Why small business insolvency numbers are expected to rise

Small business insolvencies are expected to worsen as Labor’s changes to negative gearing and capital gains tax slow the economy and eventually hit bigger corporations, a leading insolvency expert fears.

The Reserve Bank of Australia’s three interest rate rises this year have already worsened the rate of companies going into external administration for the first time.

The number of court-appointed administrators soared by 11 per cent to 3094 when the year to June 21 was compared to the corresponding period in 2025, Australian Securities and Investments Commission data on companies showed, as the tax office also cracked down on directors with unpaid debts.

Creditors’ voluntary liquidation rose by a more modest 3 per cent to 6163.

Both insolvency categories were a sign that recent rate hikes and new Budget taxes were hitting small and medium businesses first, KPMG Australia’s partner in charge of turnaround and restructuring, David Hardy told The Nightly.

“There is a real prospect that insolvencies continue to kick up,” he said.

“My simple observation is that small business is the heartland of the economy and at some point, it will work its way through and impact the big end of town; at some point there will be knock-on consequences for other parts of the economy and the larger corporates.”

The rise in diesel prices at the start of the Iran war is particularly hurting the transport sector with insolvencies up 13.9 per cent to 794.

Construction continues to be the worst industry for insolvencies, with 3359 going into administration during the past financial year.

Mr Hardy said Labor’s changes to negative gearing and the 50 per cent capital gains tax discount in the May Budget were now having a bigger effect on property-focused businesses, covering builders and those providing property management services to landlord investors, as real estate values fell.

“There will definitely be unfavourable impacts on the overall sector which would typically then, you would see, that manifesting itself in terms of increased insolvencies in those sectors,” he said.

“That is one element in conjunction with the inflationary environment, higher interest rates, that all have downward pressure on the property sector as a whole, not necessarily just the Budget changes in isolation.”

The ANZ bank is predicting Australia’s economy will grow by just 1.1 per cent in 2026 and 1.6 per cent in 2027.

This is well below the long-term average of 3 per cent and well under the already weak 2.5 per cent pace in the year to March.

Senior research analyst Siddhant Kalra and senior economist Jasmine Zheng noted the Reserve Bank would be unable to cut interest rates until late 2027, even if growth was under the usual 2.5 per cent level that traditionally sparked rate cuts.

“Now, in an era of frequent and persistent supply shocks and a starting point of excess demand, an even weaker pace of growth is likely to be necessary to prevent rate rises,” they said.

Small Business Australia executive director Bill Lang said many more sole traders, that didn’t have a company structure, were likely to be closing, as Labor’s Budget tax changes discouraged consumers from spending.

“If you look at the future and feel less certain about it, the smart thing for consumers to do is then cut back on their expenditure so that they’ve ideally got more nuts saved away for a rainy day because we’re not sure when the next rainy day’s coming and how bad it might be,” he told The Nightly.

“Some people start going, ‘Gees, what’s the future look like? in terms of, ‘Are there other things they might be doing from a Budget level?’”