Rural Australia's small business backbone getting older, weaker

The trend in agriculture reflects a widespread major shake-up looming across small business in general, where an ageing ownership profile and debt recovery pressures are seeing increasing numbers of operations being wound up.

However, those starting rural sector businesses are more likely to survive their first few years than new small businesses kicking off in other sectors of the economy, according to financial services firm RSM Australia.

Australia has about 2.6 million businesses categorised as "small" because they turn over less than $10m each in a typical year.

However, self-employed leaders at the helm of almost 30 per cent of these businesses are aged 50 or older, with about half of them (340,000) approaching, or already past, retirement age.

That threatens to hit particularly hard in the bush, according to RSM's Will Laird, because as small business bosses age their capacity drops, including their ability to keep up with technology change and fresh opportunities to help them stay ahead of bigger competitors.

While many were keen to employ extra help, or start handing ownership to next generation family members or other younger operators, Mr Laird said they were hitting two significant hurdles.

Labour shortages across the farm sector had forced many to operate below the capacity they were expected to achieve.

Their labour shortage challenge was not helped by a recent post-pandemic population drift away from some agricultural districts, eroding the big gains achieved in regional areas between 2020 and 2022 when a wave of city dwellers went bush.

Overseas-sourced workers were now a common labour supply option for small businesses such as farms, agricultural engineering firms, veterinary clinics and farm supplies firms.

However, in addition to covering the initial visa and employment costs, retaining foreign workers invariably meant costly visa extension expenses and other fringe benefits taxed payment pressures.

Meanwhile, cost disincentives associated with intergenerational business transfers, particularly capital gains tax (CGT), were discouraging existing owners to sell to new, younger operators.

"We think there's a very good case for concessions on capital gains tax for any intergenerational transfer of ownership when a farm or other small business sells to a younger owner," said Mr Laird, an RSM partner and agribusiness specialist.

"At the moment the prospect of CGT is hanging over many existing owners, discouraging them from making firm exit plans, also potentially encouraging next generation owners to drift off elsewhere.

"It's restricting the chances of new capital flowing into the existing business, or fresh ownership ideas."

Anecdotal feedback suggested key reasons small businesses folded were their lack of capital to expand, and reluctance by younger family members to take over and commit to a lengthy debt repayment period before receiving any realistic payback.

"Fortunately stamp duty exemptions do exist to assist family farms to be passed down to the next generation, so with certain provisions, it would seem logical to have CGT exemptions, too, Mr Laird said.

Offspring should not have to wait until mum and dad died to buy into their business.

RSM has also highlighted increasing insolvencies and the past year's rapid interest rate rises as threats to small business survival.

The Australian Taxation Office and creditors had stepped up debt recovery actions against struggling businesses, leading to increased insolvencies.

Small businesses owed 67pc of Australia's total collectable tax debt of $50 billion.

Of the 5400 reports lodged by insolvency practitioners in 2022-23, about 83pc related to small businesses.

RSM business advisory partner Brisbane, Andy Graham, said while the federal government had provided well-received short term relief to small businesses via previous measures such as the instant asset write-off and energy rebates, he felt next month's Federal Budget needed to address the long-term sustainability of Australia's small business sector.

In particular, it should focus on energy supply and supporting innovative entrepreneurs to drive productivity outcomes.

Mr Graham said while there were some positive signs of a new wave of emerging millennial business entrepreneurs, the big question remained about who would take over the hundreds of thousands of existing businesses serving local communities.

"Concerningly, in 2022-23 the number of new small business entrants (405,000) was only just ahead of the number exiting the business scene (384,000)," he said.

Importantly, small and mid-sized businesses tended to commit more investment to innovation than big corporations according to recent Reserve Bank of Australia commentary.

"If small businesses are going to be the innovation engine room of our economy they should be encouraged and supported," Mr Laird said.

He noted the agriculture business start ups also tended to be more resilient and likely to "tough it out for longer" than their city peers.

However, he qualified that observation by noting agriculture sector operations tended to be "fairly capital intensive from the start".

Therefore, a new agricultural business may have more resources and lending support behind it to get their enterprise rolling.