For more than five years I have written about ATO debt recovery, Director Penalty Notices (DPNs), Small Business Restructuring (SBR) and Voluntary Administration (VA). During that time, one theme has remained constant: businesses experiencing financial distress should seek advice early. 

The recent release of the Australian National Audit Office’s (ANAO) Auditor-General Report No. 45 of 2025–26 – Australian Taxation Office Management of Small Business Collectable Debt reinforces that message. 

The report is not directed at struggling businesses. Rather, it examines whether the Australian Taxation Office (ATO) is effectively managing the collection of small business tax debt. Nevertheless, its findings are highly relevant to directors, accountants, lawyers and restructuring professionals because they provide an insight into the scale of Australia’s tax debt problem and the ATO’s evolving recovery strategy. 

The report contains some sobering statistics. 

As at 30 June 2025, collectable small business tax debt totalled $35.9 billion, representing 66.1 per cent of the ATO’s total collectable tax debt of $54.2 billion. There were more than 1.3 million small businesses with collectable tax debt, with an average debt of approximately $26,800. The ANAO also noted that small business collectable debt had increased by $19.4 billion (118 per cent) since 2018–19. 

These figures are remarkable. 

They demonstrate that unpaid tax is no longer simply an issue affecting a relatively small number of distressed businesses. Instead, it has become a significant economic issue affecting a substantial proportion of the Australian small business sector. 

How did we get here? 

The answer is more nuanced than simply saying that businesses failed to pay their tax. 

The ANAO recognised that the ATO deliberately moderated its collection activity during the COVID-19 pandemic, natural disasters and subsequent economic shocks. Businesses were granted additional time to pay, payment arrangements became more flexible, and the remission of interest and penalties became more common. Those measures were designed to support businesses through an unprecedented period of disruption. 

Many businesses survived because of that support. 

However, the report also recognises that those temporary measures changed payment behaviour. In its own words, the ATO considered that some of the measures adopted during the pandemic had “normalised” poorer payment behaviour among taxpayers, making it more difficult to restore pre-pandemic payment patterns. 

That observation is consistent with what many advisers have seen in practice. During the pandemic, tax liabilities often became the liability that could be deferred while businesses focused on paying wages, suppliers and rent. As economic conditions remained challenging, those deferred liabilities frequently continued to grow. 

What did the Auditor-General conclude? 

Importantly, the ANAO did not conclude that the ATO was failing. 

Its overall conclusion was that the ATO’s management of collectable small business debt is “partly effective.” 

That is an important distinction. 

The report acknowledges that the ATO has established a broadly sound framework for managing debt, including sophisticated analytical tools, risk assessment processes and debt collection strategies. At the same time, it identifies several areas where improvements are required. 

Among the key observations were: 

• the ATO has recognised that the risk posed by growing small business debt remains outside its preferred tolerance; 

• it has not established specific measurable targets directed at reducing small business collectable debt; 

• public reporting does not adequately demonstrate whether its strategies are successfully reducing that debt over time; and 

• additional work is required to improve performance measurement, governance, communication and the use of data analytics. 

The ATO agreed to all eight recommendations made by the ANAO. 

What does this mean for directors? 

For many directors, the detailed governance recommendations contained in the report may seem remote from the day-to-day challenges of operating a business. 

The practical implications, however, are much more immediate. 

The ANAO notes that after reducing collection activity during the pandemic, the ATO resumed stronger debt recovery measures, including garnishee notices, Director Penalty Notices, directions to pay and disclosure of business tax debts to credit reporting agencies.
Those measures are familiar to anyone practising in restructuring and insolvency. 

Businesses that fail to engage with the ATO should no longer assume that recovery action will simply be deferred indefinitely. The environment has changed considerably since the pandemic. 

This does not mean that the ATO is unwilling to work constructively with taxpayers. Payment arrangements, restructuring proposals and other options continue to be available in appropriate circumstances. 

However, those opportunities generally exist before enforcement action escalates. 

Early engagement remains critical 

One of the strongest themes emerging from the report is that a significant proportion of tax debt relates to businesses that have become disengaged from the ATO. 

The ANAO reported that in 2024–25 there were more than 39,000 small businesses classified as “disengaged taxpayers”, together owing approximately $11.3 billion in collectable debt. These were generally businesses with debts exceeding $100,000 that were more than 90 days overdue and were not actively engaging with the ATO regarding repayment. 

That statistic is significant. 

In my experience, the earlier directors seek advice, the greater the range of options available. 

Depending upon the circumstances, those options may include: 

• negotiating payment arrangements with the ATO; 

• refinancing; 

• informal business restructuring; 

• Small Business Restructuring under Part 5.3B of the Corporations Act; 

• Voluntary Administration; or 

• where recovery is no longer possible, an orderly creditors’ voluntary liquidation. 

As tax debt continues to increase and recovery action progresses, those options may become progressively more limited. 

The report reinforces existing trends 

The ANAO report should not be viewed as signalling an entirely new approach by the ATO. 

Rather, it confirms a trend that has been developing for several years. 

Many of the recovery measures that businesses are now experiencing—including Director Penalty Notices, garnishee notices and disclosure of business tax debts—have already become an established part of the ATO’s debt collection strategy. 

For advisers, the report provides independent confirmation that tax debt has become one of the most significant financial challenges facing Australia’s small business sector. 

Looking ahead 

The ANAO report is ultimately concerned with public administration and accountability. Its purpose is to assess whether the ATO is effectively managing one of the Commonwealth’s largest financial risks. 

For directors, however, the report carries a different message. 

The issue is not whether the ATO’s governance arrangements should be improved. 

The more important question is whether businesses are recognising financial distress early enough to preserve restructuring options before recovery action escalates. 

In many cases, the answer lies not in waiting for the next letter from the ATO, but in obtaining professional advice while meaningful options remain available. 

Final observations 

The growth in small business tax debt to almost $36 billion demonstrates that Australia is dealing with a systemic issue rather than isolated instances of non-compliance. 

The ANAO has identified opportunities for the ATO to improve the way it measures and manages that debt, and the ATO has accepted each of the report’s recommendations. 

For directors, however, the practical lesson remains unchanged. 

Businesses that engage early, understand their options and obtain timely restructuring advice are generally better placed than those that delay until enforcement action has commenced. 

We’ve identified the problem here. In the coming weeks I will examine two further aspects of the ANAO report: 

• what the report says about the ATO’s debt recovery strategy and why that matters for directors; and 

• why early restructuring advice remains one of the most effective ways of preserving business value when tax debt begins to accumulate.