Tax debts? Expect the ATO to come knocking

This article was current at the time of publication.

The Australian Taxation Office (ATO) is stepping up its efforts to recover around A$50 billion in collectable debts owed by thousands of small businesses across the nation.

The message is clear. If you have an outstanding debt and have not already negotiated a repayment arrangement with the ATO, expect a knock on your door.

The ATO’s Commissioner of Taxation, Rob Heferen, recently told the Senate Economics Legislation Committee, “For these taxpayers, we are moving more urgently to deploy the full powers available to us, including issuing director penalty notices, taking garnishee action, and – if necessary – taking wind up action.” 

He noted that the ATO is focusing on taxpayers who exhibit the most non-compliant behaviour in avoiding their obligations.

The Australian federal government has also upped the ante with the recent passing of the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025. From 1 July, any general interest charge for late payments or underpayments, regardless of whether the debt relates to an earlier income year, will no longer be tax deductible.

A rise in defaults

Shaun Matthews CPA, Partner at restructuring advisory firm Cor Cordis, says that during the COVID-19 pandemic many business owners treated their ATO debt as an interest-free loan they weren’t required to repay.

“Now the ATO is putting increased pressure on businesses to recover amounts owed and is making sure businesses are aware that it will recover their debt, whether that’s through reporting them to credit agencies, issuing director penalty notices, winding up proceedings or garnishee notices.

“They’re using every available method to ensure people are aware that their debt is due and payable.”

CreditorWatch, a company that collects tax default data for the ATO, reported in March that more than 30,000 businesses had defaulted on tax debts worth A$100,000 or more.

Matthews says his firm has seen a rise in the number of insolvencies, with businesses entering small business restructure, liquidation or voluntary administration. At the same time, the ATO has become harder to deal with in relation to debt work-out proposals.

“They’re really looking at the future viability and the compliance history of the businesses and making sure that any proposals are in the best interest of all stakeholders,” he says.

“As we always say, the earlier businesses seek advice from their advisers, the more options are available. Working with advisers, we have been able to achieve some pleasing results with early intervention.

“By the time the ATO has commenced winding up proceedings, some options are limited. To minimise the risk of ATO enforcement action, businesses should get in contact with their advisers as soon as there is any sign of financial distress.”

Dealing with debt delays

Bernadette Smith FCPA, Partner at accounting and business advisory firm Aspen Corporate, says practitioners understand the necessity for addressing tax debts.

“These debts often arise when clients get caught in a bind and need time to pay off amounts on their BAS, usually related to GST. Another common scenario involves businesses entangled in divorce proceedings, where the completion of tax returns is delayed due to disagreements between parties.

“In the past, practitioners could call the ATO to discuss these issues and arrange payment plans. However, they are now finding that the ATO is less willing to make arrangements, requiring the taxpayer to call directly.

“The process of dealing with the ATO has become tedious and time-consuming, especially with the shift to online systems. Requests can be refused online, requiring further communication and potentially costly objections.”

Smith says the ATO’s tougher stance means that interest and penalties are no longer easily remitted, even with valid reasons.

“Practitioners are now telling clients upfront that securing a payment plan may be difficult, and interest and penalties are likely.”

Communication with the ATO is key

Christopher Pino CPA, Client Adviser at business, tax and wealth advisory firm SEIVA, says having outstanding tax debt is not always a sign of mismanagement and can relate to broader challenges like cash flow, economic shocks or lack of advice.

“We’ve seen many new clients with significant ATO debt. The first thing we do is address that debt and find ways to get on top of it,” Pino says.

“Communication is key. Early contact with the ATO is crucial. Ignoring its letters is the worst move. We encourage clients, especially new ones with existing ATO debt, to communicate with the ATO. 

“The ATO just wants to recover the debt, so if you can put together a plan that makes sense and is achievable, that’s important. When you default once or twice, it’s hard to get another chance. Early contact and putting together an achievable plan are both crucial.”

Pino says the ATO is still offering payment plans for 12 to 24 months and remitting interest.

“We’ve been successful in removing a lot of interest recently because of the plans we put in place. You have to sell the plan to the ATO, showing that the client is doing their best to pay down the debt and meet future debts on time and in full.”