Business failures in NSW closing in on record high as company prospects look bright elsewhere

Australia’s most populous state is racing towards a record year for business failures as the nation endures a two-speed economic slowdown which is seeing companies perform better elsewhere.

NSW is edging towards a record year of business failures as a two-speed economic slowdown driven by poor consumer spending, interest rate and inflation pressures spell mixed fortunes for many companies.

While all states have seen insolvency rates climb in the past year, growth varies significantly, with the country’s eastern states feeling the pinch more so than many smaller jurisdictions and Western Australia.

Nationally, the country is bracing for the highest rate of insolvencies since the depths of the 2008 Global Financial Crisis with 8742 insolvency appointments up to April 30 this financial year, compared with 6200 during the same period a year ago.

Data from the Australian Securities and Investments Commission shows that NSW is set to register the highest number of insolvencies since the data set from the corporate regulator started in 1999.

While NSW is home to more businesses than any other region, the state’s insolvency rate has climbed 43.3 per cent to 3695 this financial year to April 30, putting it on track to surpass its previous high of 4487 in the 2008.

CreditorWatch chief executive Patrick Coghlan told The Australian said the cost of doing business in NSW made it very hard for many operators in the state, with the credit agency identifying Sydney’s southwest as particularly vulnerable.

“Sydney is a really expensive place to do business, and southwest Sydney is sort of a lower socio-economic demographic, therefore less capable of dealing with increases in property prices, both, you know, in buying property but also in renting property,” he said.

“So that has a knock on effect on consumer spend and therefore impacts businesses. Businesses themselves also have to deal with rising costs, which puts them under a lot of pressure.”

Victoria had the smallest growth in insolvencies among the major of the states with rates up 31.9 per cent to 2247 — putting it on track for its worst year since 2016. The Northern Territory rose 22.6 per cent but to a small figure of 38.

Queensland had the third-highest rate of insolvencies at 1608 as of April 30, a 39 per cent jump on the previous period. It is unlikely to surpass its recent peak of 2292 in 2012. Tasmania had the sharpest increase in the past year, up 144.4 per cent, but off a small base of 66, while the ACT rose 44.1 per cent to 147 and South Australia firmed 43.5 per cent to 353.

The worst regions for business defaults were in NSW and Queensland, according to CreditorWatch. The credit bureau says businesses in Bringelly-Green Valley and Merrylands-Guildford in Sydney’s southwest were expected to have the highest rate of defaults in the coming 12 months, at nearly 8 per cent.

In Queensland, Ormeau-Oxenford, Surfers Paradise, Broadbeach-Burleigh and Southport had the strongest risk for defaults. Mr Coghlan said the Gold Coast, which is reliant on tourism, has been impacted by international tourists not returning to levels seen prior to the pandemic, while holiday-makers were trading down to cheaper alternatives.

“Post Covid, the Gold Coast has not got that big international tourism top up that it has been used to,” he said.

The Gold Coast is seen as one of the regions most as risk of business defaults in the next 12 months Picture: Stephen Brookes

“Now the region is also vulnerable to the trading down concept, where a family will opt for a three-star hotel instead of five, while a couple who once would have gone to a fancy Japanese restaurant is now dining at Sushi Train.”

The regions least likely to see payment defaults in the past year were mostly in South Australia and Victoria, with Borwood, Unley, Ballart and Yarra Ranges among the most stable pockets.

Major of insolvencies across Australia have been from construction firms with accommodation and food services, as well as retail, increasing amid a pullback in consumer spending.

The past month has seen a number of major companies buckle with Tier 2 commercial construction firm Stevens Construction entering into voluntary administration on Monday, placing 10 projects across Sydney and the Central Coast at risk.

Sunshine Coast-based airline Bonza, entered into voluntary administration on April 30, was one of the 994 businesses that went insolvent in April.

Melbourne-based venue seating manufacturer Camatic Seating was also placed into voluntary administration last month with debts of $29m.

Poor consumer spending is hurting many retailers. Picture: ChrisPavlich/The Australian

Local designer label Dion Lee also entered into voluntary administration in the past week amid poor retail sales, months after Taylor Swift was seen wearing the label at the Super Bowl.

Insolvency rates have surged since Covid-19 support measures and flexibility from the Australian Taxation Office were eased.

Business Reset director and restructuring practitioner Jarvis Archer said despite the ATO’s significant efforts to date, there were still businesses with large tax debts that have so far avoided recovery action.

He added that he was now recommending his clients that are struggling with debt to consider liquidation instead of undertaking small business restructure due to the tax office only viable businesses with a history of paying tax survive.

“While every small business owner wants to save their business, if you’re losing more than $10,000 per month for six months or more, or you haven’t restarted paying the ATO in the last two years, you need to be realistic about the prospects of your business,” he said.

“Either implement the changes you believe need to be made to see profit improvements, or think about whether you’d be better off with a job, and without the stress of running your small or medium business.”