Why This Article Matters

In June 2026, the Australian National Audit Office (ANAO) released Auditor-General Report No. 45 of 2025–26 – Australian Taxation Office Management of Small Business Collectable Debt.

The ANAO is Australia’s independent public sector audit office. Rather than auditing taxpayers, it examines whether Commonwealth agencies are administering legislation efficiently, effectively and in accordance with good public administration. When the ANAO conducts a performance audit and an agency accepts its recommendations, as the ATO has done in this case, it provides valuable insight into the future direction of that agency’s administrative practices.

Although the report is directed to the ATO, it contains important practical lessons for company directors, accountants, lawyers and business advisers.

The report confirms that small business collectable tax debt has grown to $35.9 billion and that the ATO is continuing to refine the way it manages unpaid tax.

For directors, however, the report highlights a broader issue. Managing tax debt is not simply about obtaining extra time to pay. The ATO expects businesses to engage early, remain compliant with their ongoing obligations and demonstrate that any repayment proposal is realistic and sustainable. Businesses that maintain good lodgement and payment histories, communicate openly with the ATO and honour repayment arrangements are generally in a much stronger position than those that repeatedly fail to engage or default on agreed arrangements.

One of the central themes throughout this article is Practice Statement Law Administration (PS LA) 2011/16. Although it is an internal ATO practice statement, it provides important guidance as to the matters the Commissioner considers when deciding whether to support payment arrangements, restructuring proposals and other formal insolvency processes.

Among other matters, the Commissioner may consider:

• whether the business has appropriate arrangements to meet future tax liabilities as they fall due;
• the taxpayer’s compliance history;
• whether any proposed repayment or restructuring is realistic and capable of being achieved;
• the overall benefit to the Commonwealth revenue; and
• broader public interest considerations.

These principles explain why maintaining a constructive relationship with the ATO is so important. Obtaining a payment arrangement is only the beginning. Businesses must also demonstrate that they can continue meeting their ongoing tax obligations while complying with the agreed arrangement. Repeated defaults or poor compliance history may significantly reduce the willingness of the ATO to provide further assistance, including in appropriate cases supporting a Small Business Restructuring proposal or other restructuring process.

This article brings together a three-part series examining the ANAO report and its practical implications. It also draws upon our practical experience assisting directors, accountants and advisers dealing with ATO debt recovery, restructuring proposals and formal insolvency appointments.

The message throughout is consistent. The earlier financial difficulties are recognised, the sooner advice is obtained and the stronger the compliance history maintained, the greater the range of options likely to remain available.

This article is also provided as a booklet, 2026 ANAO ATO Booklet, as a practical resource for advisers and their clients, helping them understand the key differences between these two insolvency options. 

1. ATO Small Business Tax Debt Reaches $35.9 Billion: What the ANAO Report Means for Directors, DPNs and Restructuring Options

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. 

2. ATO Debt Recovery is Changing: What the ANAO Report Means for Director Penalty Notices, Payment Arrangements and Business Restructuring

In the previous section, I examined the Australian National Audit Office’s (ANAO) findings on the Australian Taxation Office’s management of small business collectable debt. The report highlighted the scale of Australia’s tax debt problem, with small business collectable debt reaching $35.9 billion and accounting for more than two-thirds of all collectable tax debt. 

While those figures are concerning, they are only part of the story. 

For directors, accountants and business advisers, the more important question is what the report tells us about the future of ATO debt recovery. 

The ANAO’s findings suggest that the ATO is moving towards a more targeted, data-driven and measurable approach to debt collection. Combined with the ATO’s increasing use of Director Penalty Notices (DPNs), garnishee notices and disclosure of business tax debts, the report reinforces an important message: directors should not expect the flexibility that existed during the COVID-19 pandemic to continue indefinitely. 

The ANAO’s criticism was not about enforcement 

Some commentary following the release of the report has suggested that the ANAO criticised the ATO for being too aggressive. 

That is not what the report says. 

The Auditor-General accepted that the ATO has established a largely sound framework for managing debt and acknowledged that the ATO had to balance debt recovery with supporting businesses through the COVID-19 pandemic and other economic disruptions. 

Instead, the ANAO’s criticism focused on something quite different. 

The report identified weaknesses in governance, performance measurement and reporting. In particular, it found that the ATO had not established measurable targets for reducing small business collectable debt, had not consistently monitored whether its debt collection activities were achieving their intended outcomes and was not making full use of the extensive data available to analyse taxpayer behaviour. 

Those observations are important because they suggest that the next phase of ATO debt management will not necessarily involve harsher enforcement. Rather, it is likely to involve smarter enforcement. 

A more data-driven approach to debt recovery 

The report notes that the ATO already uses sophisticated analytical and machine learning models to determine which taxpayers should receive different debt treatments. 

Those models consider factors such as payment history, taxpayer behaviour and risk characteristics when determining how debt cases should be managed. The ANAO observed that these systems are central to the ATO’s debt collection strategy but recommended that the ATO improve how those models are monitored, retrained and evaluated over time. 

This is a significant point. 

As the ATO implements the ANAO’s recommendations, it is reasonable to expect that debt collection will become increasingly informed by data rather than broad administrative policies. 

That does not necessarily mean more businesses will face immediate enforcement action. 

It does mean the ATO is likely to become better at identifying which taxpayers are actively engaging to resolve their debts and which are not. 

For directors, engagement may become an even more important factor in determining how the ATO responds to outstanding tax liabilities. 

The COVID approach is over 

During the pandemic, the ATO deliberately reduced debt recovery activity. 

Payment plans became more accessible, interest remissions were more common and many businesses were given additional time to recover. 

Those measures achieved their purpose. 

Many otherwise viable businesses survived an extraordinary period of economic uncertainty. 

However, the ANAO also recognised that those temporary measures changed taxpayer behaviour. Businesses became accustomed to extended payment arrangements and, in some cases, developed an expectation that tax debts could continue to be deferred. 

The report confirms that the ATO has now returned to more active debt management. The focus has shifted from providing broad relief to encouraging timely payment and restoring payment discipline. 

Directors should not assume that the approach adopted during the pandemic will continue. 

Where do Director Penalty Notices fit? 

One of the most significant developments over recent years has been the increased use of Director Penalty Notices. 

A DPN allows the Commissioner of Taxation to recover certain company tax liabilities personally from directors where statutory conditions are met. 

For many directors, a DPN is the first indication that what appeared to be a company cash-flow issue has become a personal financial risk. 

Importantly, a Director Penalty Notice is rarely the beginning of the recovery process. 

It is usually one step in a broader sequence that may include: 

• reminders and correspondence from the ATO; 

• opportunities to negotiate payment arrangements; 

• firmer debt collection activity; 

• Director Penalty Notices; 

• garnishee notices; 

• disclosure of business tax debts to credit reporting agencies; and 

• legal recovery proceedings, including winding-up applications where appropriate. 

The ANAO report highlights that stronger debt collection measures remain a relatively small proportion of total ATO interactions. However, it also confirms that these measures form an established part of the ATO’s overall recovery strategy. 

The lesson is simple. 

Directors should not wait until a DPN arrives before seeking advice. 

Why early engagement matters 

One of the recurring themes throughout the ANAO report is the distinction between taxpayers who engage with the ATO and those who do not. 

Businesses that communicate with the ATO, provide financial information and genuinely attempt to resolve outstanding liabilities are generally in a much stronger position than those that ignore correspondence or fail to respond. 

Early engagement demonstrates a willingness to address the problem. 

Equally important, it preserves options. 

The longer a tax debt remains unpaid without meaningful engagement, the fewer alternatives may remain available. 

Negotiating payment arrangements 

Many directors mistakenly assume that contacting the ATO is only worthwhile if the company can immediately pay its entire debt. 

That is not the case. 

Where appropriate, payment arrangements may provide businesses with time to restore cash flow while meeting their ongoing tax obligations. 

However, successful payment arrangements generally require more than simply requesting additional time. 

The ATO will usually expect businesses to demonstrate that they: 

• understand the cause of their financial difficulties; 

• can meet future tax obligations; 

• have realistic cash-flow forecasts; and 

• are capable of complying with the proposed arrangement. 

A payment arrangement should therefore be viewed as part of a broader financial strategy rather than a temporary solution in isolation. 

When restructuring should be considered 

Not every business experiencing ATO debt requires a formal insolvency appointment. 

However, directors should regularly assess whether the business remains viable. 

Where tax debt continues to increase despite payment arrangements, or where multiple creditors are experiencing payment delays, restructuring options should be considered sooner rather than later. 

Depending on the circumstances, those options may include: 

• informal restructuring; 

• refinancing; 

• negotiated settlements with creditors; 

• Small Business Restructuring; 

• Voluntary Administration; or 

• where recovery is no longer achievable, an orderly liquidation. 

Seeking advice before enforcement action escalates generally provides directors with greater flexibility in selecting the most appropriate course. 

Looking beyond the ANAO report 

Although the ANAO’s recommendations are directed to the ATO, they also send a message to Australia’s business community. 

The ATO is likely to become increasingly sophisticated in how it identifies, prioritises and manages unpaid tax debt. 

Businesses that remain engaged, communicate openly and address financial difficulties early are likely to retain more options than those that delay. 

Final observations 

The ANAO report is not simply about improving government administration. 

It also reflects the changing environment in which Australian businesses now operate. 

The period of widespread payment deferrals and pandemic-related concessions has largely passed. 

ATO debt recovery is increasingly supported by sophisticated analytics, improved targeting and a renewed emphasis on payment compliance. 

For directors, the practical lesson is clear. 

Do not wait for a Director Penalty Notice or legal proceedings before seeking advice. 

Engage with the ATO early, understand the options available and obtain professional restructuring advice while meaningful choices still exist. 

In the next section, I will consider the final and perhaps most important question arising from the ANAO report: when should directors move beyond payment arrangements and begin considering Small Business Restructuring or Voluntary Administration? 

3. From ATO Tax Debt to Business Restructuring: When Should Directors Consider Small Business Restructuring or Voluntary Administration?

Over the past two articles, I have examined the Australian National Audit Office’s (ANAO) review of the Australian Taxation Office’s (ATO) management of small business collectable debt. 

The first article considered the scale of Australia’s tax debt problem, with collectable small business tax debt reaching $35.9 billion. The second examined how the ATO’s debt recovery strategy is evolving and why directors should not assume that the flexibility shown during the COVID-19 pandemic will continue indefinitely. 

The final question is perhaps the most important. 

At what point should directors move beyond payment arrangements and begin considering formal restructuring or insolvency options? 

In my experience, this is one of the most difficult decisions facing directors. It is also one of the most important. 

The ANAO report highlights a broader problem 

Although the ANAO report focuses on the ATO’s administration of tax debt, it also reflects a broader issue affecting Australian businesses. 

Many companies do not fail because of a single event. 

Financial distress usually develops gradually. 

Cash flow tightens. 

Suppliers begin waiting longer for payment. 

Tax obligations are deferred. 

Payment arrangements are entered into. 

General Interest Charges accumulate. 

Eventually, what began as a temporary cash flow issue becomes a structural financial problem. 

The ANAO recognised that thousands of businesses remain disengaged from the ATO while carrying substantial tax debts. At the same time, it acknowledged that the ATO has resumed more active debt recovery following the pandemic. 

For directors, the challenge is recognising when the business has moved beyond a short-term cash flow issue and requires a more fundamental solution. 

Payment arrangements are often the first step 

A payment arrangement with the ATO is frequently the most appropriate starting point. 

Many otherwise viable businesses experience temporary financial pressure due to delayed debtor collections, seasonal fluctuations or unexpected expenses. 

Where the underlying business remains profitable and cash flow is expected to recover, a negotiated payment arrangement may provide the breathing space needed to stabilise operations. 

However, directors should be careful not to confuse a payment arrangement with a long-term restructuring strategy. 

A payment arrangement addresses how an existing debt will be paid. 

It does not necessarily address why the debt arose. 

If ongoing tax liabilities continue to exceed the business’s capacity to pay them, the underlying financial issues remain unresolved. 

When should directors reconsider? 

There is no single point at which formal restructuring becomes necessary. 

However, several warning signs frequently indicate that directors should obtain specialist advice. 

These include: 

• recurring ATO payment defaults; 

• increasing reliance on extended payment terms with suppliers; 

• mounting General Interest Charges and penalties; 

• difficulties paying employee entitlements or superannuation; 

• receipt of Director Penalty Notices; 

• threatened legal proceedings or winding-up applications; and 

• persistent cash flow shortages despite payment arrangements. 

One warning sign alone may not indicate insolvency. 

Several occurring together often warrant closer examination. 

Is Small Business Restructuring the right option? 

The Small Business Restructuring (SBR) process was introduced to provide eligible small businesses with an opportunity to compromise their debts while allowing directors to retain control of day-to-day trading. 

Unlike Voluntary Administration, directors generally continue operating the business throughout the restructuring process under the supervision of a Small Business Restructuring Practitioner. 

For many businesses, SBR can provide an effective pathway where: 

• the business remains fundamentally viable; 

• tax debt represents a significant proportion of total liabilities; 

• directors are committed to ongoing compliance; and 

• creditors are likely to receive a better return through restructuring than liquidation. 

Importantly, SBR is not simply a mechanism for reducing debt. 

It is a structured process requiring realistic financial projections, transparent disclosure and creditor approval. 

Businesses that seek advice early are generally in a stronger position to determine whether they satisfy the eligibility requirements and whether SBR is commercially appropriate. 

When should Voluntary Administration be considered? 

Not every business will be suitable for Small Business Restructuring. 

Where liabilities are more complex, creditor relationships have significantly deteriorated or broader restructuring is required, Voluntary Administration may provide greater flexibility. 

The purpose of Voluntary Administration is to maximise the chances of the company continuing to exist or, if that is not possible, to achieve a better outcome for creditors than would result from an immediate liquidation. 

It allows an independent administrator to assess the company’s financial position while providing directors and creditors with an opportunity to consider alternative restructuring proposals. 

For some businesses, Voluntary Administration provides the time needed to preserve enterprise value and negotiate an outcome that would otherwise not be achievable. 

What if restructuring is no longer possible? 

Not every business can or should continue trading. 

Where the underlying business is no longer commercially viable, an orderly liquidation may be the most appropriate course. 

Although directors often view liquidation as a failure, an early and properly managed liquidation may reduce personal risk, preserve records and ensure creditors are treated fairly. 

Delaying that decision rarely improves the outcome. 

The role of Director Penalty Notices 

One of the recurring themes throughout this series has been the importance of Director Penalty Notices. 

A DPN should not be viewed as an isolated event. 

Rather, it is often an indication that the company’s financial difficulties have progressed beyond a simple cash flow problem. 

While a DPN does not necessarily mean the business cannot be saved, it should prompt directors to immediately review the company’s financial position and obtain professional advice. 

Waiting until legal proceedings commence significantly reduces the range of restructuring options available. 

The common thread 

After many years working with distressed businesses, I have observed one consistent pattern. 

The businesses with the greatest number of options are usually those that seek advice early. 

The businesses with the fewest options are often those that delay, hoping that improved trading conditions alone will solve mounting tax liabilities. 

The ANAO report indirectly reinforces this observation. 

The report describes an environment in which the ATO is improving its governance, enhancing its data capabilities and refining its debt recovery strategy. As those improvements are implemented, directors should expect earlier identification of unpaid tax debts and more consistent recovery action where taxpayers fail to engage. 

That makes timing increasingly important. 

Final observations 

The ANAO report is ultimately a review of public administration. 

For insolvency practitioners, however, it also confirms something that has long been recognised in practice. 

Tax debt is rarely the problem in isolation. 

It is usually a symptom of broader financial distress. 

The critical question is not whether a business owes the ATO money. 

The real question is whether the business remains capable of returning to sustainable profitability. 

If the answer is yes, payment arrangements or Small Business Restructuring may provide a pathway forward. 

If broader restructuring is required, Voluntary Administration may preserve options that would otherwise be lost. 

If the business is no longer viable, an orderly liquidation may be the most responsible course. 

Whatever the circumstances, directors should remember one overriding principle. 

The earlier advice is obtained, the greater the range of restructuring options that are likely to remain available. 

ATO Debt Recovery

The ANAO Report confirms that the ATO is continuing to strengthen its management of unpaid tax debt through improved governance, better use of data and more targeted debt recovery strategies. For directors and advisers, however, the more important issue is understanding how to engage constructively with the ATO before recovery action escalates.

Good Compliance History Matters

Businesses that lodge returns on time, engage with the ATO early and honour agreed payment arrangements are generally in a much stronger position when seeking assistance. Repeated defaults under payment arrangements, poor lodgement history or a failure to engage with the ATO may significantly reduce the prospects of obtaining further assistance or support for future restructuring proposals.

Payment Arrangements Must Be Sustainable

A repayment arrangement should never be viewed simply as obtaining more time to pay. The important question is whether the business has the capacity to meet the agreed repayments while continuing to pay new tax liabilities as they arise. Entering into an arrangement that cannot realistically be completed may place the business in a more difficult position than before, particularly where repeated defaults affect the business’s compliance history.

Accordingly, payment arrangements should only be entered into where they are commercially realistic and capable of being maintained.

Early Engagement Preserves Options

As unpaid tax debt increases, the ATO has a range of recovery options available, including Director Penalty Notices, garnishee notices, legal proceedings and, where appropriate, winding-up applications. Businesses that engage early generally preserve more restructuring options than those that delay until recovery action has commenced.

Depending on the circumstances, those options may include informal workouts, refinancing, Safe Harbour, Small Business Restructuring, Voluntary Administration or, where appropriate, an orderly liquidation.

About Levi Consulting

If you have read this article through to the end, you are probably dealing with a significant business issue or advising someone who is.

This article forms part of Levi Consulting’s broader thought leadership on restructuring, insolvency and corporate advisory matters. Our website contains practical guides on topics including Small Business Restructuring, Voluntary Administration, Members’ Voluntary Liquidations, Safe Harbour, property disputes under section 66G and a range of formal and informal restructuring options.

David is currently working with businesses navigating ATO debt recovery initiatives. His approach is informed by the practical application of PS LA 2011/16 and the commercial considerations that underpin successful restructuring proposals.

This article is also provided as a booklet, 2026 ANAO ATO Booklet, as a practical resource for advisers and their clients, helping them understand the key differences between these two insolvency options.