ATO Audit Activity is Increasing - What This Means for Small & Medium Enterprises
By Tom Warner & Garrett Douglas
February 2026
Over the past 12–18 months, the Australian Taxation Office (ATO) has significantly stepped up its compliance program as the Federal Government continue to increase their funding to pursue the ever-growing estimated tax gap. The tax gap is the estimated difference between the amount the ATO collects and what would be collected if every taxpayer was fully compliant. The most recent information from the 2023 financial year places the tax gap at around $58 billion.
For small and medium enterprises (SMEs), this has resulted in more review letters, information requests and formal audits. While many reviews are routine, they can be a considerable burden on time, management focus and professional costs.
The real cost of an ATO audit
Even when no adjustments are ultimately made, an ATO audit can be costly in several ways:
Owner’s time being shifted from business operations to compliance tasks
Administrative effort in sourcing and preparing records (we are seeing requests for invoices and source documents back 4+ years)
Professional fees for accounting, advisory support and assistance in answering the large number of questions and queries that are raised
Stress and uncertainty throughout the review process
Why the ATO can do more - Data and Technology
The ATO now has access to a broad range of data sets that allow it to pinpoint inconsistencies and unusual patterns with greater precision than before, including:
Single Touch Payroll (STP) data
BAS and GST reporting which can be used to cross match to your lodged tax returns and queries raised on variances
Bank and transaction data
Third-party platform reporting including trading platforms and sharing economy platforms such as Uber and Air BnB
Property and asset transaction records including motor vehicle transfer information
Superannuation guarantee reporting
With the ATO knowing so much now in a faster time period, what does this increased compliance activity look like for SME’s?
These will come as a phone call followed by a letter stating the ATO are looking into an area of your business operations and reporting. They will provide a list of information they want such as bank statements, payroll records, invoices you have sent to customers or supplier invoices to support purchases you have claimed deductions for. We are finding that in most instances, the ATO are only giving a short period of time to provide all of this to their officer.
Common focus areas include:
GST reporting and refunds where these fluctuate up and down
Payroll classifications (employee versus contractor)
Business versus private expenses
Income reporting versus bank transactions
Variations from industry benchmarks
The ATO may also provide an estimate of how much they have calculated the variance to be based on their data. These are mostly prepared using estimated calculations or previous year’s information as the basis. Any estimates the ATO provide should be reviewed and confirmed before acceptance of these are made. Recently we had a client told they under reported income of over $300,000 based on the ATO calculations, however, when we did the calculations it was only $6,000. Big difference and big relief to the client.
Director Penalty Notices - A notable increase
One of the clearest signs of heightened compliance activity has been an increase in the issuing of Director Penalty Notices (DPN’s) over the past 12 months.
A DPN can make directors (past and present) personally liable for unpaid PAYG withholding, superannuation and GST where obligations have not been met by companies they have been director’s of. The ATO apply strict response deadlines which are typically as short as 28 days and may require payment of 100% of the outstanding debt or engaging an insolvency practitioner. Recent stats say that the ATO have increased the issuing of DPN’s by over 50% on the previous financial year and this is not likely to slow down.
Don’t stick your head in the sand, preparation is the best defense
Practical steps include:
Maintaining clear and accessible records
Regular reconciliation of GST and payroll
Reviewing contractor and payroll arrangements
Addressing issues proactively rather than reactively by engaging in conversations with your accountant
Identify and address issues before they escalate into an ATO audit or review
Consider voluntary disclosure of known issues as a way to reduce potential penalties and interest.
ATO audits are becoming more common and more data driven. While often unavoidable, the disruption and cost can be reduced through preparation, good records and early professional advice.
PayDay Super Is Coming: What Employers Need to Know Now
Significant changes to superannuation payments are on the horizon, and while July 2026 may feel some time away, preparation needs to start well before then.
From 1 July 2026, employers will be required to pay Super Guarantee contributions at the same time as wages. Instead of paying super quarterly, contributions will need to be processed with each pay run. This reform, known as Payday Super, represents one of the most substantial payroll compliance changes in recent years.
For many businesses, this will mean reviewing payroll systems, updating processes and carefully considering cash flow timing.
What is Changing?
Under the new rules:
Super must be paid on payday, alongside salary and wages
Contributions must be received by the employee’s super fund within the required timeframes
Quarterly super payments will no longer be permitted
In addition, the ATO Small Business Superannuation Clearing House will close on 30 June 2026. Businesses currently using this service will need to transition to an alternative clearing house or payroll solution before this date.
These changes are designed to improve transparency and ensure employees receive their super entitlements more promptly. However, they also introduce new compliance obligations and operational considerations for employers.
What This Means for Your Business
For some employers, Payday Super will require only minor system adjustments. For others, particularly those with complex payroll structures or tight cash flow cycles, it may represent a more significant shift.
Key areas to consider include:
Payroll Systems and Processes: Your payroll software must be capable of calculating and processing super contributions accurately with each pay cycle. Integration between payroll and clearing house systems will become even more critical.
Cash Flow Management: Moving from quarterly payments to per-pay contributions changes the timing of cash outflows. Businesses will need to plan accordingly to avoid unexpected pressure on working capital.
Compliance Risk: With super being paid more frequently, there is less room for error. Late or missed payments may result in penalties and additional reporting obligations.
Clearing House Transition: If you are currently using the ATO Small Business Superannuation Clearing House, you will need to select and implement an alternative solution well before June 2026.
Why Planning Early Matters
Although the change does not take effect until July 2026, waiting until the final months to act could create unnecessary stress.
Early preparation allows you to:
Review your current payroll processes
Assess whether your software is fit for purpose
Model the cash flow impact of more frequent super payments
Implement system changes gradually rather than urgently
It also provides time to educate internal staff and ensure everyone understands their responsibilities under the new framework.
How Lincolns Can Support You
At Lincolns, we understand that compliance changes can feel overwhelming, particularly when they impact day-to-day operations.
Our team can assist with:
Explaining what Payday Super means for your specific business
Reviewing your payroll systems and processes
Planning your transition away from the ATO clearing house, where applicable
Advising on suitable payroll and superannuation clearing solutions
Providing ongoing practical support as the implementation date approaches
We will continue to share updates and practical insights as further details are released. Payday Super will also be discussed at our upcoming Rural Tour seminars, where we’ll explore what regional employers need to consider.
If you would like to discuss how these changes may affect your business, please contact our team. The earlier the conversation starts, the more options you will have.
