Rising land taxes and interest rates force landlords to increase rents, hurting distressed business

A ‘domino effect’ has emerged with rising land rates and interest rates forcing landlords to pass costs on through rent increases, potentially pushing more businesses to the brink.

Rising land taxes and higher ­interest rates are creating a “domino effect”, forcing landlords to hike up rents on their commercial properties, potentially leading to rising business and personal insolvencies, according to Jirsch Sutherland partner Malcolm Howell.

A registered liquidator and bankruptcy trustee, Mr Howell said rental rises were another issue for small businesses to deal with and have led to an increase in business-related personal insolvencies. According to Australian Financial Security, such insolvencies made up the bulk (27.3 per cent) of insolvencies in the year to December.

And the latest Alares Monthly Credit Risk Insights shows insolvencies in March peaked at the highest monthly level seen in many years: more than 50 per cent above pre-Covid levels.

“It’s having a real domino ­effect,” Mr Howell said. “Landlords are under pressure from higher land taxes and rates and are having to increase rents, which then adds to small business owners’ financial burdens.

“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 is proving challenging for many.”

Mr Howell said the Australian Taxation Office continued to put pressure on business owners, with a high level of director penalty notices (DNP) being issued and business tax debts being disclosed.

“Court recoveries are also high, as both the ATO and big four banks chase moneys owed,” he said. “There’s now an even greater risk of personal assets being exposed, as often business and personal assets are intertwined. I urge business owners to start monitoring their own position even more closely and consider whether their business and personal assets are protected.”

Alares director Patrick Schweizer said as the ATO continues to disclose overdue tax debts, as well as issuing DNPs and warning letters, more small business owners are turning to the small business restructuring (SBR) process for relief.

Jirsch Sutherland partner Malcolm Howell.

The Alares report showed that SBR as been growing and ­accounted for 16 per cent of all insolvency appointments.

“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,” Mr Schweizer said.

“We have seen a marked increase in small business failures evidenced by the recent spike in SBR appointments.”

The recent Westpac-Melbourne Institute’s consumer sentiment survey revealed a fall in consumer confidence at the April survey of 2.4 per cent.

Consumer confidence has now been near-record lows for two years, representing one of the longest lengths of time of consumer despondency since the survey began.

What should be of concern to retailers is the slump in the “time to buy a major item” index, which was down 6.6 per cent month on month, and is at record lows.

Vantage Performance chief executive Michael Fingland whose company specialises in turning around distressed businesses said they have had a significant increase in work since the start of the year.

“We've seen a large increase in work ad that has been aligned with the ATO ramping up recovery proceeding,” he said.

“The total amount of debt outstanding to the ATO which is predominantly from SMEs (small medium enterprises) is $60bn and it has gone up $20bn since the start of Covid.

“We’ll have a bumpy 12 to 18 month period. We have household savings ratio of 1.2 per cent which is the lowest in 30 years and households have no cash left. Because of rising inflation and the increase interest rates they have no spare cash and are maxing out credit cards so there’s no buffer left.”

Mr Fingland said while businesses in the construction and discretionary retail sectors remain over-represented he has been seeing a rise in cattle producers and people on the fruit and vegetable sector seeking help.

“With the BOM (Bureau of Meteorology) calling an El Nino cattle producers started destocking because of expected drier conditions,” he said. “They were selling at a loss or very low margins as their produce flooded the market but there was a lot of rain and never so much feed.”

Originally published as Rising land taxes and interest rates force landlords to increase rents, hurting distressed business