Land tax, interest rate pressures on landlords contributing to insolvency ‘domino’ among SMEs

Landlords insolvency SMEs
Small business restructuring or voluntary administration are alternatives to insolvency. (Source: Bigstock)

Rising land taxes and higher interest rates have forced many Australian landlords to implement rent hikes on their commercial properties, which according to insolvency advisor Jirsch Sutherland only serves to add greater pressure to small-business owners and a rise to business and personal insolvencies, alongside a higher risk to personal assets.

“It’s having a real domino effect,” Jirsch Sutherland Partner Malcolm Howell, a Registered Liquidator and Bankruptcy Trustee, said.

“Landlords are under pressure from higher land taxes and rates and are having to increase rents, which then adds to small-business owners’ financial burdens. They’re already under fire from the ATO and banks, not to mention facing higher operating costs and superannuation requirements. The stark reality is that the expenses involved in running a business and retaining staff is proving challenging for many.”

Insolvencies peaked in March

According to Australian Financial Security (AFSA) figures, business-related personal insolvencies made up the bulk (27.3 per cent) of insolvencies in the year to December 2023. Furthermore, the latest Alares Monthly Credit Risk Insights showed that insolvencies in March peaked at the highest monthly level seen in many years at more than 50 per cent 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,” Howell said.

“There’s now an even greater risk of personal assets being exposed, as often business and personal assets are intertwined. I 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 – particularly if you seek help early.”

The latest Alares report found that SBRs continue to account for a growing percentage of all insolvencies, spiking in March amid mounting pressure from the ATO.

“As the ATO continues to disclose overdue tax debts, as well as issuing Directors Penalty Notices and warning letters, more small business owners are turning to the SBR process for relief,” Alares Director, Patrick Schweizer, said. “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. We have seen a marked increase in small business failures evidenced by the recent spike in SBR appointments.”

Alternatives to small business restructuring

For those businesses that don’t meet the SBR criteria, Howell suggests that voluntary administration is an option.

“It provides an opportunity for a business to continue trading, while giving the company breathing space and address outstanding debt in a more orderly manner,” he said. “VAs can be an excellent business rescue solution. It takes the pressure off the directors and gives the business the best chance of survival.”

And from a personal insolvency perspective, a Part X Agreement serves an alternative to bankruptcy.

“The word ‘bankruptcy’ brings with it numerous negative connotations and unfortunately, people often think declaring bankruptcy is the only way out of their financial woes. However, a Part X Agreement is an alternative,” Howell explained. “It’s designed for individuals who are financially insolvent and allows you to appoint a controlling trustee who 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, so it’s so important to speak with an expert in the field to help you navigate the best path forward,” Howell concluded.

This article was first published on Inside Small Business.