Australian businesses are facing a host of economic pressures, with the business failure rate climbing to its highest levels since the peak of the pandemic. According to CreditorWatch, the current national failure rate stands at 5.04%, up from 3.97% in October 2022. Projections suggest this could rise to 5.8% in 2024, driven by persistent challenges like high operational costs, declining consumer demand, and increasing insolvency actions.
Key sectors and regional trends
The food and beverage industry has been the most affected, with a failure rate reaching 8.5% as of October 2023 and an expected rise to 9.1% by mid-2024. Other sectors such as construction, retail, and accommodation are also experiencing elevated insolvency rates, all exceeding 5% in October 2023. These industries, vital to the economy, are grappling with diminishing consumer spending, higher interest rates, and escalating costs.
Geographically, businesses in Sydney’s western suburbs and southeast Queensland face the highest risks. Suburbs like Merrylands, Canterbury, and Bankstown report failure rates above 7.5%. In contrast, regional Victoria and parts of Adelaide are faring better, reflecting lower rents and more stable demographic factors.
ATO collection efforts drive business insolvencies to pandemic-era highs
Amid mounting financial pressures on Australian businesses, the Australian Tax Office (ATO) has intensified its tax recovery efforts, contributing significantly to a surge in business failures. With insolvencies at their highest rate since 2020, many companies are struggling to meet obligations as the ATO resumes aggressive enforcement after a period of pandemic leniency.
During the COVID-19 pandemic, the ATO adopted a more lenient stance, allowing businesses breathing room through deferred tax payments and reduced recovery actions. However, as economic conditions began to normalise, the ATO has ramped up its collection activities. This shift has included issuing more director penalty notices, filing winding-up applications, and pursuing unpaid tax debts with renewed vigour.
Strategic responses for businesses
To withstand the growing pressure from the ATO’s tax collection measures, businesses can adopt proactive strategies, including:
- Seeking Professional Advice: Consulting insolvency experts can help companies manage tax liabilities and explore viable options like payment plans or voluntary administration.
- Improving Cash Flow Management: Streamlining accounts receivable processes and reducing unnecessary expenditures can help businesses stay current with their tax obligations.
- Engaging Early with the ATO: Open communication with the ATO to negotiate payment terms or extensions can prevent escalation to formal recovery actions.
What lies ahead
While the ATO’s enforcement efforts are expected to remain robust, easing inflation and potential interest rate cuts in 2024 may alleviate some financial pressure. However, businesses will need to stay vigilant, particularly in navigating ATO actions that could trigger insolvency.
Proactive planning, combined with a focus on financial resilience, will be critical for companies aiming to weather the storm of increased tax enforcement.
At AVA Advisory, we understand the unique challenges small and medium business owners face. In these uncertain times, our experienced team of debt solutions experts and corporate advisors can provide practical, actionable advice to help you boost business preparedness, as well as build resilience to financial and operational risks.
Contact us now at 1300 181 220 for a private, obligation-free discussion, or schedule a meeting via our online booking system.
