Recently implemented employee payroll reforms are set to materially change the cash flow landscape for Australian businesses.
Considered in isolation, these reforms may seem innocuous and well intentioned, however, they come at a time when many businesses’ cash reserves are already coming under strain on multiple fronts, whether from geopolitical uncertainty, economic downturns, inflationary and interest rate pressures, or reduced consumer spending.
For businesses already buckling under these pressures, the reforms may ultimately be the straw that breaks the camel’s back, precipitating the significant insolvencies that have been anticipated for some time. For directors, the stakes are particularly acute: the reforms intersect with the Director Penalty Notice regime and Safe Harbour entry hurdles requirements in ways that can convert a company’s cash-flow shortfall into personal liability.
- Australian businesses are facing mounting financial pressure from persistent inflation, elevated interest rates, subdued consumer spending and broader economic uncertainty, with corporate insolvencies continuing to rise.
- From 1 July 2026, the introduction of Payday Super, together with increases to the National Minimum Wage and modern award wages, will materially alter the timing of employee payment obligations.
- While these reforms are unlikely to cause insolvency in isolation, they may significantly increase liquidity pressure for businesses already operating with thin margins, limited working capital and constrained cash flow.
- Where the reforms lead to employee entitlements not being paid as they fall due, this will heighten legal risk for directors personally via exposure under the Director Penalty Notice regime and limit access to Safe Harbour.
- Businesses and directors should proactively review payroll systems and cash flow forecasting to ensure they can meet these obligations in real time. Where necessary, restructuring options should be considered early to address any anticipated liquidity shortfalls.
Economic backdrop
Prior to the 2020 Covid-19 pandemic, Australia had not experienced an economic recession for nearly 30 years. While that economic run was briefly punctuated by a short-lived technical recession in the first half of 2020, the Australian economy quickly rebounded.
Beneath that rosy statistic lies a more troubling reality: many Australian businesses have been forced to navigate successive macroeconomic headwinds since the onset of the pandemic. For some, these challenging conditions date back even further.
We have also seen stagnation in markets for over-valued assets purchased or invested in during pandemic times, which investors have since struggled to reconcile with prevailing mark-to-market values. This has permeated a wide range of assets, from beach houses in sought-after Australian coastal spots, through to biotech and bike manufacturing companies.
Lenders and investors alike have been reluctant to move on these assets at a loss and have instead opted to ‘wait and see’ if valuations improve. This has in turn prevented working capital tied up in those assets being redeployed to more profitable investments for businesses.
More recently, geopolitical disruptions have added further strain. The conflict in the Strait of Hormuz has sharply inflated energy costs for businesses. Even businesses without a direct exposure to energy price inflation have experienced knock-on effects via increased shipping costs, extended transit times and exacerbated pressures on fuel, freight, insurance and commodity costs – even the local coffee shop has been hit (or so says the price of coffee).
As noted, many businesses have been struggling for several years as a result of the business disruption and increased costs caused by the external events beyond their control. Add inflation, interest rate pressures, reduced discretionary spending and now tax reform and it is a heady mix for any economy and business to absorb.
So, what do the numbers say?
Recent data indicates that insolvency levels in Australia are steadily rising due to these challenges. Whilst they have not, at this stage, reached alarming levels, corporate insolvencies have in particular increased significantly, with ASIC recording 14,722 companies entering external administration in FY24-25, compared with 11,053 in FY23-24 and 7,942 in FY22-23.
The broader growth outlook offers little comfort. Deloitte has reportedly forecast that weak growth this financial year and next will mark the most prolonged stretch of sub-2% growth in three decades, noting that “strong population growth has masked a weak underlying productivity performance and lifted aggregate growth while doing less to improve living standards”. With underlying inflation expected to remain elevated, Deloitte has also forecast a further rate rise this year.
For many of these businesses in consumer exposed sectors – such as retail, hospitality, construction and commercial real estate – the equation is simple: as consumers feel the hip-pocket pinch, they prioritise essentials, discretionary spending falls and some companies fall over. Consumer sectors further share a high exposure to labour costs and may therefore be in line for even further strain.
Payday super reforms
From 1 July 2026, a little-understood change to the timing by which businesses must pay their employees’ superannuation contributions has come into effect. We have discussed the details and background to those changes in our earlier article, Payday Super: What the 1 July 2026 reforms mean for directors, businesses and Safe Harbour.
In short, from 1 July 2026 employers need to pay employee superannuation contributions in line with each pay cycle, rather than the previous quarterly cycle, with contributions required to be received by an employee’s nominated superannuation fund within seven business days of payday.
This reform, known as ‘Payday Super’, will also coincide with increases to the National Minimum Wage and modern award wages. For many employers, these changes will merely require an administrative and payroll overhaul; yet for some businesses already under pressure, the effect may be much more significant.
Impact on cash flow
The superannuation liability itself is not new. What is changing is timing. For Australian businesses the bottom-line impact is that companies will on average need to find an extra 12-15% of cash each month (or more frequently where employees are for example paid fortnightly or even weekly).
Under the previous regime, employers generally paid superannuation within 28 days after the end of each financial quarter. Under Payday Super, that cash must be available much earlier. It follows that businesses that have historically relied on delayed superannuation payments as a short-term cash-flow buffer will have less room to manoeuvre, with superannuation needing to be funded more frequently and against a higher wage cost base.
This will be particularly relevant for businesses that:
- have large payroll obligations
- employ a significant number of minimum wage or award-reliant employees
- operate with seasonal or irregular cash flow
- rely on stretching creditors to manage liquidity
- are already behind on tax or employee entitlement obligations
- have not upgraded payroll systems and internal finance controls.
Businesses in industries such as hospitality, retail, and construction may be particularly exposed, given their combined sensitivity to labour costs, volatile rental conditions, elevated interest rates and revenue seasonality. These pressures may further flow through to contractual counterparties, including corporate landlords, suppliers and service providers.
The issue is not that Payday Super or the minimum wage increase will alone cause insolvency. Rather, these changes will impact businesses already operating with limited working capital, thin margins and little tolerance for timing shocks. For many Australian businesses in impacted sectors, this cumulative impact may prove too great to withstand.
ATO enforcement and DPN risk
The Australian Tax Office (ATO) has finalised Practical Compliance Guideline PCG 2026/1, which sets out its first-year compliance approach for Payday Super.
Broadly speaking, under the reforms employers will be assessed by reference to low, medium and high-risk zones. Low-risk employers will generally be those that make genuine attempts to comply, maintain strong payroll controls, make contributions on time and promptly remediate errors. High-risk employers will include those with repeated late payments, unresolved shortfalls, incorrect calculations or poor engagement with the ATO. However, the tiered compliance approach should not be mistaken for a grace period.
The reforms will also intersect with the existing Director Penalty Notice (or ‘DPN’) regime. DPNs allow the ATO to recover certain company tax debts, including GST, PAYG withholding and superannuation guarantee charges, directly from directors personally.
This is not a theoretical risk. In the 2024-25 financial year, the ATO issued more than 84,000 DPNs to directors of approximately 64,000 companies, a 136% increase on the prior financial year.
For directors, the key point is that unpaid superannuation can create both corporate and personal exposure. Where a company fails to pay superannuation on time, the company may become liable for the superannuation guarantee charge leading to interest accruing and tax deductibility consequences. If that liability remains unpaid, directors may be exposed to DPN risk or indeed at a later stage to liability for insolvent trading.
Directors should not wait until a DPN is issued to take advice. By that stage, the available options may be narrow and the timing pressure acute.
Safe Harbour and restructuring options
The Payday Super reforms will also have consequences for directors seeking to rely on Safe Harbour under section 588GA of the Corporations Act 2001 (Cth) for protection against potential personal liability for insolvent trading.
Safe Harbour can protect directors from insolvent trading liability, but only where certain requirements are met. One ’entry hurdle’ is that employee entitlements are paid by the time they fall due and the other is tax reporting obligations are met.
Superannuation is an employee entitlement. If superannuation is not paid when required, directors may be unable to avail themselves of Safe Harbour protections where required and thereby expose themselves to personal liability for insolvent trading.
This may force directors into earlier decision-making. If a company cannot meet increased wage costs and more frequent superannuation obligations from operating cash flow, such that Safe Harbour protection is unavailable, directors will need to consider whether:
- additional sources of funding are available
- the company can continue to trade as a going concern
- the appointment of a voluntary administrator is required to protect directors from personal liability for insolvent trading.
In some cases, directors, shareholders or related parties may also consider providing section 560 funding. Section 560 of the Corporations Act allows a person who advances money to a company for paying certain employee entitlements to be subrogated to the priority position those employees would have received had the company been wound up with those entitlements unpaid.
If deployed correctly, this may assist in preserving restructuring optionality for directors by maintaining a company’s eligibility for Safe Harbour for long enough to enable a restructuring plan to be formulated and implemented. However, it is not a complete solution. It will not fix a business model that is no longer viable, cure broader tax or trade creditor defaults, or remove the need for accurate cash-flow forecasting in a business. Any section 560 arrangement must also be documented and structured carefully to ensure the statutory requirements are met.
Practical steps for employers and directors
To effectively and proactively respond to the combined impact of Payday Super and wage increases from 1 July 2026, businesses should:
- ensure payroll systems can process superannuation within the new seven business day period
- update wage rates and award classifications
- implement controls to identify rejected payments, incorrect superannuation fund details and calculation errors
- prepare cash-flow forecasts that include increased wage costs and more frequent superannuation payments
- review whether current pay cycles create unnecessary liquidity pressure
- ensure tax reporting obligations are up to date
- monitor any unpaid superannuation exposure
- seek restructuring advice early where cash-flow forecasts identify liquidity shortfalls.
The question for directors is no longer simply whether the business can meet its employment obligations eventually. From 1 July 2026, the question is now whether those obligations can be met in real time.
For businesses already under pressure, that timing difference may be critical.
For further guidance on the impact of Payday Super on businesses, Safe Harbour, DPN exposure or restructuring options, please contact Nicholas Edwards, Head of Restructuring and Insolvency, or James Simpson, Partner – Workplace and Employment.
