A Perfect Storm For Australian SMEs: Fuel Costs, Interest Rates And ATO Debt Squeezing Margins In 2026

What the numbers are telling us — and what it means for businesses already carrying structural stress

At Cathro & Partners, we deliver financial, strategic, commercial and operational solutions to support businesses and their advisers.

Our work gives us a particular vantage point on what is happening beneath the surface of the Australian business environment. What we are observing right now is a convergence of cost pressures that, individually, many businesses could absorb. Together, however, they are proving harder to manage — particularly for businesses that entered 2026 already carrying accumulated obligations from the COVID era.

This article outlines the pressures we are tracking and the patterns we are seeing in the businesses we are working with. We hope it provides useful context for advisers working with clients in the sectors most exposed.

The Pressures Converging in 2026

Fuel: A sudden structural cost shock

The escalating conflict in the Middle East has sent crude oil prices surging to levels not seen since 2022, following strikes on Iran and the near-closure of the Strait of Hormuz — a chokepoint for roughly one fifth of global oil supply.

Australia imports around 90% of its refined liquid fuels and is therefore directly exposed. Westpac has modelled a scenario where a three-month Strait of Hormuz disruption could increase Australian CPI by approximately 1.5 percentage points, with pump prices potentially rising between $0.25 and $1.00 per litre depending on duration and severity.

Industries most exposed include transport and logistics, agriculture, construction and mining.

Road freight in Australia already operates on thin profit margins, with average operators recording net profit margins of around 3% in FY2025, according to ANZ’s Road Freight Transport Industry Benchmarking and Industry Update. Those margins are now being compressed by fuel cost increases and intense price competition.

The Australian Trucking Association has warned that sustained diesel prices above $2.10 per litre will force freight rate renegotiations across the industry.

For a business operating at these margins, a sustained fuel cost increase does not trim profit — it can eliminate it.

Construction faces a similar vulnerability. The sector has accounted for 26% of all corporate insolvencies nationally since FY2022, according to our Cathro Clarity analysis of ASIC data. Additional fuel pressure will compound an industry already affected by rising material and labour costs since COVID.

Food distribution networks are also under pressure, with industry bodies and supply chain operators already calling for government relief. Any policy response is likely months away. In the meantime, businesses in that segment are absorbing cost increases that cannot easily be passed through in competitive or contracted supply arrangements.

Interest Rates: The relief cycle appears over

After a brief easing cycle in 2025, the RBA increased the cash rate by 25 basis points to 3.85% in February 2026, citing inflation pressures that had “picked up materially in the second half of 2025.”

Governor Bullock has declined to rule out further increases. All four major banks are forecasting further rate rises.

For businesses carrying variable-rate debt — overdrafts, equipment finance or property-backed facilities — the cumulative impact of the rate cycle is now being felt in servicing costs rather than just repayments.

Many distressed businesses we encounter established their debt structures during the low-rate environment and have not reviewed them since.

Rising interest costs also place pressure on working capital. Businesses relying on short-term facilities to bridge trading gaps now face materially higher financing costs.

We are also seeing more payment arrangements with non-ATO creditors, particularly in supply chains where suppliers themselves are under pressure and tightening credit terms.

A business with extended creditor days, slower debtor collections and a constrained overdraft may appear stable on paper but can be under significant liquidity pressure in practice.

ATO Debt: Manageable — until it isn’t

The ATO currently holds more than $46 billion in collectable debt, the majority owed by small and medium businesses.

Payment arrangements remain a legitimate and commonly used mechanism. A business meeting the terms of an arrangement — while staying current on ongoing lodgements and payments — is generally in a manageable position.

What we are increasingly seeing are businesses that either breach arrangements or delay engagement until the ATO escalates enforcement.

Once a payment plan is breached, the ATO’s tolerance narrows considerably.

In 2023–24, the ATO issued 26,702 Director Penalty Notices (DPNs) relating to company debts exceeding $4.4 billion. In 2024–25, the number increased 136%, with more than 84,000 notices issued affecting directors of around 64,000 companies.

The removal of tax deductibility for General Interest Charge (GIC) from 1 July 2025 has added further pressure. At current rates, non-deductible interest on a $200,000 tax debt represents a meaningful annual cost for an already stressed business.

Additionally, the ATO may disclose tax debts above $100,000 that are overdue by more than 90 days to credit bureaus. This can trigger lender reviews, tightening of trade credit and reputational exposure.

CreditorWatch data indicates businesses with ATO tax defaults are 37 times more likely to become insolvent within 12 months.

The issue is rarely the debt alone. More often, it is the combination of ATO debt, deteriorating trading conditions and delayed engagement that drives poor outcomes.

What We Are Seeing

Businesses rarely present with a single challenge. More commonly, it is a combination of pressures:

• ATO arrangements that remain current but depend on trading conditions that are weakening
• Working capital ratios that appear acceptable but rely heavily on creditor forbearance
• Businesses that are profitable on paper but cash-negative due to debt servicing and legacy obligations

Common indicators preceding our involvement include:

• declining gross margins across multiple periods
• tightening working capital ratios with extended debtor days
• multiple creditor payment plans, including with the ATO
• increased reliance on short-term or director-funded liquidity
• delayed superannuation payments
• limited headroom within existing ATO arrangements
• elevated stress in sectors such as transport, agriculture and construction

Where Early Engagement Matters

Timing strongly influences outcomes.

The options available when financial stress is identified early are materially different from those available once the ATO issues a Director Penalty Notice, a creditor files a winding-up application, or directors provide further funding or personal guarantees to sustain trading.

For viable businesses, early engagement may open restructuring pathways including:

• negotiated ATO arrangements before enforcement escalation
• informal creditor compromises
• Small Business Restructuring (SBR) where eligibility criteria are met

These options rely on the business retaining sufficient trading position and stakeholder goodwill to support a viable restructuring.

We work closely with stakeholders across Australia and consistently find that earlier engagement provides more options and better outcomes than referrals made once distress has accumulated.

If you are working with a client where any of the patterns described above are emerging, we are available for a confidential conversation. Our team provides independent business viability assessments, restructuring and turnaround advisory, as well as formal appointments including Small Business Restructuring, Voluntary Administration and Liquidation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.