operating activities excluding salary packaging receipts and payments Receipts in restricted cash Payments of customer salary packaging liability Net cash inflow from operating activities Cash flows from investing activities Payments for business acquisitions (net of cash acquired) Proceeds from business acquisition escrow claims Payments for property, plant and equipment Dividends received from joint venture Interest received Capitalised contract rights Net cash outflow from investing activities Cash flows from financing activities Repayment of borrowings Dividends paid Proceeds from long term incentive plan Payment of lease liabilities Proceeds from borrowings Net cash outflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Restricted cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the financial year Restricted cash and cash equivalents at the end of the financial year Cash and cash equivalents at the end of the year 73 Note 2020 $’000 2019 $’000 40 34 25 7 12 16 40 254,641 283,031 (151,438) (161,355) (19) 884 (1,972) (1,006) (457) 2,181 (1,576) (986) (26,557) (31,853) 74,533 88,985 2,455,979 2,363,265 (2,473,270) (2,349,537) 57,242 102,713 – – (1,153) 500 423 (611) (841) (73,748) (50,851) 3,392 (2,756) 38,000 (85,963) (29.562) 39,639 65,402 27,368 48,111 75,479 (471) 531 (882) – 301 (4,500) (5,021) – (82,051) 3,869 (2,846) 6,900 (74,128) 23,564 39,186 42,291 39,639 65,402 105,041 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. Smartgroup2020Annual ReportAccountability Care TeamFinancial Statements 74 Note 1. General information Net current liability position The financial statements cover Smartgroup Corporation Ltd (referred to as the ‘Company’ or ‘parent entity’) and its subsidiaries (collectively referred to as the ‘Group’). The financial statements are presented in Australian dollars, which is Smartgroup Corporation Ltd’s functional and presentation currency. Smartgroup Corporation Ltd is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 8, 133 Castlereagh Street Sydney, Australia, 2000 A description of the nature of the Group’s operations and its principal activities is included in the Directors’ Report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 24 February 2021. The Directors have the power to amend and reissue the financial statements. Note 2. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These consolidated financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of financial assets and liabilities (including derivative instruments) at fair value through profit or loss. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 4. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 27. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with the instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. As at 31 December 2020, the Group had net current liabilities of $7,432,000 due to the early repayment of non-current borrowings, specifically $53,748,000 of its term loan facility and $20,000,000 of its revolving loan facility, both of which were due to be repaid in May 2022 but were repaid in December 2020. The debt facilities were repaid early as the Group held a large excess cash balance immediately prior to repayment. The Group has prepared projected cashflows for the twelve months from the date of the Directors’ Declaration, taking into consideration the continued business impacts of the COVID-19 pandemic. These forecasts indicate that the Group is expected to generate sufficient levels of operating cashflows to enable it to pay its debts as and when they fall due. Further, the Group currently has undrawn debt facilities of $20,352,000 that may be drawn for operational liquidity purposes, with these facilities maturing on 1 May 2022. These factors support the Group’s ability to continue as a going concern. Note 3. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out in note 41 and in the respective notes. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are mandatory for the current reporting period with the following standards and amendments applied for the annual reporting period commencing 1 January 2020: Conceptual Framework for Financial Reporting AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework AASB 2018-6 Amendments to Australian Accounting Standards – Definition of a Business AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material AASB 2019-5 Amendments to Australian Accounting Standards – Disclosure of the Effect of New IFRS Standards Not Yet Issued in Australia The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group. New standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for the 31 December 2020 reporting year and have not been early adopted by the Group. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting years and on foreseeable future transactions. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 75 Expected credit loss In preparing the financial statements, the Group re-assessed areas of judgement and identified that the estimates more exposed to uncertainty were those of expected credit loss (ECL) and inputs to assessing the carrying value of assets and liabilities. Using the Group’s own direct experience/knowledge as well as forward looking information, obtained by reviewing external analyst reports and public forecasts, to identify potential impacts from COVID-19, the inputs to these estimates were stress-tested, with the amount of the ECL re-evaluated. Operations provision The Group exercises judgement in measuring and recognising provisions relating to the operations, including potential customer and supplier disputes and claims. Judgement is necessary in assessing the likelihood that a claim will arise, and to quantify the possible range of financial settlement. Because of the inherent uncertainty in this evaluation process, actual losses may be different from the originally estimated provision. Note 5. Restatement of comparatives On 10 October 2019, the Group acquired the novated leasing assets of Lease and Asset Finance (L&A) for a total consideration of $886,000. At 31 December 2019, the acquisition accounting for L&A was provisionally determined and this remained provisionally determined at 30 June 2020. Acquisition accounting is now finalised for L&A, with no changes to the $894,000 in goodwill reported in the 2020 Half Year Report. Details relating to the acquisition accounting are disclosed in note 24. Note 4. Critical accounting judgements, estimates and assumptions The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other factors that management believes to be reasonable under the circumstances, including expectations of future events. The resulting accounting judgements and estimates will seldom equal the eventual actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Coronavirus (COVID-19) impact The Group has formed estimates based on its own direct experience and external reports about household consumption and Gross Domestic Product (GDP) performance in the medium term, from credible sources such as the Australian Bureau of Statistics, the Reserve Bank of Australia and BIS Oxford Economics. Areas of uncertainty include the extent and duration of disruption based on consumer, business, and government actions and incentives, to contain the spread of COVID-19, and mitigate the economic downturn. Furthermore, actual economic conditions may vary from the estimates used. This could result in material differences between the accounting estimates applied and the actual results of the Group for future periods. Goodwill and other indefinite life intangible assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired, in accordance with the accounting policy stated in note 7 and note 41. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Due to the effects of COVID-19, the carrying values of goodwill, intangible assets, property, plant and equipment, right-of-use assets, and working capital for each cash generating unit (CGU) have been reassessed, and no CGU has been impaired as a result of stress-testing a range of reasonably expected outcomes. Further details are disclosed in note 7. The Group has, however, impaired the investment in the joint venture, Health-e Workforce Solutions Pty Ltd, by $5,118,000 after reviewing the asset carrying value. Further details are disclosed in note 25. The Group has also recognised accelerated amortisation relating to the transaction functionality of acquired software no longer in use due to the transition of customers. Further details are disclosed in note 7. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 76 Note 6. Operating segments Identification of reportable operating segments The Group has identified its segments based on the internal reports that are reviewed and used by the Chief Executive Officer and Chief Financial Officer, who are identified as the Chief Operating Decision Makers (CODM), in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM reviews EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. Types of products and services The principal products and services of each of these operating segments are as follows: Outsourced administration (OA) This part of the business provides outsourced salary packaging services, novated leasing, share plan administration and outsourced payroll services. Vehicle services (VS) This part of the business provides end-to-end fleet management services. Software, distribution and group services (SDGS) This part of the business provides salary packaging software solutions, the marketing of salary packaging debit cards, distribution of vehicle insurances and workforce management software to the healthcare industry. Intersegment transactions Intersegment transactions were made at market rates. Intersegment transactions are eliminated on consolidation. Intersegment receivables, payables and loans Intersegment loans are initially recognised at the consideration received. Intersegment loans receivable and loans payable that earn or incur non-market interest are not adjusted to fair value based on market interest rates. Intersegment loans are eliminated on consolidation. Operating segment information Consolidated - 2020 Revenue Products, services and commissions Management and administrative fees Performance fees and rebates Inter-segment sales Total revenue Segment results (EBITDA) Depreciation Amortisation Impairment of joint venture investment Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Assets Total segment assets Total assets Liabilities Total segment liabilities Total liabilities OA $’000 116,561 61,280 17,064 228 VS $’000 – 6,821 3,403 3,912 195,133 14,136 97,563 8,669 Intersegment eliminations / Corporate $’000 – – – (30,394) (30,394) (23,829) SDGS $’000 8,211 2,116 876 26,254 37,457 12,634 116,485 11,637 34,865 245,454 75,774 6,247 25,171 30,314 Total $’000 124,772 70,217 21,343 – 216,332 95,037 (3,173) (22,113) (5,118) (3,113) 61,520 (20,195) 41,325 408,441 408,441 137,506 137,506 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Note 6. Operating segments (continued) Operating segment information (continued) Consolidated - 2019 Revenue Products, services and commissions Management and administrative fees Performance fees and rebates Inter-segment sales Total revenue Segment results (EBITDA) Depreciation Amortisation Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Assets Total segment assets Total assets Liabilities Total segment liabilities Total liabilities OA $’000 VS $’000 SDGS $’000 Intersegment eliminations / Corporate $’000 134,335 67,658 17,674 208 219,875 102,815 – 6,936 3,789 3,600 14,325 8,709 17,217 671 1,555 22,466 41,909 21,162 – – – (26,274) (26,274) (15,756) 163,434 163,434 95,175 95,175 19,498 19,498 11,873 11,873 39,821 39,821 16,781 16,781 250,156 250,156 72,367 72,367 77 Total $’000 151,552 75,265 23,018 – 249,835 116,930 (3,521) (21,680) (3,019) 88,710 (27,261) 61,449 472,909 472,909 196,196 196,196 Accounting policy for operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the CODM. The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 78 2019 $’000 274,395 274,395 65,109 (50,081) 15,028 77,915 (60,836) 17,079 4,557 (459) 4,098 1,304 1,304 2020 $’000 274,395 274,395 65,109 (58,725) 6,384 77,915 (73,281) 4,634 5,168 (1,483) 3,685 1,304 1,304 290,402 311,904 Note 7. Non-current assets — intangible assets Consolidated Goodwill - at cost Goodwill Customer contracts and relationships - at cost Less: Accumulated amortisation Customer contracts and relationships Software and website - at cost Less: Accumulated amortisation Software and websites Contract rights - at cost Less: Accumulated amortisation Contract rights Brand names and logos - at cost Brand names and logos Intangible assets Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Customer contracts and relationships $’000 Goodwill $’000 Software and website $’000 Contract rights $’000 Brand names and logos $’000 Total $’000 Balance at 1 January 2019 266,588 23,110 27,303 Additions Additions through business combinations (note 24) Amortisation expense Balance at 31 December 2019 Additions Amortisation expense Accelerated amortisation1 – 7,807 – 274,395 – – – Balance at 31 December 2020 274,395 – 680 (8,762) 15,028 – – 2,235 (12,459) 17,079 – – 4,557 – (459) 4,098 611 (8,644) (11,221) (1,024) – 6,384 (1,224) 4,634 – 3,685 1,304 318,305 – – – 1,304 – – – 4,557 10,722 (21,680) 311,904 611 (20,889) (1,224) 1,304 290,402 1 The accelerated amortisation in 2020 relates to the transactional functionality of certain acquired software no longer in use after the transition of customers to other systems. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 79 Note 7. Non-current assets — intangible assets (continued) Impairment testing The Group monitors its business through cash-generating units (CGU), being Outsourced Administration (OA), Vehicle Services (VS), Software Distribution and Group Services (SDGS), Autopia, and Public Benevolent Institutions (PBI). The CGUs identified are consistent with the previous financial year, but for OA, which now includes Selectus, following the completion of customer transitions to other CGUs and the redeployment of Group resources. Goodwill acquired through business combinations has been allocated to the following CGUs: Goodwill CGU 1: Outsourced Administration CGU 2: Vehicle Services CGU 3: SDGS CGU 4: Autopia CGU 5: PBI CGU 6: Selectus Goodwill Brand names and logos have been allocated to the following CGUs: Brand names and logos CGU 1: Outsourced Administration CGU 2: Vehicle Services CGU 3: SDGS Brand names and logos 2020 $’000 2019 $’000 149,029 122,482 8,564 5,574 31,318 79,910 – 8,564 5,574 31,318 79,910 26,547 274,395 274,395 2020 $’000 1,285 15 4 2019 $’000 1,285 15 4 1,304 1,304 The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five year period. Cash flows beyond the five year period are extrapolated using the estimated growth rates stated below. These growth rates do not exceed the long-term average growth rates for the industry in which each CGU operates. In addition to testing the carrying amount of goodwill and intangible assets with an indefinite useful life against the recoverable amount of a CGU. Property, plant and equipment, right-of-use assets, and working capital are also included in the carrying value tested. The following key assumptions were used in the discounted cash flow model for different CGUs: A projected terminal growth rate of 1.4% (2019: 1.4%) has been used for all CGUs. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements Note 7. Non-current assets — intangible assets (continued) Pre-tax discount rates CGU 1: Outsourced Administration CGU 2: Vehicle Services CGU 3: SDGS CGU 4: Autopia CGU 5: PBI CGU 6: Selectus 80 2020 17.5% 20.0% 20.4% 23.9% 18.3% – 2019 16.0% 15.7% 15.5% 21.8% 16.1% 13.6% In performing the value-in-use calculations for each CGU, the Group has applied post-tax discount rates to discount the estimated future post-tax cash flows. The equivalent pre-tax discount rates are disclosed above. The recoverable amount of net assets in each CGU is greater than the carrying value of the assets and, therefore, the intangible assets are not considered to be impaired. Increases in the pre-tax discount rates calculated from 2019 to 2020 are largely the result of the debt repayments that occurred in December 2020. While the same terminal growth rates as the prior year have been used, due to the volatility and economic disruption arising from the COVID-19 pandemic and ongoing uncertainty regarding the impact of the winding down of various government assistance measures, an additional COVID-19 risk premium has been applied to pre-tax discount rates. Sensitivity analysis Several revenue and earnings scenarios have been modelled in order to estimate the recoverable amount of intangible assets. Transactional revenue streams primarily relating to novated leasing have been most impacted by COVID-19 and are likely to be most impacted by any prolonged economic disruption. The scenarios modelled vary in terms of the duration of the economic downturn and strength of the subsequent economic recovery, taking into account economic forecasts from a broad range of sources. For non- transactional revenue streams, and due to the nature of the Group’s customer base, the Group has assumed that revenue growth will be in line with GDP growth estimates as at 31 December 2020, adjusted for known and expected contract re-pricing. Each scenario has been probability-weighted, in order to determine a best-estimate recoverable amount of intangible assets. Under all reasonably expected scenarios, there is sufficient headroom for all CGUs, such that the carrying amount does not exceed its forecast recoverable amount. Under the probability-weighted revenue and earnings scenario, no reasonably expected change in assumptions would cause the CGUs’ carrying amounts to exceed their forecast recoverable amounts, assuming there are no significant changes to salary packaging tax concessions or the group’s ability to sell add-on insurance products. Should the relevant legislation change, depending on the nature of the changes, there may be a different impairment testing conclusion for CGUs 1, 3, 4 and 5. Smartgroup has identified CGU1 as the CGU most at risk to changes in pre-tax discount rates and transactional volumes. Applying a pre-tax discount rate in excess of 37.5% would result in an impairment to CGU1. Reasonably expected transactional volume reductions for this CGU, such as a novated leasing volume reduction of 14%, would not result in an impairment. For CGUs 2 to 5, applying pre-tax discount rates in excess of 30.0% would result in an impairment however revenue for these CGUs is generally less volatile. Reasonably expected revenue reductions for these CGUs would not result in an impairment. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 81 Note 7. Non-current assets — intangible assets (continued) Accounting policy for intangible assets Contract rights Contract rights consist of exclusive rights to distribute services to certain customers in accordance with AASB 138 Intangible Assets, as well as capitalised incremental costs and fulfilment costs arising from contractual obligations over a period greater than one year which are recoverable and generate revenue in accordance with AASB 15 Revenue. Amortisation is on a straight-line basis over the period of their expected benefit, the life of the contract, and being up to 5 years. Accounting policy for impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in the Consolidated Statement of Profit or Loss and Other Comprehensive Income in the year in which the expenditure is incurred. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Customer contracts and relationships Customer contracts and relationships acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being 5 to 6 years. Software and website Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the Group is able to use or sell the asset; and when the Group has sufficient resources and intent to complete the internal development and the related costs can be measured reliably. The software costs are amortised on a straight-line basis over the period of their expected benefit, being between 2 and 5 years. Brand names and logos Brand names and logos acquired in a business combination are recognised separately to goodwill and included in other intangible assets. They have been assessed as having an indefinite useful life on the basis that the asset is allocated to businesses that are expected to continue into perpetuity. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements Note 8. Revenue Consolidated Products, services and commissions Management and administration fees Performance fees and rebates Revenue 82 2020 $’000 2019 $’000 124,772 151,552 70,217 21,343 75,265 23,018 216,332 249,835 Accounting policy for revenue recognition The Group recognises revenue when it transfers control over a product or a service to a customer. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. Nature of goods and services The following is a description of the principal activities, separated by reportable segments, from which the Group generates its revenue. For more detailed information about reportable segments, see note 6. Management and administration fees The Group generates revenue from arranging and administering outsourced salary packaging and fleet management services on behalf of employers. Administration fees for salary packaging are paid by the employers through amounts deducted from their employees’ pre-tax salary. Revenue is recognised over the period of administration and includes interest earned from cash held on behalf of customers. Fleet management fees are paid by employers in respect of fleet management services and revenue is recognised over the period of administration. Share plan and payroll administration revenue is recognised over the period of administration. Revenue on customer contributions is recognised when contributions occur. Revenue from the licensing of in-house salary packaging software is recognised monthly based on a monthly fee per user. Products, services and commissions The Group earns upfront commissions and rebates from suppliers relating to financing and sourcing of vehicles, sale of certain insurance products and fees for the sale of certain auxiliary products. Revenue is recognised upon delivery of the service or product to the customer. Performance fees and rebates The Group generates revenue from arranging and providing salary packaging products and services. The Group earns fees and rebates from various suppliers relating to maintenance of a vehicle finance book, the arrangement of certain insurance products, and fees for the arrangement or provision of ancillary vehicle consumables. The Group also acts as a distributor of salary packaging debit cards for a major financial institution. Revenue is recognised in the period the services are rendered. Contract balances Contract assets primarily relate to the Group’s rights to consideration for products and services provided and not billed at the reporting date. Incremental costs and directly attributable costs to fulfil a contract over one year that are recoverable and generate resources are capitalised, in accordance with AASB 15 Revenue, and included within contract rights in note 7. Contract liabilities primarily relate to consideration received in advance from customer contracts for which revenue is recognised on satisfaction of outstanding performance obligations. Receivable and contract asset balances at the reporting date are disclosed in note 19 as trade receivables and accrued revenue, respectively, and contract liability balances are disclosed in note 23 as income received in advance. Significant changes in contract assets and liabilities during the period result from satisfaction of performance obligations. Transaction price allocated to the remaining performance obligations The Group applies the practical expedients available in AASB 15 Revenue and does not disclose information about its remaining performance obligations, the amount of the transaction price allocated to the remaining performance obligations, or an explanation of when the Group expects to recognise that amount as revenue. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Note 9. Expenses Consolidated Depreciation Office equipment Computer equipment Furniture, fixtures and fittings Other assets Leasehold improvements Right-of-use assets Total depreciation Amortisation Customer contracts and relationships Software and website Accelerated software and website amortisation Total amortisation of acquired intangible assets Amortisation Contract rights Total amortisation of contract rights Total depreciation and amortisation Finance costs Interest and finance charges paid/payable Interest on lease liabilities Finance income Total finance costs Occupancy costs Superannuation expense Defined contribution superannuation expense Share-based payments expense Share-based payments expense Onerous lease costs Accelerated depreciation Right-of-use asset write-down Other lease termination costs Total onerous lease costs 83 2020 $’000 2019 $’000 188 325 66 5 140 2,449 3,173 8,644 11,221 1,224 21,089 1,024 1,024 25,286 2,530 1,006 (423) 3,113 1,428 199 318 102 6 426 2,470 3,521 8,762 12,459 – 21,221 459 459 25,201 2,334 986 (301) 3,019 1,366 5,702 6,362 466 1,596 – – 11 11 361 10 67 438 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 84 2020 $’000 24,255 (4,060) 20,195 2019 $’000 28,527 (1,266) 27,261 (4,060) (1,266) 2020 $’000 61,520 18,456 1,535 124 17 140 (19) (17) 2019 $’000 88,710 26,613 – – 133 479 (4) – 20,236 27,221 (53) 12 26 14 20,195 27,261 Note 2020 $’000 2019 $’000 (146) (947) Note 10. Income tax Income tax expense Consolidated Current tax Deferred tax - origination and reversal of temporary differences Aggregate income tax expense Deferred tax included in income tax expense comprises: Increase in deferred tax assets Numerical reconciliation of income tax expense and tax at the statutory rate Consolidated Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Impairment of joint venture investment Intangible assets Non-deductible expenses Share-based payments Share of profits — joint venture Sundry items Prior year tax claims not recognised now recouped Prior year temporary differences not recognised now recognised Income tax expense Amounts recognised directly in equity Consolidated Amounts charged/(credited) directly to equity: Deferred tax assets Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 85 2020 $’000 2019 $’000 74 2,505 6,838 162 1,677 2,050 981 30 2,412 4,167 (401) 1,396 2,704 1,093 (1,394) (3,125) (190) (717) 14 6 12,006 (2) 243 241 (131) (180) 3 (22) 7,946 9 378 387 12,247 8,333 2020 $’000 8,333 4,060 (146) – 12,247 2020 $’000 851 2019 $’000 8,051 1,266 (947) (37) 8,333 2019 $’000 1,474 Note Note 10. Income tax (continued) Deferred tax assets Consolidated Deferred tax assets comprises of temporary differences attributable to: Impairment of receivables Employee benefits Accruals and other provisions Property and equipment Revenue received in advance Acquisition and issuance costs Leased property and equipment Intangible assets Prepayments Accrued revenue Derivative financial instruments Sundry items Total temporary differences Amounts recognised in equity: Derivative financial instruments Share issue transaction costs Total recognised in equity Net deferred tax assets Movements: Consolidated Opening balance Credited to profit or loss Credited/(charged) to equity Additions through business combinations Closing balance Income tax payable Consolidated Income tax payable Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 86 Note 10. Income tax (continued) Accounting policy for income tax Current and deferred tax for the year Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Tax consolidation group Smartgroup Corporation Ltd (the head entity) and its wholly owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime, from 6 June 2012. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. The income tax expense for the year is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted for changes in deferred tax assets and liabilities arising from temporary differences, unused tax losses and adjustments recognised in relation to prior periods, where applicable. Current tax liabilities are measured at the amount expected to be recovered from or paid to taxation authorities at the tax rates and tax laws enacted or substantively enacted at the reporting date. Deferred tax Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • when the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • when the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets is reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 87 Note 11. Current assets — cash and cash equivalents Consolidated Cash at bank and in hand Term deposits Cash and cash equivalents 2020 $’000 27,368 – 27,368 2019 $’000 39,623 16 39,639 Accounting policy for cash and cash equivalents Cash and cash equivalents includes cash on hand, term deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Note 12. Non-current liabilities — borrowings Consolidated Bank loan Borrowing costs and interest at amortised cost Borrowings Refer to note 18 for further information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Consolidated Bank loan As at 31 December 2019, the following facilities were available to the Group: • A three year facility of $99,000,000; • A three year letter of credit facility of $4,000,000; and • Ancillary facilities: credit card and electronic pay away facility of $12,500,000 2020 $’000 24,900 (227) 24,673 2019 $’000 60,648 (256) 60,392 2020 $’000 2019 $’000 24,900 60,648 On 27 March 2020, $38,000,000 of the three year facility was drawn down, with the banking facilities refinanced on 1 May 2020. A loss on revaluation of financial liabilities of $1,283,000 was recognised in the first half of the year. On 23 December 2020, $73,748,000 of the three year facility was repaid early, and a gain on revaluation of financial liabilities of $1,157,000 was recognised. As a result of the debt repayment on 23 December 2020, the following facilities are now available to the Group as part of an arrangement maturing on 1 May 2022: • A three year facility of $45,252,000; • A three year letter of credit facility of $4,000,000; and • Ancillary facilities: credit card and electronic pay away facility of $12,500,000 The banking facilities are guaranteed and secured by the Company and certain of the Company’s subsidiaries. The facilities are subject to a variable interest rate, which is based on the BBSY plus a margin. The Group is subject to certain financing covenants and meeting these is given priority in all capital risk management decisions. These covenants include leverage and interest cover ratios with reference to recurring earnings before interest, tax, depreciation and amortisation, and with distribution restrictions on dividends. There have been no events of default on the financing arrangement during the year. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements Note 12. Non-current liabilities — borrowings (continued) Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Consolidated Total facilities Bank loan Letter of credit facility Used at the reporting date Bank loan Letter of credit facility Unused at the reporting date Bank loan Letter of credit facility 88 2020 $’000 2019 $’000 45,252 4,000 49,252 24,900 3,572 28,472 20,352 428 20,780 99,000 4,000 103,000 60,648 3,572 64,220 38,352 428 38,780 Accounting policy for borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the years of the facility to which it relates. Accounting for finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred, including interest on short-term and long-term borrowings. Accounting for finance income Interest income on corporate accounts is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Note 13. Equity — issued capital Ordinary Shares — fully paid 2020 Shares 2019 Shares 132,820,695 131,651,028 Less: Shares associated with the loan funded share plan (LFSP) (3,303,160) (2,682,932) Issued Capital 129,517,535 128,968,096 2020 $’000 283,516 (20,994) 262,522 Movements in ordinary share capital Details Opening balance Shares issued for LFSP Buy-back of forfeited LFSP shares Deferred tax directly recognised in equity Balance Shares issued for LFSP Buy-back of forfeited LFSP shares Deferred tax directly recognised in equity Balance Movements in loan funded share plan Details Opening balance LFSP shares exercised Shares issued for LFSP Buy-back of forfeited LFSP shares Balance LFSP shares exercised Shares issued for LFSP Buy-back of forfeited LFSP shares 89 2019 $’000 277,799 (18,684) 259,115 Total $’000 Date Shares 1 January 2019 130,891,931 272,114 20 March 2019 13 May 2019 4 February 2019 2 September 2019 830,191 383,648 (210,952) (243,790) 7,023 3,146 (2,004) (2,182) (298) 31 December 2019 131,651,028 277,799 6 March 2020 1,245,905 15 June 2020 27 February 2020 19 March 2020 10 July 2020 835,243 (154,082) (697,784) (59,615) 8,308 5,179 (853) (6,277) (505) (135) 31 December 2020 132,820,695 283,516 Date Shares Total $’000 1 January 2019 (2,513,465) (15,427) 8 February 2019 20 March 2019 13 May 2019 4 February 2019 2 September 2019 589,630 (830,191) (383,648) 210,952 243,790 2,726 (7,023) (3,146) 2,004 2,182 31 December 2019 (2,682,932) (18,684) 11 February 2020 549,439 6 March 2020 (1,245,905) 15 June 2020 (835,243) 27 February 2020 19 March 2020 10 July 2020 154,082 697,784 59,615 3,542 (8,308) (5,179) 853 6,277 505 Balance 31 December 2020 (3,303,160) (20,994) Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 90 Note 13. Equity — issued capital (continued) Ordinary shares LFSP shares forfeited Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands, every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Loan funded share plan (LFSP) On 6 March 2020, loan funded shares were granted to the management team under the LFSP based on the closing share price on 2 March 2020 (ex-dividend), and at the Annual General Meeting on 15 June 2020, the 2020 LFSP grant to the CEO and CFO was approved, with shares being granted based on the closing share price on 10 June 2020. The shares vest on 31 December 2022. The shares granted as part of the LFSP are eligible for dividends and are held by the participant until they vest or are forfeited. Should the Company pay dividends or make capital distributions in the future, any dividends paid or distributions made to the participant will be applied to repay the loan and to meet the tax liability on those dividends or distributions. The vesting of the shares is subject to two performance hurdles, being an earnings growth hurdle and a total shareholder return hurdle, and a continuous employment condition. The shares can only be exercised once the participant has repaid the loan. Shares issued under the LFSP are accounted for as options. As a consequence of this classification, the unvested shares issued under the LFSP have been treated as contingently issuable, as the vesting conditions have not been satisfied at the balance date. Therefore, the shares issued under the LFSP are excluded from basic earnings per share and included in diluted earnings per share. For the year ended 31 December 2020, the Group recorded $7,635,000 for the buy-back shares issued under the LFSP because the vesting conditions on those shares had not been met and the shares were forfeited. 911,481 shares were bought back and cancelled, resulting in a reduction of ordinary shares on issue. Share buy-back There is no current on-market share buy-back of the Company’s shares. Capital risk management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. The Group’s debt and capital includes ordinary share capital and financial liabilities, supported by financial assets. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings excluding prepaid borrowing costs less cash and cash equivalents, and excludes restricted cash and cash equivalents. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company’s share price at the time of the investment or to reduce debt. The capital risk management policy remains unchanged from the 31 December 2019 Annual Report. Accounting policy for issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 91 2020 $’000 5 8,686 85 8,776 2019 $’000 (21) 8,456 – 8,435 Note 14. Equity — reserves Cash flow hedge reserve Share-based payments reserve Other reserves Reserves Hedging reserve – cash flow hedges The reserve is used to recognise the effective portion of the gain or loss of cash flow hedge instruments that is determined to be an effective hedge. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to the senior management team as part of their remuneration. Other reserves Other reserves are used to record increments and decrements to the valuation of non-current assets, and preserve current profits for the purpose of paying dividends in future years. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 January 2019 Movements in hedges Deferred tax Share-based payments LFSP exercised LFSP forfeited Balance at 31 December 2019 Movements in hedges Deferred tax Transfer from share-based payments reserve to other reserves Share-based payments LFSP exercised LFSP forfeited Balance at 31 December 2020 Cash flow hedges $’000 139 (229) 69 – – – (21) 37 (11) – – – 5 Share- based payments $’000 5,717 – – 5,698 (2,726) (233) 8,456 – – (85) 5,103 (3,521) (1,267) 8,686 Other Reserves $’000 – – – – – – – – – 85 – – – 85 Total $’000 5,856 (229) 69 5,698 (2,726) (233) 8,435 37 (11) – 5,103 (3,521) (1,267) 8,776 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 92 Note 15. Share-based payments Loan funded share plan (LFSP) The LFSP is a long term incentive plan for the senior management team. Refer to note 13 for the terms of LFSP. The LFSP shares are legally held by the employees, however, they cannot trade in the shares until the vesting conditions are satisfied and the loan is fully repaid. These have been treated as options in accordance with AASB 2 Share-based payment. Set out below are summarises of loan funded shares granted under the Company’s LFSP: Grant date Vesting date 2020 17 March 2017 31 December 2019 5 May 2017 31 December 2019 28 March 2018 31 December 2020 4 May 2018 31 December 2020 20 March 2019 31 December 2021 13 May 2019 31 December 2021 3 March 2020 31 December 2022 10 June 2020 31 December 2022 Exercise price Balance at start of the year Granted during the year Exercised during the year Forfeited during the year Balance at end of the year $6.39 $6.50 $10.89 $10.84 $8.55 $8.20 $6.95 $6.20 543,165 338,628 333,247 382,984 701,260 383,648 – – – – – – – – 1,245,905 835,243 (446,658) (281,053) – – – – – – (96,507) (57,575) (333,247) (382,984) – – – – (45,594) 655,666 (383,648) – – – 1,245,905 835,243 Vested and exercisable at end of the year 178,272 – – – – – – – Weighted average exercise price $8.42 $6.65 $6.43 $9.47 $7.10 $6.39 2,682,932 2,081,148 (727,711) (1,299,555) 2,736,814 178,272 2019 18 March 2016 31 December 2018 9 May 2016 31 December 2018 17 March 2017 31 December 2019 5 May 2017 31 December 2019 28 March 2018 31 December 2020 4 May 2018 31 December 2020 20 March 2019 31 December 2021 13 May 2019 31 December 2021 $4.42 $4.76 $6.39 $6.50 $10.89 $10.84 $8.55 $8.20 235,978 353,652 672,641 338,628 529,582 382,984 – – – – – – – – 830,191 383,648 (235,978) (353,652) – – – – – – – – – – (129,476) 543,165 – 338,628 (196,335) 333,247 – 382,984 (128,931) 701,260 – 383,648 2,513,465 1,213,839 (589,630) (454,742) 2,682,932 Weighted average exercise price $7.62 $8.44 $4.62 $8.95 $8.42 – – – – – – – – – – The weighted average share price during the financial year was $5.91 (2019: $9.54). The loan funded shares have an expiry date of 5 years from the date of issue and their weighted average remaining contractual life outstanding at the end of the financial year was 3.9 years (2019: 3.4 years). For the loan funded shares granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Vesting date Share price at grant date Exercise price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date 3 March 2020 31 December 2022 10 June 2020 31 December 2022 $6.14 $6.65 $6.67 $6.20 40% 40% 6.49% 6.17% 0.58% 0.28% $1.25 $1.40 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 93 Note 16. Equity – dividends Dividends Dividends paid during the financial year were as follows: Consolidated Final dividend for the year ended 31 December 2019 of 21.5 cents (2018: 21.0 cents) per ordinary share Interim dividend for the year ended 31 December 2020 of 17.0 cents (2019: 21.5 cents) per ordinary share Special dividend for the year ended 31 December 2019 of 20.0 cents per ordinary share Dividends paid 2020 $’000 2019 $’000 28,272 27,446 22,579 – 50,851 28,305 26,300 82,051 On 24 February 2021, the Directors declared a fully franked final dividend of 17.5 cents per ordinary share. The final dividend will be paid on 23 March 2021 to shareholders registered on 9 March 2021 with an expected total distribution of $23,240,000. On 24 February 2021, the Directors also declared a total special dividend of 14.5 cents per share, comprising of a final special dividend of 9.0 cents per share in respect of the year ended 31 December 2020, and an interim special dividend of 5.5 cents per share in respect of the current year. The special dividend will be paid on 23 March 2021 to shareholders registered on 9 March 2021 with an expected total distribution of $19,259,000. The financial effect of dividends declared after the reporting date is not reflected in the 31 December 2020 financial statements and will be recognised in subsequent financial reports. Franking credits Consolidated Franking credits available at the reporting date based on a tax rate of 30% Franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date based on a tax rate of 30% Franking credits available for subsequent financial years based on a tax rate of 30% 2020 $’000 2019 $’000 30,074 49,628 260 30,334 1,474 51,102 Accounting policy for dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Note 17. Earnings per share Consolidated 2020 $’000 2019 $’000 Profit after income tax attributable to the owners of Smartgroup Corporation Ltd 41,325 61,449 Consolidated 2020 Number 2019 Number Weighted average ordinary shares used in calculating basic earnings per share 129,612,299 128,905,095 Adjustments for calculation of diluted earnings per share: Options over ordinary shares – 219,444 Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 129,612,299 129,124,539 Consolidated Basic earnings per share Diluted earnings per share 2020 Cents 31.9 31.9 2019 Cents 47.7 47.6 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 94 Note 17. Earnings per share (continued) Note 18. Financial instruments Accounting policy for earnings per share Financial risk management objectives (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Smartgroup Corporation Ltd, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding, excluding shares issued under the LFSP, during the financial year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares, including shares issued under the LFSP, which are treated as options in the calculation of diluted earnings per share, as they may not vest. Shares issued under LFSP are only included where the average market price of ordinary shares during the period exceeds the exercise price of the LFSP shares. The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall financial risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group may use derivative financial instruments such as interest rate swap contracts to hedge certain risk exposures. Derivatives are exclusively used for risk management purposes, i.e. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, ageing analysis for credit risk and rolling cash flow forecasts for analysis of liquidity risk. Risk management is carried out centrally by the management team under oversight from the Board. These policies include identification and analysis of the risk exposure of the Group and appropriate procedures, controls and risk limits. The management team identifies, evaluates and may hedge financial risks within the Group’s operating units. Market risk Foreign exchange risk The Group operates primarily in Australia and is not exposed to any significant foreign currency risk. Price risk The Group is not exposed to any significant price risk. Interest rate risk The Group’s main interest rate risk arises from long-term borrowings, cash and cash equivalents, and restricted cash and cash equivalents, which are subject to variable interest rates. The exposure to interest rate risk on long-term borrowings is managed through the use of interest rate swaps. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 95 Note 18. Financial instruments (continued) Market risk (continued) Interest rate risk (continued) As at the reporting date, the Group had the following variable rate borrowings, cash and cash equivalents, restricted cash and cash equivalents and interest rate swap contracts outstanding: 2020 2019 Weighted average interest rate % 2.07% 0.49% 0.60% 0.31% Weighted average interest rate % 2.17% 0.91% 0.69% 0.96% Balance $’000 24,900 (27,368) (48,111) (15,500) (66,079) Balance $’000 60,648 (39,639) (65,402) (31,000) (75,393) Expected credit loss assessment for customers The Group allocates each exposure to a credit risk grade based on data that is determined to be predictive of the risk of loss and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of the risk of default. Exposures within each credit risk grade are generally based on actual historical credit loss experience. The Group has historically based the expected credit loss (ECL) on actual historical credit loss experience, however, due to the disruption of the COVID-19 pandemic, additional information has also been considered in reassessing the expected credit loss rate, with specific provisions totalling $235,000 raised for at-risk customer groups. The Group has identified motor vehicle dealers and small- medium corporates as the most at-risk groups of credit loss. Using counterparty-specific information and historical data from previous recessions and economic projections, the credit loss rates based on a 3-year rolling average have been revised and increased between 0.2% - 3.5%. The Group has additionally provided $977,000 in relation to counterparty arrangements with motor vehicle dealerships, given that the economic downturn has seen significant volatility in motor vehicle values. This provision is reflected in Current Liabilities – Provisions within the Consolidated Statement of Financial Position. Consolidated Bank loans Cash and cash equivalents Restricted cash and cash equivalents Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk Sensitivity An increase in interest rates of 100 (2019: 100) basis points would have a favourable effect on profit before tax and equity of $630,000 (2019: $760,000) per annum while a decrease in interest rates to the interest rate floor of certain financial assets would have an adverse impact on profit before tax and equity of $228,000 (2019: $760,000). The percentage change is based on the expected volatility of interest rates using market data and analysts’ forecasts. Derivatives interest rate swap The Group has entered into interest rate swap contracts with notional/principal value as at 31 December 2020 of $15,500,000 (2019: $51,250,000). The interest rate contracts hedge the Group’s risk against an increase in variable interest rates. The weighted average fixed rate is 0.96% (2019: 0.96%). Sensitivity – derivative valuation An increase in interest rates of 100 (2019:100) basis points would have a favourable effect on derivative financial instruments value and total equity by $257,000 (2019: $488,100) while a decrease in interest rates to nil would have an adverse effect on derivative financial instruments value and total equity by $10,000 (2019: $488,100). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has procedures in place to monitor credit risk, which include obtaining references and setting appropriate credit limits. The Group obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The Group does not hold any collateral, and nor does the group utilise supplier financing. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 96 Note 18. Financial instruments (continued) Credit risk (continued) Expected credit loss assessment for customers (continued) The following table provides information about the exposure to credit risk and ECL for trade receivables as at 31 December 2020: 31 December 2020 Grade 1 (Financiers/Insurers) Grade 2 (Employer/Corporate) Grade 3 (Dealers) Liquidity risk Gross carrying amount ($'000) 563 5,869 1,169 Expected credit loss allowance ($'000) Specific loss allowance ($'000) Total impairment loss allowance ($'000) – (12) – (23) (165) (47) (23) (177) (48) Weighted- average loss rate 4.09% 3.02% 4.08% Prudent liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Remaining contractual maturities The following tables detail the Group’s remaining contractual maturities for its financial instrument liabilities. The tables reflect the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the consolidated statement of financial position. Contractual maturities of financial liabilities 1 year or less $’000 >1 to 2 years $’000 >2 to 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 At 31 December 2020 Non-interest bearing Trade payables Customer salary packaging liability Interest bearing - variable Bank loans Lease liabilities Total non-derivatives At 31 December 2019 Non-interest bearing Trade payables Customer salary packaging liability Interest bearing - variable Bank loans Lease liabilities Total non-derivatives 4,416 48,111 499 3,738 56,764 10,860 65,402 1,321 3,629 81,212 – – 25,076 3,541 28,617 – – 61,965 3,738 65,703 – – – 7,792 7,792 – – – 11,330 11,330 – – – – – – – – – – 4,416 48,111 25,575 15,071 93,173 10,860 65,402 63,286 18,697 158,245 The cash flows in the maturity analysis above are not expected to occur significantly earlier than disclosed above. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 97 2020 $’000 2019 $’000 20,352 428 20,780 2020 $’000 7,601 (248) 7,353 7,346 1,182 8,528 15,881 38,352 428 38,780 2019 $’000 11,123 (99) 11,024 10,559 4,066 14,625 25,649 Note 18. Financial instruments (continued) Credit risk (continued) Financing arrangements The Group had access to the following undrawn borrowing facilities at the reporting date: Consolidated Unused at the reporting date Bank loan Letter of credit facility Note 19. Current assets – trade and other receivables Consolidated Trade receivables Less: Provision for impairment of receivables Contract assets Other receivables Total trade and other receivables Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $2,435,000 as at 31 December 2020 ($4,299,000 as at 31 December 2019). The Group did not consider a credit risk on the aggregate balances after reviewing the credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: Consolidated 0 to 3 months overdue > 3 to 6 months overdue > 6 months overdue Past due and not impaired 2020 $’000 2,431 2 2 2,435 2019 $’000 4,168 117 14 4,299 Accounting policy for trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 14 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. Trade receivables have been grouped based on shared credit risk characteristics and the days past due. Contract assets represent unbilled receivables for commission-based revenue with a lower expected credit loss as funds have been collected and are held within the restricted cash accounts. Expected credit loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors that may affect the ability of the customers to settle the receivables, such as GDP rates. They are also adjusted to reflect historical and current debtor- based information impacting the probability that certain debtors will enter bankruptcy or financial reorganisation, or default on payments (more than 60 days overdue). The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of management’s estimate of future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 98 Note 20. Fair value measurement Fair value hierarchy The following tables detail the Group’s assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input significant to fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability. Consolidated 2020 Liabilities Interest rate swap contracts - cash flow hedges Total liabilities 2019 Liabilities Interest rate swap contracts - cash flow hedges Total liabilities There were no transfers between levels during the financial year. Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – (47) (47) (10) (10) – – – – (47) (47) (10) (10) The carrying amounts of trade and other receivables and trade and other payables approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 Derivatives - interest rate swap contracts Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available and relies as little as possible on entity specific estimates. Accounting policy for fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and assumes that the transaction will take place either in the principal market or, in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset, or liability, assuming they act in their economic best interests. Valuation techniques that are appropriate in the circumstances, and for which sufficient data is available to measure fair value, are used maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used either when internal expertise is not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 99 2019 $’000 1,943 96 582 2,621 2019 $’000 (10) 2020 $’000 1,815 54 – 1,869 2020 $’000 (47) Note 21. Current assets — other current assets Consolidated Prepayments Other current assets Back-to-back leased vehicles Other current assets Note 22. Derivative financial instruments Consolidated Interest rate swap contracts - cash flow hedges Refer to note 20 for further information on fair value measurement. Accounting policy for derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depending on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Cash flow hedges Cash flow hedges are used to cover the Group’s exposure to variability in cash flows that is attributable to particular risks associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income through the cash flow hedges reserve in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis both retrospectively and prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, is exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. Note 23. Current liabilities — other current liabilities Consolidated Leased vehicle borrowings Contract liabilities Other current liabilities 2020 $’000 – 5,782 5,782 2019 $’000 1,081 4,652 5,733 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 100 Note 24. Business combinations (a) Prior period acquisitions Lease & Asset Finance (L&A) On 10 October 2019, the Group acquired the novated leasing assets of Lease and Asset Finance (L&A) for a total cash consideration of $886,000. The goodwill of $894,000 reflects the synergies expected to be obtained by the Group from this acquisition. Excluding integration costs, L&A contributed revenues of $121,000 and net profit after tax of $47,000 to the Group for the period from 10 October 2019 to 31 December 2019. If the acquisitions had occurred on 1 January 2019, the full year contribution would have been revenue of $552,000, and profit after tax of $239,000, subject to adjustments arising as a result of purchase price allocation. No revisions were made and the business combination has been finalised in the current reporting period, for the year ended 31 December 2019. Details of the purchase consideration, the net assets acquired and goodwill are summarised as follows: Restricted cash and cash equivalents Other intangibles Net deferred tax liabilities Customer salary packaging liability Employee provisions Other provisions Net assets acquired Goodwill Acquisition date fair value of consideration transferred Representing: Cash paid to vendor/into escrow Acquisition costs Cash used to acquire business, net of cash acquired: Cash paid to vendor/into escrow Less: Restricted cash and cash equivalents Net consideration L&A Fair Value $’000 1,680 106 3 (1,680) (20) (97) (8) 894 886 886 88 886 (1,680) (794) Note 25. Non-current assets — investments accounted for using the equity method Consolidated Investment in joint venture - Health-e Workforce Solutions Pty Ltd 2020 $’000 827 2019 $’000 6,400 Smartgroup holds an investment in the joint venture, Health-e Workforce Solutions Pty Ltd. Expected future cashflows were evaluated to determine the value-in-use following indicators of impairment that arose in relation to this investment. Based on historical performance, an impairment charge of $5,118,000 has been recognised during the year in relation to the Group’s investment. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 101 Note 25. Non-current assets — investments accounted for using the equity method (continued) Interests in joint ventures Interests in joint ventures are accounted for using the equity method of accounting. Information relating to joint ventures that are material to the Group are set out below: Name of entity Place of business/ country of incorporation Health-e Workforce Solutions Pty Ltd Australia Consolidated Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Total liabilities Net assets Summarised statement of profit or loss and other comprehensive income Revenue Amortisation expense Other expenses Profit before income tax Income tax expense Profit after income tax Other comprehensive income Total comprehensive income Reconciliation of the Group’s carrying amount Opening carrying amount Dividends received Share of profit after income tax expense Impairment of joint venture investment Closing carrying amount Contingent liabilities 2020 % 50 2020 $’000 2,587 54 2,641 656 656 1,985 2,720 (572) (2,021) 127 (38) 89 – 89 6,400 (500) 45 (5,118) 827 2019 % 50 2019 $’000 2,447 1,204 3,651 125 125 3,526 2,723 (572) (2,127) 24 (7) 17 – 17 6,392 – 8 – 6,400 Share of contingent liabilities relating to joint venture as at 31 December 2020 was $nil (2019: $nil). Commitments Share of commitments relating to joint venture as at 31 December 2020 was $nil (2019: $nil). Accounting policy for joint venture A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method. Under the equity method, the share of the after tax profits or losses of the joint venture is recognised in the statement of profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in joint ventures are carried in the statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the joint venture. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Income earned from joint venture entities increase the carrying amount of the investment. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 102 Note 26. Related party transactions Parent entities Smartgroup Corporation Ltd is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 28. Joint ventures Interests in joint ventures are set out in note 25. Key management personnel compensation Disclosures relating to key management personnel are set out in note 29 and the Remuneration Report included in the Directors’ Report. Receivable from/payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Transactions with other related parties There were no transactions with related parties during the current and previous financial year. Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Note 27. Parent entity financial information Summary financial information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit after income tax expense Total comprehensive income Statement of financial position Current assets Total assets Current liabilities Total liabilities Issued capital Reserves Hedging reserve - cash flow hedges Share-based payments reserve Other reserves Retained earnings Total equity 103 2019 $’000 87,981 87,981 2019 $’000 581,130 669,422 304,951 365,404 258,115 (21) 8,082 – 37,842 304,018 2020 $’000 48,371 48,371 2020 $’000 415,287 504,316 174,257 199,030 261,522 5 8,312 85 35,362 305,286 Guarantees entered into by the parent entity The parent entity and certain of its subsidiaries are party to a deed of cross guarantee under which each company guarantees the debts of the others. No deficiencies of assets exist in any of these subsidiaries. Refer to note 32 for further details. The parent entity has also provided guarantees in respect of banking facilities provided to the Group. Contingent liabilities of the parent entity The parent entity has given bank guarantees as at 31 December 2020 of $1,409,000 (2019: $1,409,000). Capital commitments - Property and equipment The parent entity had no capital commitments for property and equipment as at 31 December 2020 and 31 December 2019. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 3 and note 41, except for the following: Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. • • Dividends received from subsidiaries are recognised as other income by the parent entity. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 104 Note 28. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described throughout the financial statements: Name Principal place of business/ corporation 2020 % 2019 % ABM Corporation Pty Limited AccessPay Pty Ltd Australian Vehicle Consultants Pty Ltd Autopia Group Pty Limited Autopia Management Pty Limited Fleet West Pty Ltd Pay-Plan Pty Ltd PBI Benefit Solutions Pty Limited Salary Packaging Solutions Pty Ltd Salary Solutions Australia Pty Ltd Selectus Pty Ltd SET Leasing Pty Ltd Smartsalary Software Solutions Pty Ltd Smartequity EIS Pty Ltd Smartequity Pty Ltd Smartfleet Management Pty Ltd Smartgroup Benefits Pty Ltd Smartsalary Pty Limited Smartsalary Payroll Solutions Pty Ltd Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Note 29. Key management personnel disclosures Compensation The aggregate compensation made to Directors and other members of key management personnel of the Group is set out below: Consolidated Short-term employee benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments Compensation 2020 $ 2019 $ 3,183,677 3,032,552 191,324 192,986 618,998 193,834 183,665 124,823 91,413 1,471,898 4,278,398 5,006,772 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 105 Note 30. Contingent liabilities The Group had contingent liabilities at 31 December 2020 of $3,572,000 (2019: $3,572,000) which primarily relate to guarantees on property leases. The Group has given guarantees for performance of contracts to its customers as at 31 December 2020 of $500,000 (2019: $500,000). Note 31. Events occurring after the reporting period In December 2020, the final legislation regarding the Deferred Sales Model for the sale of Add On Insurance Products passed through Parliament. Full compliance with this model is required by 5 October 2021. The Australian Securities and Investments Commission (ASIC) has confirmed its intention to move ahead with a revised version of the draft Product Intervention Order - Add-on Motor Vehicle Financial Risk Products released in August 2020 (PIO). ASIC has confirmed that the revised PIO: 1. will not apply to motor vehicle add-on insurance. Rather it will apply only to motor vehicle extended warranty products; and 2. will be designed to mirror the structure and operation of the industry-wide DSM. Smartgroup has commenced the work for compliance with the legislated Deferred Sales Model to ensure that the necessary changes are made to its processes and systems before 5 October 2021. Based on 2020 volumes and following the repricing of add-on insurance products by Smartgroup’s insurance partner effective 1 July 2020, Smartgroup estimates that it generates approximately $5.4m revenue per annum from the sale of add-on insurance products covered by the ASIC review and Treasury legislation. Given the range of possible outcomes and potential steps Smartgroup might take to mitigate any impact from these changes, Smartgroup is not yet able to provide specific detail on the quantum and timing of any such impacts, and whether or not they will be material. As of the date of issue, the future impact of COVID-19 on the Australian economy and the flow-on effects on the Group remain uncertain, and Smartgroup will continue monitor the situation. No other matter or circumstance has occurred subsequent to year end that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Note 32. Deed of cross guarantee The following entities are parties to a deed of cross guarantee under which each company guarantees the debts of the others: Smartgroup Corporation Ltd AccessPay Pty Ltd Autopia Group Pty Limited Autopia Management Pty Limited Salary Packaging Solutions Pty Ltd Salary Solutions Australia Pty Ltd Selectus Pty Ltd Smartfleet Management Pty Ltd Smartgroup Benefits Pty Ltd Smartsalary Pty Limited By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare financial statements and Directors’ report under Corporations Instrument 2016/785 issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Corporations Instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Smartgroup Corporation Ltd, they also represent the ‘Extended Closed Group’. Set out below is a consolidated statement of profit or loss and other comprehensive income and statement of financial position of the ‘Closed Group’. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 106 Note 32. Deed of cross guarantee (continued) Consolidated statement of profit or loss and other comprehensive income and summary of movements in consolidated retained earnings Consolidated Statement of Profit or Loss and Other Comprehensive Income Revenue Product costs Employee benefits expense Administration and corporate expenses Occupancy expenses Advertising and marketing expenses Amortisation of acquired intangibles Depreciation expense Other expenses Operating profit before income tax expense Finance costs Impairment of joint venture investment Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Net change in the fair value of cash flow hedges taken to equity, net of tax Total comprehensive income for the year Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year Profit after income tax expense Dividends paid Retained earnings at the end of the financial year 2020 $’000 2019 $’000 212,460 (5,970) (77,573) (28,798) (1,428) (1,843) 251,431 (8,059) (86,043) (27,630) (1,332) (3,389) (20,097) (21,859) (3,162) (1,825) 71,764 (3,113) (5,118) 63,533 (20,857) 42,676 26 42,702 (3,422) (2,556) 97,141 (3,052) – 94,089 (25,704) 68,385 (160) 68,225 2020 $’000 2019 $’000 1,159 42,676 (50,851) (7,016) 14,825 68,385 (82,051) 1,159 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Note 32. Deed of cross guarantee (continued) Consolidated Statement of Financial Position Current assets Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables Income tax receivable Other current assets Total current assets Non-current assets Investments accounted for using the equity method Deferred tax assets Property and equipment Intangible assets Right-of-use assets Total-non-current assets Total assets Current liabilities Trade and other payables Customer salary packaging liability Lease liabilities Income tax payable Provisions Other current liabilities Total current liabilities Non-current liabilities Provisions Derivative financial instruments Borrowings Lease liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity 107 2020 $’000 2019 $’000 26,148 47,776 20,217 2,071 1,869 38,057 65,085 32,319 – 2,022 98,081 137,483 28,546 11,548 1,739 260,692 9,143 311,668 409,749 40,678 47,776 3,738 – 12,774 5,136 34,119 8,351 1,356 281,633 11,592 337,051 474,534 48,972 65,085 3,629 160 10,670 4,363 110,102 132,879 2,596 47 24,673 8,678 35,994 146,096 263,653 1,630 10 60,392 11,543 73,575 206,454 268,080 261,893 258,486 8,776 (7,016) 8,435 1,159 263,653 268,080 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 108 Note 33. Reconciliation of profit after income tax to net cash from operating activities Reconciliation of profit after income tax to net cash inflow from operating activities Consolidated Profit for the year Adjustments for Share of profits — joint ventures Share-based payments Fair value change to derivative financial instruments Interest received — disclosed under investing activities Amortisation of interest and borrowing costs Loss on sale of non-current assets Depreciation Amortisation Impairment of joint venture investment Net (gain)/loss on revaluation of financial liabilities Onerous lease costs Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Decrease/(increase) in net deferred tax assets Decrease/(increase) in other current assets Increase/(decrease) in trade and other payables Increase/(decrease) in provision for income tax Increase/(decrease) in provisions and other liabilities Increase/(decrease) in customer salary packaging liability Net cash from operating activities Changes in liabilities arising from financing activities This section sets out an analysis of net debt and the movements in net debt for each of the years presented. Consolidated Balance as at 1 January 2019 Proceeds from borrowings Amortisation of interest and borrowing costs (non-cash) Balance as at 31 December 2019 Proceeds from borrowings Borrowing costs Repayment of borrowings Net gain on revaluation of financial liabilities (non-cash) Amortisation of interest and borrowing costs (non-cash) Balance as at 31 December 2020 2020 $’000 2019 $’000 41,325 61,449 (45) 466 (69) (423) 150 48 3,173 22,113 5,118 127 11 9,492 (4,195) 1,282 (5,384) (2,325) 3,669 74,533 (17,291) 57,242 (8) 1,596 (21) (301) 481 12 3,521 21,680 – – 438 (1,274) (548) 8,977 3,626 (4,069) (6,574) 88,985 13,728 102,713 Borrowings $’000 53,011 6,900 481 60,392 38,000 (248) (73,748) 127 150 24,673 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Note 34. Non-current assets — property and equipment Consolidated Computer equipment At cost Accumulated depreciation Computer equipment Furniture, fixtures and fittings At cost Accumulated depreciation Furniture, fixtures and fittings Office equipment At cost Accumulated depreciation Office equipment Leasehold improvements At cost Accumulated depreciation Leasehold improvements Other assets At cost Accumulated depreciation Other assets Property and equipment 109 2020 $’000 2019 $’000 7,055 (6,313) 742 1,265 (1,093) 172 1,707 (1,478) 229 5,066 (4,478) 588 22 (11) 11 6,383 (6,033) 350 1,455 (1,226) 229 1,643 (1,288) 355 4,757 (4,338) 419 22 (6) 16 1,742 1,369 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements Note 34. Non-current assets — property and equipment (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Year ended 31 December 2020 Opening net book amount Additions Assets written off Depreciation expense (note 9) Closing net book amount Year ended 31 December 2019 Opening net book amount Additions Transfers Assets written off Depreciation expense (note 9) Accelerated depreciation (note 9) Closing net book amount Computer equipment $’000 Furniture, fittings and equipment $’000 Office equipment $’000 Leasehold improvements $’000 Other assets $’000 350 766 (49) (325) 742 407 258 28 (2) (318) (23) 350 229 9 – (66) 172 303 72 – – (102) (44) 229 355 69 (7) (188) 229 311 297 (28) – (199) (26) 355 419 309 – (140) 588 834 279 – – (426) (268) 419 16 – – (5) 11 56 – – (34) (6) – 16 110 Total $’000 1,369 1,153 (56) (724) 1,742 1,911 906 – (36) (1,051) (361) 1,369 Accounting policy for property and equipment Property and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives or lease term as follows: • Leasehold improvements • Furniture, fixtures and fittings • Computer equipment • Office equipment • Other assets Period of lease 3 - 7 years 2 - 5 years 3 - 6 years 1 - 5 years The residual values, useful lives and depreciation methods are reviewed annually and adjusted if appropriate. Property and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property and equipment is de-recognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Note 35. Current liabilities — trade and other payables Consolidated Trade payables Accrued expenses Other payables and accruals Trade and other payables 111 2020 $’000 4,416 16,821 8,655 29,892 2019 $’000 10,860 18,842 5,571 35,273 Refer to note 18 for further information on financial instruments. Accounting policy for trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and that are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Note 36. Current liabilities — provisions Consolidated Employee benefits Operations provision Provisions – current Employee benefits 2020 $’000 6,714 7,275 2019 $’000 7,004 4,052 13,989 11,056 The provision for employee benefits relates to the Group’s liability for annual leave and long service leave. Refer to note 41 for the accounting policy relating to employee benefits. Operations provision The provision relates to negative employee salary packaging account balances which may be uncollectible, customer and supplier disputes as well as provisions relating to indirect tax obligations. Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken within the next 12 months: Consolidated Employee benefits obligation expected to be settled after 12 months Accounting policy for provisions 2020 $’000 1,136 2019 $’000 973 Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 112 2019 $’000 1,221 – 463 1,684 2020 $’000 1,092 1,041 463 2,596 Note 37. Non-current liabilities — provisions Consolidated Employee benefits Operations provision Make good provision Provisions – non-current Make good provision The provision represents the present value of the estimated costs to make good the premises leased by the Group at the end of the respective lease terms. Movements in provisions Movements in each class of provision (current (note 36) and non-current) during the financial year, other than employee benefits, are set out below: Consolidated 2020 Carrying amount at start of year Charged/(credited) to profit or loss – additional provisions recognised/(de-recognised) Carrying amount at end of year Note 38. Cash held on behalf of customers and associated liabilities The Group administers funds on behalf of customers and this can take one of two forms: • Restricted cash and cash equivalents (pooled customer funds) • Cash held on behalf of customers (segregated bank accounts in a customer’s name). Restricted cash and cash equivalents Consolidated Restricted cash and cash equivalents Customer salary packaging liability Make good provision $’000 Operations provision $’000 463 – – 463 4,052 – 4,264 8,316 31 December 2020 $’000 31 December 2019 $’000 48,111 (48,111) 65,402 (65,402) The restricted cash and cash equivalents in the Consolidated Statement of Financial Position and in the Consolidated Statement of Cash Flows represents funds held by the Group on behalf of certain customers. The use of these funds is restricted to the making of salary packaging payments on behalf of those customers only and therefore not available for general use. The Group recognises a liability for all restricted cash balances to reflect the amounts owing to its customers. The restricted cash accounts are held with Australia’s major financial institutions. Depending on commercial arrangements, the Group may earn interest income from these accounts. For the year ended 31 December 2020, the Group has recognised finance revenue of $231,000 (31 December 2019: $468,000) from restricted cash. Refer to note 18 for interest rate sensitivity analysis on restricted cash balances. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 113 Note 38. Cash held on behalf of customers and associated liabilities (continued) Cash held on behalf of customers not recognised in the statement of financial position: Accounts established by the Group as cash held on behalf of customers Accounts established by customers directly Cash held on behalf of customers 2020 2019 Weighted average interest rate 0.56% 0.01% Weighted average interest rate 0.88% 0.03% $’000 131,817 87,863 219,680 $’000 113,925 96,837 210,762 Cash held on behalf of salary packaging and share plan administration customers is deposited by customers into segregated bank accounts, to be used only to settle their employees’ salary packaging obligations to suppliers or for contributions into share plans. The Group cannot use these funds for any other purpose than as directed by its customers. Customers are liable to ensure adequate funds are kept in the segregated bank accounts for salary packaging and share plan payments. The Group has assessed that these assets are held in a fiduciary capacity rather than being assets of the Group and as such, have excluded them from the Consolidated Statement of Financial Position. The segregated bank accounts used for cash held on behalf of customers are with Australia’s major financial institutions. Depending on commercial arrangements, the Group may earn interest income from these accounts. For the year ended 31 December 2020, the Group has recognised interest revenue of $648,000 (31 December 2019: $1,683,000) from those accounts established by the Group as cash held on behalf of customers, and $5,000 (31 December 2019: $29,000) from those accounts established by the customers directly. These amounts are recognised within management and administration revenue. Note 39. Remuneration of auditors During the year the following fees were paid or payable for services provided by PricewaterhouseCoopers, the auditor of the Company: Consolidated Audit and review of financial statements Total remuneration for audit and other assurance services Other assurance services Risk and governance Total remuneration for other services PricewaterhouseCoopers 2020 $ 550,000 550,000 2019 $ 554,720 554,720 22,683 22,683 46,376 46,376 572,683 601,096 Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 114 Total $’000 11,543 2,741 (2,470) (10) (212) 11,592 (2,449) 9,143 2019 $’000 15,582 986 (986) (2,846) 2,853 (417) 15,172 Property $’000 Equipment $’000 11,108 2,741 (2,371) (10) (212) 11,256 (2,351) 8,905 435 – (99) – – 336 (98) 238 2020 $’000 15,172 1,006 (1,006) (2,756) – – 12,416 Note 40. Leases Amounts recognised in the balance sheet The balance sheet shows the following amounts relating to leases: Right-of-use assets Balance at 1 January 2019 Additions Depreciation charge for the year Impairment charge for the year Remeasurement of leases on lease renewal Balance at 31 December 2019 Depreciation charge for the year Balance at 31 December 2020 Lease liabilities (current and non-current) Consolidated Balance at 1 January Interest incurred Interest paid on lease liabilities Payments of lease liabilities Additions Lease surrender costs Balance at 31 December Maturity analysis - contractual undiscounted cashflows At 31 December 2020 Lease liabilities 1 year or less $’000 3,738 >1 to 2 years $’000 3,541 >2 to 5 years $’000 7,792 Over 5 years $’000 Remaining contractual maturities $’000 – 15,071 Amounts recognised in the statement of profit or loss The Consolidated Statement of Profit or Loss and Other Comprehensive Income shows the following amounts relating to leases: Consolidated Interest on lease liabilities (included in finance costs) Expense relating to short-term leases (included in other expenses) Amounts recognised in the statement of cash flows Consolidated Total cash outflow for leases 2020 $’000 (1,006) – 2019 $’000 (986) (46) 2020 $’000 2019 $’000 (3,762) (3,832) Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 115 The lease liability is measured at amortised cost using the effective interest method. It is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of 12 months or less and leases of low-value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Note 40. Leases (continued) Accounting policy for leases As a lessee The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability, adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore the underlying asset, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following: • fixed payments, including in-substance fixed payments; • variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; • amounts expected to be payable under a residual value guarantee; and • the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 116 Note 41. Additional significant accounting policies (a) Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Smartgroup Corporation Ltd as at 31 December 2020 and the results of all subsidiaries for the year then ended. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interests in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the Group. Losses incurred by the Group are attributed to the non-controlling interest in full, even if that results in a deficit balance. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained, together with any gain or loss in profit or loss. (b) Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is current when: it is expected to be realised or intended to be sold or consumed in the entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is current when: it is expected to be settled in the entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. (c) Financial instruments (Note 18) Recognition and measurement Trade receivables are initially recognised when they are originated. All other financial assets and financial liabilities are initially recognised when the Group becomes a party to the contractual provisions of the instrument. Classification and subsequent measurement Financial assets On initial recognition, a financial asset is classified as measured at: • Amortised cost; • Fair value through profit & loss (FVTPL); or • Fair value through other comprehensive income (FVOCI) Financial assets are not reclassified subsequently unless the Group changes its business model for managing financial assets. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: • • it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All financial assets not classified as measured at amortised cost or FVOCI are measured at FVTPL. On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. The Group classified its financial assets into one of the following categories: loans and receivables; • • held to maturity; • available for sale; and • at FVTPL, and within these categories as: – held for trading; – derivative hedging instruments; or – designated as at FVTPL. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report 117 Note 41. Additional significant accounting policies (continued) (c) Financial instruments (Note 18) (continued) (d) Employee benefits Classification and subsequent measurement (continued) Financial assets (continued) Financial assets at FVTPL: Measured at fair value and changes therein were recognised in profit or loss. Held-to-maturity financial asset: Measured at amortised cost using the effective interest method. Loans and receivables: Measured at amortised cost using the effective interest method. Available-for-sale financial assets: Measured at fair value and changes therein, other than impairment losses and interest income, were recognised in OCI and accumulated in reserves. When these assets were derecognised, the gain or loss accumulated in equity was reclassified to profit or loss. Financial liabilities - classification, subsequent measurement and gains and losses: Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held-for- trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense is recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss. Derecognition Financial assets The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. Financial Liabilities The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. The Group also derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognised at fair value. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid is recognised in profit or loss. Short-term employee benefits (Note 36) Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled within 12 months of the reporting date are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee obligations (Notes 36 and 37) The liability for long term employee benefits is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense (Note 9) Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments (Note 15) Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions is measured at fair value on grant date. Fair value is independently determined using the Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date, expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions is recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date, less amounts already recognised in previous periods. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Smartgroup2020Annual ReportAccountability Care TeamNotes to the Consolidated Financial Statements 118 Note 41. Additional significant accounting policies (continued) (d) Employee benefits (continued) Share-based payments (Note 15) (continued) Market conditions are taken into consideration in determining fair value. Therefore, any awards subject to market conditions are considered to vest irrespective of whether that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled they are treated as if they have vested on the date of cancellation, and any remaining expense is recognised immediately. If new replacement awards are substituted for the cancelled awards, the cancelled and new awards are treated as if they were a modification. (e) Business combinations (Note 24) The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the Group remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. (f) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Notes to the Consolidated Financial StatementsFor the year ended 31 December 2020Financial Report Directors’ Declaration 119 Directors’ Declaration For the year ended 31 December 2020 In the Directors’ opinion: (a) the financial statements and notes set out on pages 70 to 118 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) complying with International Financial Reporting Standards as issued by the International Accounting Standards Board, and (iii) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2020 and of its performance for the financial year ended on that date, and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed Group identified in note 32 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 32. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors Michael Carapiet Chairman 24 February 2021 Sydney Smartgroup2020Annual ReportAccountability Care Team Independent auditor’s report 120 Independent auditor’s report To the members of Smartgroup Corporation Ltd Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Smartgroup Corporation Ltd (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 31 December 2020 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) the consolidated statement of financial position as at 31 December 2020 the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the consolidated statement of profit or loss and other comprehensive income for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Independent auditor’s report 121 Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality (cid:120) For the purpose of our audit we used overall Group materiality of $3.1 million, which represents approximately 5% of the Group’s profit before tax. (cid:120) We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. (cid:120) We chose Group profit before tax because, in our view, profit before tax (which is a generally accepted benchmark for profit-orientated entities) is a key metric against which the performance of the Group is measured. (cid:120) We selected 5% based on our professional judgement, noting that it is within the range of commonly acceptable profit related materiality thresholds. Audit Scope (cid:120) Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. (cid:120) An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. (cid:120) We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, Smartgroup2020Annual ReportAccountability Care Team Independent auditor’s report 122 its accounting processes and controls and the industry in which it operates. (cid:120) Smartgroup Corporation Ltd’s financial report consolidates the businesses of various controlled entities and the Group has a substantially centralised finance function. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter How our audit addressed the key audit matter Goodwill and indefinite life assets impairment Refer to note 7 - $275.7 million The Group’s goodwill and brand names and logos are required by Australian Accounting Standards to be tested annually for impairment at the cash generating unit (CGU) level. The impairment assessment was a key audit matter due to: (cid:120) the size of the goodwill and other indefinite life intangible assets balances the judgement involved in assessing whether an impairment was required and; the volatility and disruption arising from the COVID-19 pandemic and ongoing uncertainty regarding the impact of the winding down of government assistance measures. (cid:120) (cid:120) The Group performed an impairment assessment over goodwill and other indefinite life intangible assets by calculating the value in use for each CGU, using discounted cash flow models (the models). Key judgements in the models included the determination of CGUs, discount rates, annual revenue and terminal growth rates and the assumption that there will be no significant changes to the legislation governing the provision of products and services within the salary packaging administration and novated leasing industries in the forecast periods. We performed the following audit procedures, amongst others: (cid:120) we assessed whether the Group’s identification of CGUs was consistent with our knowledge of the operations, internal reporting lines and the level of integration of the previously acquired businesses (cid:120) we evaluated the process by which the cash flow forecasts were developed including the review of significant assumptions and judgements by the Audit and Risk Committee (cid:120) we compared the cash flow forecasts to Board approved budgets and inspected evidence of oversight over key assumptions in the forecasts by the directors (cid:120) we assessed the Group’s ability to accurately (cid:120) (cid:120) (cid:120) forecast by comparing previous forecasts with actual results for significant inputs and assumptions, we considered and evaluated management’s evaluation and response to estimation uncertainty together with PwC valuation experts, we tested the method used by management to determine the recoverable amount of the CGUs and confirmed that this was in compliance with the requirements of the Australian Accounting Standards together with PwC valuation experts, we tested the inputs and assumptions used by management in determining the discount rates by comparing to observable and comparable data (cid:120) we tested the integrity of the data (including revenue and expense forecasts and growth rates) and assumptions used by management in developing the cashflow forecasts by agreeing to observable data Independent auditor’s report 123 Key audit matter How our audit addressed the key audit matter (cid:120) we tested the mathematical accuracy of the impairment model (cid:120) we considered whether there had been any published plans from mainstream Australian political parties relating to any potential changes to legislation governing the provision of products and services within the salary packaging administration and novated leasing industries to assess the appropriateness of management’s assumptions about the future of the salary packaging industry is reasonable (cid:120) we compared the Group’s net assets of $270.9 million as at 31 December 2020 to its market capitalisation of $932 million on the same date (cid:120) we evaluated the reasonableness of the Group’s disclosures on goodwill and other infinite life intangible assets impairment in light of the requirements of Australian Accounting Standards. Restricted cash and cash equivalents held on behalf of customers Refer to note 38 – $48.1 million The provision of salary packaging services involves the Group holding funds on behalf of certain customers, either as restricted cash or cash equivalents held on behalf of customers. This was a key audit matter as the Group may be responsible for any shortfall in these accounts, there is a significant volume of transactions impacting restricted cash and cash held on behalf of customers’ accounts throughout the year and due to the large volume of accounts and employees under management (EUM). We performed the following audit procedures, amongst others: (cid:120) tests of the operating effectiveness of the Group’s relevant key controls over the EUM cash transaction process, which include reconciliation of trust bank accounts to bank statements, reconciliation of employer deductions to bank statements and authorisation of payments from trust accounts for bank balances relating to restricted cash and cash held on behalf of customers, we examined evidence of reconciliations between the bank statements and the cashbook balances for a sample of bank accounts and obtained confirmations directly from banks of the balances at year end (cid:120) we read board minutes, enquired with management (cid:120) and obtained a written description from the Group’s lawyers of current legal matters to identify whether there were any material claims from EUMs or employers (cid:120) we considered the adequacy and accuracy of the Group’s disclosures in relation to restricted cash and cash held on behalf of customers’ accounts in the light of the requirements of Australian Accounting Standards. Smartgroup2020Annual ReportAccountability Care Team Independent auditor’s report 124 Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 31 December 2020 but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor's report. Independent auditor’s report 125 Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 51 to 65 of the directors’ report for the year ended 31 December 2020. In our opinion, the remuneration report of Smartgroup Corporation Ltd for the year ended 31 December 2020 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Joe Sheeran Partner Sydney 24 February 2021 Smartgroup2020Annual ReportAccountability Care Team Shareholder information Shareholder Information 126 This section contains additional information required by the ASX Listing Rules not disclosed anywhere else in this report. The information in this section is current as at 29 January 2021. Substantial Shareholders As at 29 January 2021, the following persons were disclosed as substantial holders in substantial holding notices given to the Company under the Corporations Act: Name Mitsubishi UFJ Financial Group, Inc. Commonwealth Bank of Australia Class of shares and voting rights Number of shares in which relevant interests held 9,053,344 6,800,125 Voting power 6.82% 5.12% At 29 January 2021, there were 8,721 holders of ordinary shares in the Company. The voting rights attached to the ordinary shares set out in the Company’s Constitution are that on a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Distribution of shareholders as at 29 January 2021: Size of holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total shareholders Number of holders Total shares held 4,315 3,133 760 455 58 8,721 1,961,340 8,172,246 5,620,115 10,919,538 106,147,456 132,820,695 Percentage of total shares 1.48% 6.15% 4.23% 8.22% 79.92% 100.00% Shareholder information 127 Number of ordinary shares Percentage of ordinary shares 37,681,180 17,874,742 13,230,647 9,195,955 5,517,475 5,185,023 1,935,435 1,729,223 1,606,897 1,460,836 1,246,001 1,195,358 625,000 563,607 519,979 496,965 410,563 405,949 405,520 342,767 28.37% 13.46% 9.96% 6.92% 4.15% 3.90% 1.46% 1.30% 1.21% 1.10% 0.94% 0.90% 0.47% 0.42% 0.39% 0.37% 0.31% 0.31% 0.31% 0.26% 101,629,122 76.52% Twenty largest shareholders of ordinary shares as at 29 January 2021: Name HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty Ltd BNP Paribas Nominees Pty Ltd Anacacia Pty Limited HSBC Custody Nominees (Australia) Limited - A/C 2 Gentilly Holdings 2 Pty Limited Equitas Nominees Pty Limited Heatherwood Court Pty Ltd Timothy Looi Point Capital Pty Ltd AMP Life Limited BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Netwealth Investments Limited Mr Haining Yu & Ms Weihua Han Sophie MacIntosh Sarah Haas Mutual Trust Pty Ltd Total Restricted securities or securities subject to voluntary escrow There are no securities or securities subject to voluntary escrow as at 29 January 2021. Note: in accordance with the ASX Listing Rules, securities issued under the Company’s LTIP that have restrictions on their transfer under the terms of the LTIP are not regarded as being subject to voluntary escrow. On-market buy-back There is no current on-market buy-back. Smartgroup2020Annual ReportAccountability Care Team Five Year Summary Five Year Summary Index Income statement ($m) Revenue EBITDA NPAT (statutory) NPATA Statement of financial position ($m) Assets Liabilities Net assets Net cash/(debt) Share information 128 2020 2019 2018 2017 2016 216.3 95.4 41.3 65.2 408.4 137.5 270.9 2.5 249.8 118.2 61.4 81.0 472.9 196.2 276.7 (21.0) 241.8 115.0 59.3 77.8 464.0 171.7 292.3 (14.6) 205.4 147.1 93.6 41.2 64.1 466.7 262.0 204.7 (111.1) 63.3 32.8 44.0 438.6 244.3 194.3 (72.0) Ordinary shares (million shares) 132.8 131.7 130.9 123.2 121.5 Dividends per share (cents per share) Interim Special Final Total dividends Share price at 31 December ($) NPATA/ordinary shares (cents per share) Ratios Ordinary dividend payout ratio Operating cashflow/NPATA Net debt/EBITDA Operational metrics FTEs Packages 17.0 9.0 17.5 43.5 6.83 49.1 70% 115% (0.0) 21.5 20.0 21.5 63.0 6.94 61.5 70% 110% 0.2 20.5 – 21.0 41.5 8.88 59.4 70% 103% 0.1 16.5 – 18.5 35.0 10.85 52.0 67% 99% 1.2 9.8 – 15.0 24.8 6.28 36.2 68% 103% 1.1 630 689 695 706 544 360,500 358,500 343,000 325,000 221,000 Novated leases under management 66,700 68,500 65,250 62,500 53,000 Glossary of terms Glossary of terms 129 AGM ARC Board Company CAGR CEO CFO CGS CIO CLO COO Director EBITDA EPS Executive Executive KMP Greenfleet GRI Group GST HRRC ITIC KMP KPI LFS LTIP Net debt Non-Executive Director NPAT NPATA NPS Operating cash flow PBI PBT Smartgroup STIP TFR TSR VWAP WGEA Website The annual general meeting of the Company Audit and Risk Committee Board of Directors Smartgroup Corporation Ltd ABN 48 126 266 831 Compound annual growth rate Managing Director and Chief Executive Officer Chief Financial Officer Corporate Governance Statement. Available on the website at http://ir.smartgroup.com.au/Investors/?page=Corporate-Governance Chief Information Officer Chief Legal Officer Chief Operating Officer Director means a director of the Company Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for significant non-operating items Earnings per share The CEO and each of his direct reports The KMP, excluding the Non-Executive Directors An environmental not-for-profit organisation, whose mission is to protect the climate by restoring forests The Global Reporting Initiative is an international independent standards organisation that helps businesses, governments and other organisations understand and communicate their impacts on issues such as climate change, human rights and corruption. It developed the GRI Standards The consolidated Smartgroup Corporation Ltd entity consisting of the Company and the entities it controlled at the end of or during the year ended 31 December 2020 Goods and services tax Human Resources and Remuneration Committee IT and Innovation Committee Key management personnel, being those employees who had authority and responsibility for planning, directing and controlling the activities of the Group during the 2020 financial year, and includes the Directors Key performance indicator Loan funded shares Long-term incentive plan Cash and cash equivalents less corporate borrowings, adjusted to exclude capitalised borrowing costs Director who is not an Executive Net Profit After Tax Net Profit After Tax, adjusted to exclude the non-cash tax effected acquired amortisation of intangibles and significant non-operating items Net promoter score. Net promoter score is a measure of how likely a customer is to provide a word-of- mouth referral, measured on a scale of -100 to +100 Operating cash flow excludes receipts and payments from customers’ salary packaging accounts, significant non-operating items Public benevolent institution Profit before tax Smartgroup Corporation Ltd ABN 48 126 266 831 Short-term incentive plan Total fixed remuneration Total shareholder return Volume-Weighted Average Price Workplace Gender Equality Agency smartgroup.com.au Smartgroup2020Annual ReportAccountability Care Team GRI content index GRI content index 130 The 2020 Smartgroup Sustainability Report has been prepared in accordance with the GRI Standards Core Option. Identifying material topics, report content and boundaries We have selected material topics to report on that have the greatest impact on our stakeholders and the communities in which we operate and over which we have some ability to influence or address related impacts. A significant number of the possible material topics listed in the GRI standards are not relevant to our business, or have limited impact on our business and importance to our share holders and thus have been excluded from our review. Our process to identify material topics will continue to evolve as we continuously review the expectations of stakeholders and broader sustainability trends. The impacts for employee related topics are entirely within Smartgroup, whilst governance, environmental and community impacts occur both inside and outside Smartgroup and client, customer and supplier impacts occur mostly outside Smartgroup. The location of the disclosures are referenced to the relevant pages in this report, to Smartgroup’s Corporate Governance Statement and its website. Where it has not been possible to disclose information, then a brief explanation is given. GRI Standard Disclosure General Disclosures GRI 102: General Disclosures 2016 GRI 102: 1. Organisational Profile Reference or link 102-1 102-2 102-3 102-4 102-5 102-6 102-7 102-8 102-9 102-10 102-11 102-12 102-13 Name of the organisation Smartgroup Corporation Ltd Activities, brands, products and services Website: “About Us”, “What we do”. Pages 6, 10, 12 Location of headquarters Location of operations Ownership and legal form Markets served Corporate Directory (page 133) Australia – see Website ASX-listed public company Website: “About Us”, “Who we Help”, “What we do”. Pages 8-10 Scale of the operation Page 17-20 and Financial Report (page 70 onwards) Information on employees and other workers Pages 24-29 and Corporate Governance Statement Supply chain Page 39 and page 45 Significant changes to the organisation and its supply chain Precautionary principle or approach External initiatives Membership of associations Nil. There were no such changes in CY2020 Not applicable Not applicable Smartgroup is a member of NALSPA (National Automotive Leasing and Salary Packaging Association) and AFIA (Australian Finance Industry Association) GRI 102: 2. Strategy 102-14 102-15 Statement from senior decision-maker Managing Director and CEO Report (page 16) Key impacts, risks and opportunities Pages 36-41, 44-46 and Corporate Governance Statement GRI 102: 3. Ethics and integrity 102-16 Values, principles, standards and norms of behaviour Page 28 and Corporate Governance Statement 102-17 Mechanisms for advice and concerns about ethics Corporate Governance Statement GRI 102: 4. Governance 102-18 Governance Structure Corporate Governance Statement GRI Standard Disclosure GRI 102: 5. Stakeholder engagement 102-40 102-41 102-42 List of stakeholder groups Collective bargaining agreements Identifying and selecting stakeholders 102-43 Approach to stakeholder engagement 102-44 Key topics and concerns raised GRI 102: 6. Reporting practice GRI content index 131 Reference or link Pages 44-46 Nil Smartgroup identifies our key stakeholders as those who have the greatest impact on our business, or who are most impacted by our activities To ensure we focus on the issues that matter most to our stakeholders, we regularly engage throughout the year with stakeholders in different forums and ensure that the feedback is appropriately shared within the Company The topics and concerns raised depend upon the relevant group and their interests in the Company. Page 44-46 cover a number of these issues in our risks overview 102-45 102-46 102-47 102-48 102-49 102-50 102-51 102-52 102-53 102-54 102-55 102-56 Entities included in the consolidated financial statements Financial report of the Company for the year ended 31 December 2020 comprises the Company and its subsidiaries (the Group). Refer page 70 onwards Defining report content and topic Boundaries Page 130 List of material topics Restatements of information Changes in reporting Reporting period Date of most recent report Reporting cycle Reporting is limited to the disclosures most relevant to Smartgroup and are located at pages 22-46 No material restatements In 2019, Smartgroup progressed from ‘GRI Referenced’ to ‘GRI: Core’ reporting. There have been no further changes to reporting in 2020 1 January to 31 December 2020 February 2020 Annual Contact point for questions regarding the report Email: ir@smartgroup.com.au Claims of reporting in accordance with the GRI Standards GRI Content Index External assurance Page 130 Pages 130-132 No external assurance sought for the Sustainability Report Material topics GRI 200: Economic GRI 205: Anti-corruption 205-1 Operations assessed for risks related to corruption 205-2 Communication and training about anti-corruption policies and procedures The whole Smartgroup group of companies is subject to the risk assessment. No significant risks identified All employees of the Smartgroup Group undertake training 205-3 Confirmed incidents of corruption and actions taken There have been no confirmed incidents GRI 206: Anti-competitive behaviour 206-1 Legal actions for anti-competitive behaviour, anti-trust and monopoly practices None Smartgroup2020Annual ReportAccountability Care Team GRI content index GRI Standard Disclosure GRI 300: Environmental GRI 302: Energy 132 Reference or link 302-1 302-3 302-4 Energy consumption within the organisation Page 42 (Electricity – total consumption (kwh)) Energy intensity Page 42 (Electricity (tonnes CO2-e per FTE)) Reduction of energy consumption Pages 36-41 GRI 305: Emissions 305-1 305-2 305-3 305-4 305-5 Direct (Scope 1) GHG emissions Energy indirect (Scope 2) GHG emissions Not applicable Pages 40-41 Other indirect (Scope 3) GHG emissions Page 36-41 (in part) GHG emissions intensity Reduction of GHG emissions Page 36-41 (Electricity (tonnes CO2-e per FTE)) Page 36-41 GRI 400: Social GRI 401: Employment 401-1 401-3 Parental leave New employee hires and employee turnover Pages 22-29 and page 42 GRI 404: Training and education 404-3 Percentage of employees receiving regular performance and career development reviews GRI 405: Diversity and equal opportunity Page 42 100% 405-1 Diversity of governance bodies and employees Pages 24-26 GRI 419: Socioeconomic compliance 419-1 Non-compliance with laws and regulations in the social and economic area No non-compliance identified Corporate directory 133 Corporate Governance Statement The corporate governance statement, which was approved at the same time as the Annual Report, can be found at: ir.smartgroup.com.au/ Investors/?page=Corporate- Governance Annual General Meeting 12 May 2021 at 11am. Please refer to the website for further details. Corporate Directory Directors Michael Carapiet Timothy Looi Gavin Bell Andrew Bolam Carolyn Colley Deborah Homewood John Prendiville Ian Watt Company secretaries Sophie MacIntosh Jonathan Swain Registered office and principal place of business Smartgroup Corporation Ltd Level 8, 133 Castlereagh Street Sydney, NSW, Australia, 2000 Tel: 1300 665 855 Share register LINK Market Services Limited Level 12, 680 George Street Sydney, NSW, Australia, 2000 Tel: 1300 554 474 Auditor PricewaterhouseCoopers One International Towers Watermans Quay Barangaroo, Sydney NSW, Australia, 2000 Solicitors MinterEllison Lawyers Level 23, 525 Collins Street Melbourne, VIC Australia, 3000 Tel: 03 8608 2000 Bankers Westpac Group 275 Kent Street, Sydney NSW, Australia 2000 Australia and New Zealand Banking Group Limited 242 Pitt Street, Sydney NSW, Australia, 2000 Stock Exchange listing Smartgroup Corporation Limited shares are listed on the Australian Securities Exchange (ASX code: SIQ) Website smartgroup.com.au Smartgroup2020Annual ReportAccountability Care Team S m a r t g r o u p A n n u a l R e p o r t 2 0 2 0 smartgroup.com.au Smartgroup Corporation Ltd National Head Office Level 8, 133 Castlereagh Street Sydney NSW 2000