The behavioural reasons behind tax aversion

By Gary Anders

The Australian Taxation Office (ATO) is on a mission to recoup billions of dollars in unpaid taxes from SMEs, with some debts dating back to before the onset of the COVID-19 pandemic.

Having given many small and medium enterprises (SMEs) a lengthy tax reprieve because of the negative business impacts from the pandemic, the ATO is now taking a firm stance to chase down the taxes it is owed.

In a February 2026 update, ATO Assistant Commissioner Angela Allen referenced ATO estimates that show a small business income tax gap (the total amount of tax it expects to be paid by SMEs) of A$27.2 billion.

She cautioned SMEs to stay on top of their tax debts or risk “firmer action” such as garnishee notices and director penalties.

In 2024–25, the ATO received almost 50,000 community tip-offs about tax avoidance and other dishonest behaviours, mostly related to shadow-economy activity such as individuals demanding cash payments for work or for incorrect business expense claims.

Reasons for resistance

Behavioural economist Dr Paul Moran, principal of Melbourne-based Moran Partners Financial Planning, says the emotional or psychological resistance by some SME owners to paying their tax obligations often relates to confirmation bias, driven by feelings such as unfairness, distrust or frustration with complexity.

“I am saying that because one of the reasons people do not like paying tax is they have a sense that what the government does with the money is not necessarily in their interests.”

“They tend to read a lot of information about the waste in government … and it confirms their view that they shouldn't be paying tax. Certainly, my experience is that people in small businesses, when the business is not doing well, tend to blame the government and therefore the economy and do not want to pay tax.”

Professor Robert Breunig, director of the Tax and Transfer Policy Institute at The Australian National University, also notes that people feel better about paying tax if they think that the government is spending it sensibly and that other people are also paying their share.

 

"I think in the past the Tax Office was seen as being more lenient than they are now, and some people felt like they were a cheap creditor to them. But the Tax Office’s interest rates are probably higher than your interest rates anywhere else."

 

“A lot of ATO activity is really about tax morale,” Breunig says. “When the ATO goes after people — and sometimes they end up spending more money pursuing people than they get back in tax collections — they are doing it because they want people to see that you cannot get away with not paying your taxes.”

A few years ago, Breunig participated in some work for the ATO that involved contacting small businesses that had missed their goods and services tax (GST) payments. “When we contacted them we basically said, ‘It looks like you missed your GST payment, and we just want to check in with you to see what is happening. If you are having some kind of financial difficulty, let us know and we will make some arrangements and you can talk to us about it’.

“That actually had a positive impact in terms of getting people back onto the GST system and making payments.”

Another cognitive bias for some SME owners is loss aversion, especially when their cash flow is tight and volatile. The loss of cash today to meet their tax obligations can feel more urgent than the gain of remaining tax-compliant and avoiding penalties.

Pluta Accountants partner Natalie Pluta CPA says tax bills can be quite overwhelming, especially for newer SMEs who may lack the knowledge to budget for their future tax obligations.

“During periods when cash flow becomes tight and the most immediate concern is paying the rent and keeping the lights on, it inevitably means the easiest thing is to not pay their tax because they think it is something they can defer for a couple of months or until the ATO contacts them.

“Bringing in the right procedures and systems would enable them to keep on top of those tax obligations.”

Melanie Kay FCPA, principal of accounting, tax and business advisory firm M. Kay and Associates, says the ATO is chasing up outstanding debts from SMEs and taking recovery actions much more promptly. “I always say to my clients with regards to that: do not ignore the tax office. Put yourself in a plan and stick to it.

“I think in the past the Tax Office was seen as being more lenient than they are now, and some people felt like they were a cheap creditor to them. But the tax office’s interest rates are probably higher than your interest rates anywhere else and, as they are getting stricter and imposing late penalties and then interest, not paying your tax is not the best option.”

Tax compliance levers

The Organisation for Economic Co-operation and Development’s (OECD) Tax Administration 2025 report, which provides internationally comparative data on tax systems in 58 advanced and emerging economies, notes that a core part of supporting taxpayer compliance is the provision of effective and easy-to-use services for taxpayers.

“Providing the right services, to the satisfaction of taxpayers and other stakeholders, will increase the level of participation, taxpayer trust and confidence in the tax system as a whole,” the report states.

A growing trend is the use of generative artificial intelligence to provide taxpayers with efficient and user-friendly digital tools, such as chatbots, to facilitate tax queries and online payments. The report references various deployed digital systems that work well in this regard, including those in Austria, Canada, Ireland, South Korea, Singapore and Sweden.

Meanwhile, the country of Georgia is cited for its introduction of a pre-filled income tax declaration mechanism for small businesses, which is part of its focus on customer-oriented services and voluntary tax compliance.

 

"Part of what we do is have discussions with clients, especially those in their first year of business, in relation to electing to go into the pay-as-you-go (PAYG) instalment system. We also suggest things like setting up dedicated tax bank accounts in which they can put money aside on a weekly basis."

 

Educational and support initiatives are also seen as key elements in the tax compliance process, both to help taxpayers understand their obligations and their abilities to meet them, and to raise awareness about the role of tax in society.

Canada, Denmark, Italy and Japan are referenced for their initiatives in this area. In Türkiye, the Turkish Revenue Administration has implemented a proactive communication policy aimed at taxpayers starting new businesses to inform them of their legal obligations and rights, and to ease compliance processes.

In terms of tax compliance risk management, which is crucial for tax administration in identifying areas of non-compliance, the OECD references Australia’s Centrl dashboard that enables the ATO to track specific taxpayer groups. The ATO is also mentioned for its other advancements in data analytics systems.

A 2023 report published by researchers Mattia Anesa and Alessandro Bressan at The University of Sydney found that SMEs and tax accountants had a “shared responsibility” within the context of taxation.

Their report, SMEs tax minimisation as shared responsibility, which focused on accountants and SMEs in Italy, noted that “SMEs are often viewed as a high-risk group in relation to tax compliance … due to the frequent adoption of strategies aimed solely at tax minimisation”.

“SMEs have limited capacity and resources to dedicate to core financial and accounting skills, let alone sophisticated governance measures,” the researchers found. “In fact, our findings point to an ingrained view by both tax accountants and SMEs that the best way to fulfil their responsibilities is to minimise tax expenses.

“Within the SME context, tax accountants become an integral part of SME businesses. We see accountants as potential changemakers through an educational role that fosters more responsible tax conduct among SMEs.”

Strategies for clients

Having simple, honest discussions with SME clients about their business and their tax obligations, and pointing out the differences between gross revenue, net profit and personal income is important, Pluta says.

“Part of what we do is have discussions with clients, especially those in their first year of business, in relation to electing to go into the pay-as-you-go (PAYG) instalment system. We also suggest things like setting up dedicated tax bank accounts in which they can put money aside on a weekly basis.”

For example, she says there could be an account for GST, another for employee superannuation and another for PAYG instalments, “so you can separate out your business cash flow from your tax obligations”.

If owners are tempted to dip into their tax bank account, she encourages them to call a professional to discuss other options. “Do they need to make cost-saving measures? Are they overstaffed? Has the business changed significantly or do they need to increase their pricing?

Is there something within the structure of their business that they can do better or more efficiently that will enable them to improve their cash flow without relying on using that tax obligation money?”

Kay says her “biggest gripe” is when clients listen to the wrong people.

“Probably the worst thing that I see with clients is that wrong advice they are getting from either friends, family or sometimes even just bad accountants and tax agents,” she says. “I do my best to educate clients to not let their tax debts get out of control.

“It is about making sure you are lodging on time, making sure your super is being paid on time, and then if you are in a little bit of debt stress, you do not ignore the tax office.”