Cost-of-living insolvencies rise as ‘date-night economics’ hits small business cashflow

The so-called date night for couples appears to be becoming a luxury rather than a necessity and it’s hitting small businesses, triggering insolvencies.

Are couples forgoing their date nights in order to save money? One insolvency specialist thinks they are.

Cost-of-living insolvencies are on the rise as “date-night economics” hits small business cashflow, according to insolvency and business turnaround specialist Jirsch Sutherland.

The firm’s national managing partner, Bradd Morelli, said he had noticed a shift away from predominantly tax-driven insolvencies.

“According to the latest Alares Credit Risk Insights, the ATO is still the key driver of businesses being wound up and the big four banks continue to ramp up their court recoveries,” he said.

“However, we’re now handling more matters and receiving more inquiries from businesses that have a small but manageable tax debt, yet their financial distress isn’t caused by ATO pressures; it’s more likely to be cashflow issues.”

While the ATO has been active with 245 court actions in July and 217 in August – and the big four banks’ court actions stood at 178 and 186 in the same period, Mr Morelli said cost-of-living insolvency numbers would rise.

“It’s not a seismic shift yet but these types of insolvencies are increasing, particularly as consumers cut back their discretionary spending,” he said.

“I call it ‘date-night economics’, with householders reassessing what they spend their money on and, among other things, not going out as much.

“And it’s having a real domino effect, with myriad small businesses experiencing a cashflow hit – on top of the higher cost of doing business.”

There has been a spike in insolvencies in the hospitality sector.

According to the Australian Bureau of Statistics, during six of the past seven quarters, real retail spending declined. Real per capita retail spending contracted for the past eight quarters and was now 2.5 per cent lower than June 2023 and 6.3 per cent lower than June 2022.

Mr Morelli said there had been a significant increase in insolvencies and small business restructuring within the hospitality sector – particularly cafes and restaurants – as well as retail and building trades.

According to the latest Monthly Credit Risk Insight report by Alares, small business restructuring (SBR) accounts were trending towards 20 per cent of all insolvencies, representing a significant increase from previous years.

In September and October 2023 there were 74 and 90 SBRs respectively compared with 180 and 190 in July and August 2024.

“Anecdotally, I’ve spoken with a number of building contractors in recent weeks and they’re all saying the same thing: their workloads have dropped from the highs of the Covid years as homeowners have tightened their purse strings,” Mr Morelli said.

“Small Business Restructuring has had a positive impact on the economy since the regime was introduced, because SBRs provide much better returns to creditors than liquidations, they’re tax compliant, and they preserve jobs.

“Not only that, but with SBRs, directors stay in control of their companies and it’s a less invasive process than voluntary administration or liquidation.”

However, while SBRs have been getting the green light from creditors – including the ATO, which is usually the main creditor – Mr Morelli said there had been a perceptible change, and that there was an increase in the tax office voting against certain SBR plans.

“I understand there are three main reasons: director/shareholder loan accounts, trade creditors (except the ATO) being paid down prior to the appointment of the SBR practitioner, and poor compliance history,” he said.

“Having good compliance history is one of the indicators the ATO uses to determine the viability of a company.

“If it doesn’t have a good history, it can be a red flag. That’s why it’s so important to be up to date with activity statements, tax returns and superannuation returns and payments.”

Originally published as Cost-of-living insolvencies rise as ‘date-night economics’ hits small business cashflow