Insolvencies set to stay high in FY25

The number of business failures is predicted to keep rising with high interest rates a key factor.

The ATO’s mission of making debt collection a top priority for FY25 is clearly reflected in the latest insolvency figures. The start of the financial year shows numbers have risen – and are expected to exceed pre-pandemic levels – as the Tax Office and the big-four lenders clamp down on their recoveries.

Alares’ latest Monthly Credit Risk report found insolvency numbers in July were 40-50 per cent higher than historical levels while the month also saw the highest number of winding-ups in many years. Small business restructuring appointments are also high, fuelled by pressure exerted by the ATO. In July, SBRs accounted for just under 20 per cent of all insolvency appointments.

In its corporate plan for FY25, the ATO has stated it will focus on debt collection, declaring it will use earlier intervention and “firmer and stronger actions” when dealing with businesses with outstanding obligations. By the end of 2023, the ATO’s total collectable debt had increased to $52.4 billion. It responded by issuing an increased number of Director Penalty Notices, warning letters and garnishee notices. In the past financial year, the ATO issued 26,702 DPNs worth $4.4 billion, a 50 per cent jump on FY23.

Major lenders crack down on debt

However, the increase in insolvency numbers was not all down to the ATO. Court recoveries from the big-four banks also continue to rise – they were above historical levels throughout 2024 and show no sign of easing.

Meanwhile, CreditorWatch’s July Business Risk Index predicts nearly 88 per cent of regions throughout Australia will experience an increase in business failure rates over the next year, largely driven by high interest rates. Queensland is expected to see the highest rate of business failures while Western Australia is forecast to experience the largest rise in the failure rate. Another factor driving the trend is high commercial property prices and rents, and with soaring construction costs still affecting Queensland, it’s become increasingly difficult to add to the supply of commercial space.

ASIC found more than 11,000 businesses entered external administration during the last financial year, with construction (27%); accommodation and food services (15%) and other services (9%), the top three industry sectors affected. Of the 11,000, 53 per cent cited inadequate cash flow as a major cause, as well as poor strategic management and trading losses. Over the same time frame, around 10,000 personal insolvencies were reported to ASIC – down on the 10-year average of just above 21,000.

Regional areas are expected to record the lowest levels of failure rates over the next year, a legacy of lower commercial rents, low competition between businesses, older populations and stronger local economies.

Jirsch Sutherland Partner Andrew Spring says struggling businesses need to seek early assistance. “There are a number of solutions that can help but business owners need to contact their accountant as soon as they’re aware of any issues.”

Spring says the high number of Small Business Restructuring appointments reflects their growing popularity as a solution. “Around 20 per cent of all insolvency appointments in July were SBRs – and over two days in August we noticed 300 restructuring appointments were made, which is a huge spike,” he says. “They tend to provide better outcomes for creditors, which is why ATO likes them. The important thing is to get help as soon as you’re aware you need it. Jirsch Sutherland offers an obligation-free consultation which can provide you with guidance on the best course of action.”