The Australian Taxation Office may never be able to recover half the $100 billion tax it is owed, says a new report by the Australian National Audit Office that warns small businesses are the biggest defaulters and rising debt risks some taxpayers obtaining an unfair financial advantage.
The latest audit of the ATO’s management of small business collectable debt revealed an increase of $19.4 billion between 2018-19 and 2024-25, representing a 118 per cent rise.
Small businesses contributed $35.9 billion of $54.2 billion total collectable debt during the 2024-25 financial year, said the ANAO, pointing to 1.3 million small businesses with an average of $26,797 in collectable debt.
The widening taxation black hole comes as Australia’s gross national debt teeters towards a $1 trillion milestone, and Labor struggles to rein in spending, including through a controversial proposed overhaul of the National Disability Insurance Scheme to deliver a net budget saving of up to $22 billion over the next four years.
In its submission to the ANAO’s audit, the Chartered Accountants Australia and New Zealand (CA ANZ) highlighted that Australia’s tax debt of approximately $100 billion was an amount equal to what the federal government spends on defence and education combined each year – and that it continued to grow.
It called for “greater transparency about the composition and collection of tax debt” and lamented the lack of consistency in ATO tax debt collection as the largest source of complaints.
Confusion among tax agents about the ATO’s management of small business debt made it “extremely difficult” to improve compliance, payment behaviour and prevent future defaulting, it said.
The ANAO focused on the risk highlighted in the ATO’s own 2024-25 annual report that $49.8 billion of the total $98.4 billion tax owed was subject to an “impairment allowance”, meaning that “there is evidence that the ATO will not be able to collect all of the amounts due”.
Auditors said some losses were attributed to measures to help taxpayers weather the COVID-19 pandemic and other global economic shocks, but the audit also concluded the ATO management of collectable small business tax debt risks was only partly effective.
While it found the ATO had a “largely sound strategic framework for debt collection,” it said its strategy was not specific to small business, which accounted for 66 per cent of total collectable debt.
“The ATO recognised that measures adopted during the COVID-19 pandemic ‘normalised into poor payment behaviours’ among taxpayers” and assessed that a significant behavioural shift by small business taxpayers was required to bring the debt risk back into tolerance.
Among the auditors’ criticisms of the ATO was the absence of clearly defined targets or performance measures to actively reduce debt volumes, meaning the ATO is “unable to define what success looks like” as it seeks to bring the debt ratio back to 6 per cent, from 34 per cent in 2024-25.
“Public reporting on performance does not provide parliament with sufficient visibility of the risks and the ATO’s management of them,” it said. “A continued rise in debt volumes creates a number of risks, including that some taxpayers obtain an unfair financial advantage over others.”
The audit report revealed the tax office itself had found the collectable debt ratio for small business as of 31 March 2024 was a “catastrophic” 36.8 per cent, having “severe impact on achievement of outcomes and performance”.
The ATO agreed to eight recommendations to improve performance measures, benchmarks, communication and the use of data as part of its commitment to ensure fair and balanced outcomes for taxpayers.
“The ATO’s core focus is collecting the right amount of tax owed to the Australian community, balancing firm, timely actions where needed with appropriate support for those who need it,” it said in its official response to the audit.
Small businesses accounted for around $35.9 billion of total collectable debt as at 30 June 2025, it said.
“This debt is largely undisputed and predominantly self-reported, with a significant amount of this debt relating to money that has already been withheld from employees or collected from consumers but not yet paid to the government,” said the ATO.
“Addressing this debt is critical to maintaining a level playing field, ensuring those who do the right thing are not disadvantaged and protecting everyone involved – including other businesses and employees.”
Treasurer Jim Chalmers was contacted for comment.
Labor’s May budget made the small business instant asset write-off permanent from July 1, and increased the amount to $20,000.
Around 1.5 million sole traders will receive a $250 tax offset from 2027–28, and Labor also increased the turnover threshold for the existing 50 per cent active asset reduction Capital Gains Tax concession from $2 million to $10 million, following a backlash to its tax overhaul plans.
When he announced the concession, Chalmers said this would mean 2.7 million active small businesses and 98 per cent of active businesses would be eligible for concessional treatment.
However, Coalition Treasury spokesman Tim Wilson said he was unsurprised about the collectable debt figures, blaming Labor’s taxation policy.
“The Albanese government can’t control its addiction to spending, so it would rather sink a small business to collect revenue than have small business survive and thrive, so, unfortunately, none of this comes as a surprise and is a sign of what is to come under their higher taxing agenda,” he said.
Source: https://www.afr.com/politics/federal/ato-faces-50b-tax-shortfall-as-small-business-debts-rise-20260710-p60edy