Massive tax consequences coming for 42,000 small businesses ‘disengaged’ from ATO

More than 42,000 small businesses are reportedly “disengaged” from the Australian Taxation Office (ATO), risking massive consequences when overdue payment rules change in 2025.

The Australian Financial Review reports some 50,000 taxpayers with outstanding tax obligations over $100,000 are ignoring the ATO’s calls to pay up.

Of those, 42,127 small businesses owe a collective $11 billion.

Those figures add detail to what was already a clear and grim picture for small businesses: of Australia’s $50 billion in collectable debt, 65% is related to small and medium enterprises.

The scale of that disengagement is magnified by what accounting bodies have described as a significant and overlooked change to ATO debt repayment rules.

As flagged in December 2023, the general interest charge (GIC) — the interest tacked onto payments to the ATO when they pass their due date — will lose tax deductibility status on July 1, 2025.

This measure is expected to add an extra $500 million a year to the government’s coffers, as the tax office formally abandons the COVID-era leniency it showed taxpayers.

For the small businesses currently disengaged from the tax system, it could equate to massive consequences if they do finally pay up.

As pointed out by CA ANZ this week, the GIC rate is currently 11.34%.

The shortfall interest charge, the interest applied when a business’ self-reported tax obligations are less than its true tax obligations, will also lose tax-deductible status.

Susan Franks, CA ANZ senior tax advocate, suggested few taxpayers are currently aware of the impending change.

“The government’s announcement was not subject to a consultation process,” she said.

“It is also an initiative that will have effect after the next election.

“Currently it is a sleeper issue – but once draft legislation is issued, I am sure many people will have opinions about this measure.”

Beyond the consequences of high and unavoidable interest charges, the Australian Securities and Investments Commission is actively doling out Director Penalty Notices against corporate leaders falling short of their obligations.

With the consequences of late or ignored payments becoming clear, Australia’s top corporate authorities and regulators, including the ATO itself, have urged small businesses to come forward before they face severe penalties.