ATO Firmer Action on Small Business Tax Debt: What's Changed

Small business tax debt has become one of the ATO's most visible compliance priorities, and the numbers explain why. A national audit found collectable debt owed by small business had grown 118% between 2018-19 and 2024-25 to reach $35.9 billion.

The ATO's own response has been to use its firmer collection tools far more often than it did through the pandemic years. For a small business owner, that shows up as more director penalty notices, more use of credit reporting disclosure, and less tolerance for a debt that sits unpaid without contact.

The scale of the problem, and why it matters now

The Australian National Audit Office's review of the ATO's management of small business collectable debt found the $35.9 billion owed by small business made up the large majority of the ATO's total collectable tax debt as at 30 June 2025. The audit assessed the ATO's existing strategy as only partly effective, while still finding the underlying framework for debt collection sound.

In response, the ATO has set itself a considerably tighter internal target for cutting the ratio of collectable debt to total tax collections, aiming for 6% by June 2027. That target only gets met if debt currently sitting with small business actually comes in, which is the direct driver behind the firmer approach outlined below.

Firmer action is being used far more often

The ATO's collection process runs on an escalating ladder: reminders and SMS prompts, then a firmer action warning letter, then tools such as garnishee notices, director penalty notices and disclosure of the debt to a credit reporting bureau, and ultimately legal recovery action.

Through the pandemic the ATO largely held off on the firmer end of that ladder. It has not done so for some time now.

The clearest evidence is in director penalty notices. More than 84,000 were issued in the 2024-25 financial year, a 136% increase on the year before, according to figures cited in the Tax Ombudsman's review of the ATO's DPN administration, which was opened in response to the scale of that increase.

A DPN can make a company director personally liable for unpaid PAYG withholding, superannuation guarantee charge or GST, on top of whatever the company itself owes.

Credit reporting is a real consequence, not just a threat

One of the ATO's firmer tools is disclosing a business's tax debt to a credit reporting bureau, which can affect the business's ability to access finance. Under the ATO's disclosure of business tax debts criteria, this applies where a business holds an ABN, is not an excluded entity such as a registered charity, and has at least one tax debt of $100,000 or more that has been overdue for more than 90 days.

A business is not disclosed without warning. The ATO must first give 28 days' written notice, and a business that is genuinely engaging with the ATO to manage the debt, or that has a live dispute over it, sits outside the disclosure criteria for as long as that is the case.

Carrying ATO debt now costs more

A change that compounds all of this sits in the tax law itself. For the general interest charge and shortfall interest charge incurred in income years starting on or after 1 July 2025, the ATO's guidance on changes to the deductibility of interest on ATO debts confirms that deduction has been removed.

That interest, which the ATO charges on unpaid tax and compounds daily, is now a real after-tax cost rather than one partly offset at tax time.

For a business that has been treating a tax debt as a lower-priority creditor, that calculation has changed. The cost of leaving debt sitting with the ATO is higher than it was a year ago, on top of the ATO itself being more willing to act on it.

What this means for your business

• Lodge your BAS and tax return on time even when you cannot pay in full. Non-lodgment tends to trigger firmer action faster than a lodged debt with no payment.
• Engage with the ATO, or have your tax agent do it for you, before a firmer-action warning letter arrives rather than after.
• If you are a company director, understand that PAYG withholding, superannuation guarantee charge and GST debts can become your personal liability under the director penalty regime.
• Set up a payment plan proactively and keep it current. A plan that is being met is the clearest way to stay off the firmer-action pathway.
• Factor the loss of GIC and SIC deductibility into how you prioritise which creditor gets paid first.

Talk to us before a debt issue escalates

None of this means every overdue debt ends in a director penalty notice or a credit report entry. It does mean the gap between a manageable conversation with the ATO and a firmer-action letter is narrower than it used to be, and the businesses that come through it best are the ones that engage early rather than waiting to be chased.

If your business has tax debt building up, or you want a payment plan or your options reviewed properly, our business services team can work through it with you. Get in touch before it escalates further, not after.

Disclaimer: This article contains general information only and does not constitute financial, legal or tax advice. It has been prepared without regard to your objectives, financial situation or needs. Tax and superannuation laws change frequently, and the information in this article may not reflect the current law or may become inaccurate over time. Before acting on anything in this article, you should consider its appropriateness to your circumstances and seek advice from a registered tax agent or qualified adviser.