Increased land taxes resulting in SME insolvencies

According to registered liquidator and bankruptcy trustee Malcolm Howell, rising interest rates and land taxes – and landlords subsequently increasing rent – have placed significant pressure on small businesses.

Howell said that increased property taxes for landlords have caused a “domino effect” that has increased the number of insolvencies being filed by small- to medium-sized enterprises (SMEs), which are struggling to manage rising business costs.

Howell commented on the challenges that small businesses are facing, stating: “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 [are] proving challenging for many.”

The Australian Securities & Investments Commission (ASIC) series 3 data found that SMEs dominated external administrators’ reports, with eight out of 10 companies that entered administration in the financial year 2023 having assets of less than $100,000.

ASIC reported that the most common cause of administration was due to “inadequate cash flow or high cash use” that was present in 52 per cent of reports.

Howell said that small businesses were at “greater risk” as their personal assets (including the business owners’ homes) are frequently used to secure lending.

He commented: “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.”

This came as Banjo’s recent SME Compass Report 2024 also found that an increasing number of SMEs are planning to use secured funding in the coming year.

Indeed, 54 per cent of surveyed SMEs were planning to use secured funding, which was an increase from 45 per cent in 2023, the report found.

Similarly, Banjo found that only 19 per cent of SMEs were planning on using unsecured funding in 2024, a reduction of 9 percentage points from the previous year.

Speaking on financial solutions for SMEs, Howell commented: “[Voluntary administration] provides an opportunity for a business to continue trading, while giving the company breathing space and address outstanding debt in a more orderly manner.

“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.”

Land tax has been an increasing focus for governments recently, with the NSW government confirming that home owners would be required to pay the emergency services levy to fund Fire and Rescue NSW, the NSW Rural Fire Service, and the NSW State Emergency Service.

Speaking on the introduction of NSW’s emergency services land tax, NSW executive director of the Property Council, Katie Stevenson, said: “Now is the worst possible time to be proposing taxes and charges that will make housing more difficult to deliver, more expensive and drive much-needed investment interstate.”

Increased land taxes were also aimed at property investors in Victoria last year when the government introduced a 7.5 per cent levy on short-stay accommodations.

The federal government has also pushed through foreign investor tax legislation that would increase vacancy fees for dwellings purchased after 9 May 2024 sixfold.

[Related: Insolvency data reveals ‘COVID-19 lag’ impact on SMEs]