On 1 July 2025, the tax-deductibility of ATO interest charges disappeared — and it's landed at the same time as a sharp rise in Director Penalty Notices and a fresh ANAO audit finding small businesses now carry $35.9 billion of the ATO's $54.2 billion debt book. If cash flow has felt tighter than usual this year, you're not imagining it. This article looks at what's actually driving the pressure, the early warning signs worth watching for, the AI-assisted forecasting tools that can help you catch them sooner, and the formal restructuring option that exists if things have already gone further than a dashboard can fix.
Key Takeaways
- The GIC and SIC on ATO debts are no longer tax-deductible for charges incurred from 1 July 2025, and the rate — 11.17% per annum, compounding daily — is now one of the most expensive debts a business can carry.
- Director Penalty Notices surged 136% to more than 84,000 in FY2024-25, and small businesses now hold $35.9 billion of the ATO's $54.2 billion collectable debt book, according to a June 2026 ANAO audit.
- AI-assisted cash-flow tools like Fathom, Float, Spotlight Reporting, and Xero Cash Flow Analytics won't predict insolvency, but they surface warning signs — rising tax debt, lengthening debtor days, thinning liquidity coverage — weeks before a monthly bank statement would.
- The Small Business Restructuring process let 3,388 companies negotiate with creditors (87% of distributed funds went to the ATO) between July 2022 and December 2024, while directors kept running the business.
- Watching a dashboard isn't a substitute for professional advice — once real warning signs appear, the next call is to your accountant or a licensed restructuring practitioner, not another forecasting report.
What rising insolvency risk actually looks like for Australian small businesses right now
Insolvency risk means you can't pay your debts as and when they fall due — it's a liquidity problem, not just a balance-sheet one. The latest figures show the raw numbers easing slightly, but the underlying pressure on small businesses hasn't gone anywhere.
According to ASIC's Corporate Insolvency Update (Issue 40, June 2026), 12,819 companies entered external administration in the first 11 months of FY2025-26 — down 4.6% from 12,105 in the same period of FY2024-25. That's a genuine easing, but it doesn't mean the danger has passed: the absolute volume of failures remains elevated compared with pre-pandemic norms, and a plateau at a high level is still a high level.
Construction, hospitality, and accommodation and food services are consistently among the hardest-hit industries in Australian insolvency data, year after year — high fixed costs, volatile demand, and thin margins make construction and trades businesses especially exposed to cash-flow shocks. Other services sectors face a similar squeeze as labour costs continue outpacing revenue growth.
The practical takeaway: reviewing a bank balance once a month is no longer enough buffer. Insolvency is usually a symptom of poor cash visibility long before it's a symptom of poor profitability — which is exactly the gap forecasting tools are built to close.
Why ATO debt collection became much more aggressive in 2025-26
The ATO has intensified debt collection through both a costlier tax law and tougher enforcement, meaning unpaid tax can now compound into a solvency threat far faster than it used to. Two changes are doing most of the damage.
First, from 1 July 2025, the General Interest Charge and Shortfall Interest Charge on ATO debts are no longer tax-deductible — a change flagged in the December 2023 MYEFO and now in force. Charges incurred before that date stay deductible; what matters is when the interest is incurred, not when it's paid. With GIC currently running at 11.17% per annum and compounding daily, and no deduction left to soften it, ATO debt is now one of the most expensive forms of finance a small business can carry.
Second, enforcement has scaled up sharply. The ATO's use of Director Penalty Notices — which make directors personally liable for unpaid PAYG withholding and GST — surged 136% to more than 84,000 in FY2024-25, according to Tax Ombudsman Ruth Owen. Total ATO collectable debt sat at $54.2 billion as at 30 June 2025, and a June 2026 Australian National Audit Office report found small businesses account for $35.9 billion of that — 66.1% of the total, spread across more than 1.3 million businesses at an average of about $26,800 each. That total debt pool has grown $19.4 billion (118%) since 2018-19, and the ANAO rated the ATO's current collection strategy only "partly effective."
The correlation with insolvency is direct: CreditorWatch found 35,361 businesses carried ATO debts over $100,000 as at 30 June 2025, and those businesses had an average insolvency rate of 21.9% over the following year. Ignoring tax debt is no longer a viable way to manage cash flow — the compounding cost and the personal exposure for directors both get worse the longer it sits unpaid.
Pro tip
Common mistake: Treating ATO debt like ordinary trade credit. Since 1 July 2025, the interest on it isn't tax-deductible and it compounds daily at 11.17% per annum — it's now one of the costliest ways to fund a cash shortfall, not a low-priority bill to leave until last.
The Small Business Restructuring pathway — a genuine second chance
The Small Business Restructuring (SBR) process lets an eligible small company propose a debt repayment plan to creditors through a licensed restructuring practitioner, while the director keeps running the business — a real alternative to heading straight into liquidation.
Between July 2022 and December 2024, 3,388 companies used the SBR process, according to ASIC (media release 25-111MR). Between them, they distributed more than $101 million to unsecured creditors — about $88 million of it, 87%, went to the ATO, reflecting how central tax debt is to the cases that end up in restructuring.
ASIC said: "After a slow start, the recent growth of SBRs and other data in our report shows that the SBR regime is starting to deliver on the intended policy objective of reducing the complexity and costs involved in insolvency processes for small businesses and ultimately helping them to survive."
Under an SBR, a licensed practitioner assesses the business, develops a repayment plan, and puts it to creditors for a vote — all while the director keeps trading, serving customers, and generating the revenue the plan depends on. That continuity is the key difference from liquidation, where operations stop immediately. It's not guaranteed to work: the plan still needs a viable business behind it and creditors willing to vote yes. But for a business with a real future and a tax debt problem, it's a structured, legally recognised route that doesn't end in the company's closure.
Early warning signs an AI cash-flow tool can help you catch
AI cash-flow tools help by continuously projecting your future cash position rather than just reporting where things stand today, which means the warning signs below can show up weeks or months before a monthly bank statement would reveal them.
A rising GIC or tax debt balance is one of the clearest signals — once interest starts compounding daily, tracking it in real time (rather than at BAS time) lets you prioritise payment or start a conversation with the ATO before it snowballs. A lengthening average debtor collection period is another: if customers are taking longer to pay, AI-assisted accounts receivable tools can model exactly how that stretch affects your cash position weeks out, rather than you noticing only once the account is genuinely tight — and tightening up collections is often where accounts receivable automation pays for itself fastest.
Declining cash-flow coverage of short-term liabilities — essentially, how many months of bills your current cash could cover — is a trend worth watching closely, since a downward slope gives you time to arrange a credit line or cut discretionary spending before you're forced into it. Growing reliance on trade credit to plug gaps is a related signal: useful occasionally, but a sign of a deeper cash-conversion problem if it becomes the norm.
The advantage of continuous forecasting over a same-day bank balance check is timing: a string of delayed customer payments might not show up as a problem today, but a forecasting tool projecting weeks ahead will flag the shortfall while there's still time to act on it.
Pro tip
Pro tip: Run a 13-week cash-flow forecast before you talk to your accountant, not after. It turns a vague "things feel tight" conversation into a specific one about which week the shortfall actually hits — and gives your adviser something concrete to work from.
Comparing the AI cash-flow tools Australian small businesses actually use
AI-assisted cash-flow forecasting tools are the main way small businesses get this kind of early visibility today, and none of them market themselves as insolvency predictors — they surface distress signals as a byproduct of forecasting and reporting, which is what they're actually built to do. We've covered the broader category of AI finance tools for small business before, and the same AI-powered forecasting approach applies here, specifically to insolvency risk.
| Tool | Forecast type | Horizon | Integrates with |
|---|---|---|---|
| Fathom | 3-way (P&L, balance sheet, cash flow) | Monthly / quarterly / annual | Xero, QuickBooks, MYOB |
| Float | Cash-flow only, rolling | 13 weeks + up to 36 months | Xero (daily sync) |
| Spotlight Reporting | 3-way, with AI-generated commentary | 12–24 months | Xero, QuickBooks, MYOB |
| Xero Cash Flow Analytics | Cash position + payment timing | Up to 180 days | Native to Xero |
Fathom and Spotlight Reporting both produce full three-way forecasts, useful if you want to see how a cash-flow problem connects back to the profit and loss and balance sheet, not just the bank balance. Float is more narrowly focused on cash flow itself, syncing daily with Xero and built specifically around flagging a dip before it happens. Xero's own Cash Flow Analytics, built on the Syft Analytics technology Xero acquired in 2024, predicts expected invoice payment dates and projects your cash position up to 180 days out using your actual transaction history, and rolled out to Australian and New Zealand users through 2025.
Whichever tool you choose, the point isn't the software — it's turning cash-flow management from a monthly, backward-looking exercise into a running, forward-looking one.
Where AI tools stop and professional advice has to start
AI cash-flow tools are a useful early-warning input, not a substitute for professional judgement once a business is genuinely in financial distress. Accounting and advisory firms — William Buck among them — have published commentary specifically cautioning against over-relying on AI to predict solvency in SMEs, and the concern is a fair one: a forecasting tool works from historical data and current trends, so it can't account for a major client suddenly defaulting or a regulatory shift landing without warning.
Once the warning signs from earlier in this article start showing up for real, the next step is a conversation with your accountant or a licensed restructuring practitioner — not a closer look at the same dashboard. Australia's insolvent trading laws hold directors personally liable for debts incurred while a company is insolvent, and that's a legal question a piece of software isn't equipped to answer. A practitioner can assess whether a restructuring plan (like the SBR pathway above) is realistic, negotiate with creditors directly, and help you understand exactly where your personal exposure sits.
Used together, the two aren't in competition: the forecasting tool tells you something's changing before it's obvious, and the practitioner tells you what to actually do about it.
Where to start this week
Start with the tool, not the crisis. Set up a rolling cash-flow forecast this week if you don't already have one, get a clear read on your GIC and tax debt position this month, and treat the Small Business Restructuring process as a genuine option rather than a last resort if the warning signs start stacking up. Open banking data feeds are also changing what these tools can see automatically — see our coverage of open banking for small business finance for more on that shift, and our AI Implementation Playbook is a good next stop if you're sequencing this alongside other AI adoption, with our AI Strategy & Implementation work following the same structured logic.
None of this requires waiting for a crisis to force the issue — the businesses that come through this enforcement cycle in the best shape are the ones tracking these signals before the ATO does. If you want a second set of eyes on where your business actually sits against these numbers, that's exactly the kind of financial health assessment we help clients work through at GrowthGear.
| Priority | Action | Why it matters |
|---|---|---|
| This week | Set up (or review) a rolling cash-flow forecast in a tool like Fathom, Float, Spotlight Reporting, or Xero Cash Flow Analytics | Gives you weeks of warning instead of a same-day bank balance |
| This month | Check your GIC/tax debt balance and whether it's compounding | It's no longer tax-deductible, and 11.17% p.a. compounding daily adds up fast |
| If warning signs appear | Talk to your accountant about the Small Business Restructuring process | 3,388 companies have used it since mid-2022 to keep trading while resolving debt |
| Ongoing | Review debtor days and short-term liability coverage monthly, not just the bank balance | These usually move before the bank balance does |
Frequently Asked Questions
Insolvency risk means a business may become unable to pay its debts as and when they fall due — a cash-flow problem, not necessarily a profitability one. ASIC recorded 12,819 companies entering external administration in the first 11 months of FY2025-26.
Since 1 July 2025, the General Interest Charge and Shortfall Interest Charge on ATO debts are no longer tax-deductible, and GIC currently compounds daily at 11.17% per annum with no offsetting deduction.
It's a formal process letting an eligible small company propose a debt repayment plan to creditors through a licensed practitioner while the director keeps running the business. 3,388 companies used it between July 2022 and December 2024.
Not directly — tools like Fathom, Float, Spotlight Reporting, and Xero Cash Flow Analytics forecast cash position and surface warning signs like rising tax debt or lengthening debtor days, but none of them market themselves as insolvency predictors.
The ATO's use of Director Penalty Notices surged 136% to more than 84,000 in FY2024-25, according to Tax Ombudsman Ruth Owen. These notices make directors personally liable for certain unpaid company tax debts.
Once real warning signs appear — rising tax debt, stretching debtor days, or declining liquidity coverage — it's time to talk to an accountant or licensed restructuring practitioner rather than just watching a forecasting dashboard more closely.
Sources & References
- ASIC — "The SBR regime is starting to deliver on the intended policy objective... helping them to survive," 3,388 SBR appointments and $101 million distributed to creditors (2025)
- ASIC Corporate Insolvency Update, Issue 40 — 12,819 companies entered external administration in the first 11 months of FY2025-26 (2026)
- Australian Taxation Office — GIC and SIC no longer tax-deductible for charges incurred on or after 1 July 2025 (2025)
- SmartCompany — Director Penalty Notices surged 136% to over 84,000 in FY2024-25; total ATO collectable debt $54.2 billion (2026)
- SmartCompany — ANAO audit finding small business debt of $35.9 billion, 66.1% of total ATO collectable debt (2026)
- CreditorWatch — 35,361 businesses with ATO debt over $100,000 and a 21.9% average insolvency rate (2026)
