The construction sector in Australia is dominating other industries in terms of the number of defaults which are occurring on tax payments, new data shows.

And the number of external administrations across all industries has surged to record highs.

On Thursday, credit reporting firm CreditorWatch released the March 2024 edition of its Business Risk Index report.

The report provides a monthly overview of business insolvency risk across regions and industries throughout Australia.

According to the report, the construction sector is dominating the overall number of defaults which are occurring in respect of payments to the Australian Taxation Office.

All up, the construction industry accounted for almost one quarter (23.8 percent) of all ATO defaults in excess of $100,000 that occurred in March.

This is nearly twice the number of defaults compared with the next highest industry (Professional, Scientific and Technical Services – see chart).

Within the construction sector, more than seven in ten (70.4 percent) of ATO defaults occurred in the Construction Services subsector.

Businesses in this sector are mainly smaller sub-contracting businesses.

Construction also has the second highest rate of ATO payment default (behind food and beverage services) at 1.14 percent (see chart).

Meanwhile, the data also showed that across all sectors, the number of external administrations which occurred during March surged to record highs of just over 1,200.

This represents a 22.1 percent increase compared with the number of external administrations that occurred in March 2023.

The data also shows that:

• The average value of invoices saw a seasonal uptick in March but is still trending strongly downwards.
• B2B payment defaults decreased slightly from February to March but are up 22.6 per cent year-on-year.
• Credit enquiries were up 4.3 per cent from February to March but are down 22.8 per cent year-on-year.
• Court actions are up 45.5 per cent year-on-year and are gradually returning to pre-COVID levels.
• Businesses in the food and beverage services sector remain the most at risk of business failure (7.44 per cent) by a considerable margin. Public administration and safety is the next riskiest industry at 5.66 per cent followed by arts and recreation services (5.42 per cent).
• The mining sector is experiencing increased insolvencies and late payments due to multiple pressures.
• The regions with the lowest risk of business failure remain concentrated around regional Victoria, inner-Adelaide and North Queensland. Unley in South Australia, is the top-ranked region, followed by Norwood-Payneham-St Peters, also in South Australia, and Ballarat in Victoria.
• The regions with the highest risk of business failure are around Western Sydney (five of the top six) and South-East Queensland, with Merrylands-Guildford (NSW) the top-ranked region followed by Bringelly-Green Valley and Canterbury, all in Western Sydney.

Speaking after the release of the report, CreditorWatch CEO Patrick Coghlan told Sourceable that problems for many small construction businesses include a lack of administrative resources along with a poor culture regarding payment across the industry more generally.

“I think the first thing to note is that construction historically is known for being a slow paying industry,” Coghlan said.

“And there is a lack of sophistication when it comes to accounting, collection, credit and general business admin that plays into that.

“But the sector is also notorious for non-payment and even phoenixing activity. That’s certainly contributing to these figures.”

Asked about strategies which small construction businesses could employ in order to avoid problems, Coughlan encouraged action in three areas.

For very small businesses, it is important to have professional help in order to remain on top of financial matters.

This could be from a bookkeeper, an accountant or another party.

Beyond this, construction business operators need to understand the risks involved and to take measures to mitigate these.

Actions in this area could include asking for up-front deposits from clients, ensuring that collections are being done on a regular basis and minimising both overdue amounts and the credit which they extend to particular clients.

Finally, it is important to perform due diligence on prospective clients before entering into contracts and to undertake ongoing monitoring of client creditworthiness.

This can be done via credit reports from CreditorWatch or other providers.

Speaking about the surge in external administrations more generally, Coghlan says that this is being driven by greater cost pressures on business along with cost of living pressures which are being placed on consumers.

He says such pressures are unlikely to abate over the near term.

“Most businesses, particularly those that are consumer facing, and therefore exposed to the vagaries of discretionary spending, are currently being hit by a range of heavy impacts,” Coghlan said.

“We don’t expect business conditions to improve markedly until consumer spending increases. And that is dependent on interest rate relief, which is not even on the horizon at this point given the high rates of inflation in the US.”

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