Land tax, interest rate pressures add to insolvency ‘domino’

Personal assets at risk

A common refrain my colleagues and I are increasingly hearing from businesses under stress is that “landlords are unforgiving”. Commercial property owners are being hit by high and rising land taxes, not to mention high interest rates, and they’re being forced to hike up rents in order to meet their obligations. And in turn, that’s adding to the pressures being felt by small businesses already beleaguered by tax debt, higher operating costs and superannuation requirements. The stark reality is that the expenses involved in running a business and retaining staff are proving challenging for many.

As a result we’re seeing more business-related personal insolvencies. According to Australian Financial Security (AFSA) figures, business-related personal insolvencies made up the bulk (27.3%) of insolvencies in the year to December 2023. And the latest Alares Monthly Credit Risk Insights shows insolvencies in March peaked at the highest monthly level seen in many years – more than 50% above pre-COVID levels.

The ATO continues to put pressure on business owners, with a high level of Director Penalty Notices (DPNs) being issued and business tax debts being disclosed. Court recoveries are also high, as both the ATO and big four banks chase monies owed. Now there’s an even greater risk of personal assets being exposed, as business and personal assets are often intertwined. I strongly urge business owners to start monitoring their own position even more closely and consider whether their business and personal assets are protected. And if you are in financial distress, remember there are now more options than ever before, like the Small Business Restructuring (SBR) process.

The latest Alares report shows that SBRs continue to account for a growing percentage of all insolvencies, spiking in March amid mounting pressure from the ATO. Alares Director Patrick Schweizer reports that more small business owners are turning to the SBR process for relief as the ATO continues to disclose overdue tax debts, as well as issuing DPNs and warning letters. “We have seen a marked increase in small business failures evidenced by the recent spike in SBR appointments,” Patrick said recently.

He also mentions the risk to personal assets: “Small business lending often involves security over the business owner’s home or other personal assets. These assets can be at risk when the business faces financial hardship,” Patrick said.

Of course, we understand that not every business will meet the SBR criteria, but that doesn’t mean there aren’t other options, such as voluntary administration. This regime provides an opportunity for a business to continue trading, while giving the company breathing space and address outstanding debt in a more orderly manner. It takes the pressure off the directors and can give a business the best chance of survival.

And from a personal insolvency perspective, bankruptcy doesn’t have to be a foregone conclusion. For example, a Part X Agreement could be an alternative. It’s designed for individuals who are financially insolvent and allows you to appoint a controlling trustee who then calls a meeting of creditors and negotiates a binding formal agreement for debt repayment that’s tailored to suit your individual financial circumstances.

There really are more options than ever at both a corporate and personal insolvency level, which is why it’s so important to speak with an expert in the field to help you navigate the best path forward. My colleagues and I are here to assist directors and advisers and all you need to do in the first instance is reach out for an obligation free consultation: https://www.jirschsutherland.com.au/our-people/

Malcolm Howell
Partner
Registered Liquidator / Registered Bankruptcy Trustee
Jirsch Sutherland