Running a small business comes with its rewards—but also its challenges. Sometimes, even profitable and well-managed businesses find themselves in debt. Whether it’s a sudden health crisis, cost-of-living pressures, or an honest tax misstep, the path to financial trouble can be surprisingly common.
Recently, the Australian Taxation Office (ATO) announced that, from 1 April 2025, small businesses with a history of non-compliance—such as late or incorrect BAS lodgements—may be moved from quarterly to monthly GST reporting. The change is designed to help prevent tax debts from growing unchecked. For many small business owners, this will mean a significant shift in how they manage their cash flow.
In the past, it wasn’t unusual for businesses to use the ATO like a short-term “overdraft”—delaying payments to cover wages or unexpected costs. But with more frequent reporting and faster detection of underpayment, that buffer is disappearing. If your business is already tight on working capital, this shift could create additional strain. Understanding how debt starts—and how to avoid it—is key to staying in control.
Let’s look at five common scenarios that lead otherwise capable businesses into financial difficulty.
1. Illness and reduced revenue: Using tax monies to survive
When illness strikes, your business may not be able to operate at full capacity—or at all. Revenue can drop suddenly, yet fixed expenses like rent, wages, and supplier invoices continue. To stay afloat, some business owners divert funds intended for BAS, PAYG, or super payments. It can feel like a necessary move to buy time. But over time, these deferred payments stack up and can create a debt that can be hard to unwind.
The move to monthly BAS lodgements makes it even harder to use the ATO as a stopgap. The ATO will now be keeping a closer eye on your numbers more frequently, limiting the time you have to recover from a setback. If health issues are impacting your business, it’s important to speak with your accountant or the ATO early. There may be payment plans or temporary relief options available.
2. Cost of living and interest rate increases: Using business turnover to cover personal expenses
Australia’s rising cost of living has affected everyone. For many small business owners, particularly sole traders, the line between business and personal finances is blurry. When mortgage repayments, groceries, and school fees increase, some begin to dip into their business income to fill the gap. While this might be manageable in the short term, it can lead to major compliance issues. Using business revenue for personal costs without setting aside enough for GST, PAYG, or income tax puts you behind on your obligations. Many don’t realise the true impact until the tax bill arrives.
For a deeper understanding of why such miscalculations occur and strategies to prevent them, consider reading “Why Do I Owe the ATO Money & What to Do About It?” The solution is strong budgeting and clear separation of business and personal finances.
3. Miscalculating tax commitments after a revenue increase
More revenue doesn’t always mean more profit—especially if you’re not ready for the tax that comes with growth. A spike in business turnover can result in higher wage costs, PAYG commitments and also bigger GST bills.
Excessive or uncontrolled business growth can also be a cause of tax debt. Immediate funding is required to purchase stock, pay wages and other business expenses. Uncontrolled growth without a funding facility linked to growth can have your business end up with a sizeable tax bill. It’s easy to fall into the trap of thinking the extra revenue less past tax payable is there to use. But if you’re not adjusting your tax planning, the ATO may surprise you with catch-up instalments or reassessed liabilities.
To avoid this, ensure your tax planning scales with your revenue.
4. New businesses not understanding tax obligations
Every new business owner has a learning curve. However, taxes are one area where mistakes can quickly lead to debt. Many new operators don’t realise they need to register for GST, pay superannuation for staff and themselves, or submit quarterly BAS from early on. Unfortunately, the ATO doesn’t waive debts due to inexperience. If you’re starting out, invest time in understanding your tax obligations.
5. Transitioning from sole trader to company: Extra complexity, extra risk
Growing from a sole trader to a company is often the right move, but it comes with more compliance, more paperwork, and more rules. You’ll now need to meet company tax deadlines, lodge ASIC documents, and manage PAYG withholding and super for any staff. Not to mention, the tax on your own drawings. Make sure you understand the new structure, set up the right accounting systems, and keep track of your lodgement deadlines.
Conclusion: Don’t wait—take action early
Business debt doesn’t mean your business is failing. It often means you’re adapting to change, navigating uncertainty, or just missing the right advice at the right time. What matters most is how early you act. The ATO’s shift to monthly BAS lodgements is a clear sign that they’re keeping a closer watch on tax compliance. For business owners, that means it’s more important than ever to stay on top of obligations and seek help early—before things snowball.
If you’re worried about debt or already behind, don’t wait. Support is available, and the sooner you ask for help, the more solutions you’ll have.
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