ATO Penalties in 2026: What They Cost (and How to Avoid Them)

Deepinder Kaur

10 mins read

Published:

30 October 2025

Updated:

16 January 2026

Stay on top of your ATO penalties

Nothing derails a business faster than unexpected ATO tax penalties, one missed BAS, a forgotten PAYG payment, or a small reporting error can quickly snowball into hundreds (or even thousands) in fines. It’s not just the money, it’s the stress, the paperwork, and the fear of being on the ATO’s radar.

The good news? Most tax penalties in Australia are completely preventable with the right processes and a proactive tax accountant who keeps your lodgements accurate and on time.

This guide breaks down the most common ATO penalties in 2026, how they’re calculated, and practical ways to avoid them so you can protect your business and your peace of mind.

Avoid ATO fines before they happen

Why the ATO imposes tax penalties (and when you could face them)

The ATO’s goal is to keep the tax system fair and ensure every business meets the same compliance standards. Penalties are applied when you miss key obligations like lodging returns, paying on time, or providing accurate information. Here are the most common ones to watch out for in 2026.

Common ATO penalties for Australian businesses in 2026

Before you hit submit, it’s worth knowing the key penalties the ATO enforces for late or incorrect lodgements.

1. Submitting false or misleading information

Providing incorrect figures, even by mistake, can result in penalties based on how serious the error is:

Failure to take reasonable care: 25% of the shortfall amount
Recklessness: 50% of the shortfall amount
Intentional disregard: 75% of the shortfall amount

For large entities (Significant Global Entities), these rates can double, and penalties may still apply even if there’s no shortfall (e.g., incorrect information during an audit).

How to stay compliant?

Always double-check your reports or have a registered tax accountant review them before lodgement.

2. Making claims that aren’t reasonably arguable

If you take a tax position that lacks a reasonable basis, say, claiming an ineligible deduction, the ATO can impose a 25% penalty on the shortfall.

For trusts and partnerships: Applies if the shortfall exceeds $20,000 or 2% of net income.
For others: If the shortfall exceeds $10,000 or 1% of the income tax (or PRRT) payable, whichever is greater

Pro tip: If in doubt, get professional advice before lodging, it’s cheaper than a 25% fine.

3. Failing to lodge or register when required

The ATO can apply Failure to Lodge (FTL) penalties when required documents (like BAS/IAS/tax returns) are lodged late. Separately, there are administrative penalties for failing to register for GST (or cancel GST registration) when required.

Each penalty unit is $330 (for offences committed on or after 7 November 2024), the ATO reviews this rate periodically
The ATO charges 1 penalty unit for every 28 days (or part thereof) that a return is late, capped at 5 units.

Small entities: × 1 (base rate)
Medium entities: × 2
Large entities: × 5

Common triggers include:

Missing BAS, IAS, or income tax return lodgements
Failing to register for GST or cancel it when required
Failing to issue required tax invoices or adjustment notes can attract a separate administrative penalty (20 penalty units under s 288-45), rather than an FTL penalty.

How to avoid it?

Use reminders or accounting software like Xero or QuickBooks to stay on top of deadlines.

4. Poor record-keeping or non-cooperation

Not keeping valid records for five years, refusing ATO access, or failing to provide declarations can each result in 20 penalty units ($6,600 at $330 per unit).

How to fix this?

Store all invoices, bank statements, and correspondence digitally. The ATO accepts well-organised electronic records.

How does the ATO calculate penalties?

The Australian Taxation Office (ATO) applies penalties when businesses fail to meet their tax obligations, like lodging late, providing incorrect information, or not paying on time. These penalties are designed to promote fairness and compliance across all taxpayers, not to punish honest mistakes.

How the ATO calculates penalties

ATO penalties generally fall into two categories: administrative penalties (calculated in penalty units) and shortfall penalties (based on the amount of tax underpaid).

1. Administrative penalties (Penalty units)

Administrative penalties apply for late lodgement, poor record-keeping, or failing to register or cancel tax obligations when required.

As of 7 November 2024, one penalty unit equals $330 (indexed periodically).
The total penalty depends on your business size and how late or severe the breach is.
Example: Failure to lodge a Business Activity Statement (BAS) may attract 1 penalty unit for every 28 days late, up to a maximum of 5 units.
That means a small business could owe $330 – $1,650 per missed statement.

2. Shortfall penalties (False or misleading statements)

These apply when you make a false or misleading statement that results in paying less tax than you should have, known as a shortfall amount.

The ATO determines penalties based on your level of care:

Behaviour	Penalty (% of shortfall)
Failure to take reasonable care	25%
Recklessness	50%
Intentional disregard of the law	75%

These rates may double for Significant Global Entities (SGEs).

If the error is identified and voluntarily disclosed before ATO contact, penalties can be reduced by up to 80%.

How Much Does It Cost to Hire a Tax Accountant in Australia?

3. Other factors that influence penalties

Entity size: Medium and large entities can face higher penalty multiples.
Disclosure and cooperation: Voluntary disclosure before ATO contact can significantly reduce penalties.
Previous compliance record: The ATO may remit penalties for first-time or genuine errors if you have a good compliance history.

Example:

If your business underpaid $10,000 in GST due to an incorrect claim and the ATO considers it “failure to take reasonable care”:

Penalty = 25 % × $10,000 = $2,500

If you voluntarily disclosed it before an ATO review, that penalty might be reduced to $500 or less.

Penalty relief and remission: Can the ATO waive or reduce a fine?

The ATO recognises that genuine mistakes happen. In certain situations, you may be eligible for penalty relief (no penalty applied) or remission (penalty reduced/cancelled), provided you meet specific criteria.

When penalty relief applies

You may qualify for relief when the error was inadvertent (for example, you took reasonable care and simply made a mistake). Relief typically applies to individuals and small entities (turnover under $10 million). You can usually receive penalty relief only once within a 3-year period, and it does not apply to Fringe Benefits Tax or Super Guarantee charges.

Relief can automatically apply during an audit when the ATO identifies an error and decides you meet the criteria (you don’t need to apply for it in all cases).

How penalty remission works (and how to request it)

If you don’t qualify for full relief, you may request remission of a penalty (in whole or in part). The ATO considers your circumstances, such as your compliance history, reasons for the error, and whether you voluntarily disclosed it.
Examples:

If you made a voluntary disclosure of a tax shortfall before the ATO began an audit, you may reduce the base penalty by up to 80%.
If you disclose after audit contact, you may still get a reduction (often around 20%).

What the ATO looks at

When deciding whether to grant relief or remission, the ATO examines factors like:

Your history of meeting lodgement/payment obligations.
Whether the error was outside your control (e.g., natural disaster, system failure).
Whether you acted in good faith after discovering the error and took prompt corrective action.

Practical steps for your business

If you spot an error, act quickly. Correct it and submit a voluntary disclosure if appropriate.
Keep clear records of how the error arose (why it happened, what you did about it).
Work with a registered tax accountant who can advise you on whether relief or remission is likely and help you prepare the request.
Maintain a clean compliance track record, it improves your chances for relief/remission.

How to avoid ATO penalties in the first place

Avoiding ATO penalties isn’t about scrambling at tax time, it’s about building reliable systems that keep your business compliant, audit-ready, and stress-free year-round.

The ATO rewards consistency and transparency, so when your reporting and record-keeping are solid, your risks drop dramatically.

Here’s how forward-thinking businesses stay penalty-free:

1. Build compliance into your daily operations

Don’t treat compliance as a quarterly rush. Automate as much as possible, from invoicing and payroll to BAS prep, using accounting software connected directly to the ATO.

A solid process ensures your BAS, IAS, and tax lodgements are accurate every time, not just on deadline week.

2. Keep evidence, not just records

ATO audits focus on proof, not promises. Keep every tax invoice, payroll summary, and bank record traceable and stored securely for at least five years.

Cloud-based bookkeeping makes it easy, it’s not about storage, it’s about access and clarity when the ATO asks “why.”

3. Stay transparent and communicative

If something goes wrong, you lodge late, make an error, or underpay, proactive disclosure is your best shield.

Voluntary disclosure before ATO contact can reduce penalties by up to 80%, and even late submissions are viewed more favourably when you’re upfront.

Received a penalty?

4. Rely on professional oversight

A registered tax accountant isn’t just a number-checker, they’re your compliance safety net.
They can:

Identify risks before the ATO does
Ensure every deduction, PAYG figure, and GST claim is backed by documentation
Secure safe harbour protections, so you’re covered if mistakes happen on their end

5. Keep pace with regulatory change

ATO thresholds, penalty unit values, and reporting rules evolve, missing one update can cost you thousands. Businesses that stay penalty-free do so by staying informed, not reactive.

Your accountant should help you interpret these updates and apply them before they become compliance issues.

What to do if you’ve already received an ATO penalty notice

Even with the best systems in place, mistakes happen, a missed lodgement, a forgotten payment, or a reporting error.

The good news? ATO penalties aren’t final. You can often reduce, challenge, or have them completely remitted if you act quickly and respond the right way.

Here’s what to do step-by-step:

Step 1: Review the penalty notice and confirm the details

When the ATO issues a penalty, you’ll receive a Notice of Assessment or Penalty Notice outlining:

The type of penalty (e.g., failure to lodge, false statement, late payment)
The reason it was applied
The amount and due date

Read it carefully and confirm whether it’s correct, sometimes, penalties are system-generated or based on incomplete data.

Step 2: Check if you qualify for automatic penalty relief

The ATO may automatically remove penalties if:

You’re a small business (turnover under $10 million) with a strong compliance history
It’s your first late lodgement in the past 3 years
You’ve already lodged or paid soon after the due date

If not automatically remitted, you can still request remission by explaining the circumstances.
Common valid reasons include illness, natural disasters, system outages, or reliance on incorrect professional advice.

Step 3: Submit a penalty remission request (online or via agent)

If you believe the penalty is unfair or excessive, you can lodge a Penalty Remission Request via:

ATO Online Services for Business, or
Through your registered tax or BAS agent

Include:

A clear explanation of what happened
Supporting evidence (emails, records, medical notes, ATO correspondence)
Proof that you’ve since corrected the issue

Pro tip: Be factual, not emotional. The ATO responds more favourably to transparent, well-documented cases than to complaints or blame.

Step 4: Lodge a voluntary disclosure if you made a tax shortfall

If you realise you’ve underpaid or made an error before the ATO contacts you, make a voluntary disclosure immediately. Doing so can reduce shortfall penalties by up to 80% and demonstrates good faith, which strengthens any remission request.

Step 5: Use safe harbour protection for agent errors

If you provided all information to your registered tax or BAS agent on time, but they failed to lodge or made an error, you may qualify for safe harbour protection, meaning the penalty can’t legally apply to you.

Safe harbour applies only if you gave your registered agent all necessary information on time and they failed to lodge or made an error beyond your control.

Step 6: File an objection within the time limit

If your remission request is denied, you can object to the decision. Your accountant or tax adviser can help draft a formal objection to have the penalty reconsidered. You generally have 60 days from the date on your notice to lodge a formal objection.

How a tax accountant helps you stay penalty-free

A registered tax accountant keeps your business compliant, accurate, and stress-free. Here’s how they make a real difference:

Accurate lodgements: They review your BAS, PAYG, and tax data to prevent costly ATO errors.
Extended deadlines: Agents get extra time to lodge, reducing late lodgement risks.
Penalty relief support: They handle remission or safe harbour claims and manage ATO communication.
Real-time compliance: Cloud accounting tools ensure your records are clean, reconciled, and audit-ready.
Strategic planning: They forecast tax liabilities so you can budget and avoid surprises.

How Sleek helps you stay ahead of ATO penalties

Staying compliant isn’t about reacting to ATO notices, it’s about setting up smart systems that prevent errors before they happen. Sleek helps you do just that.

Here’s how our accounting experts keep your business penalty-free and audit-ready:

Registered tax accountants with CPA/CA backgrounds, not just compliance, but strategic advice tailored to your business.
Full tax compliance, from BAS, GST, PAYG, to ATO correspondence, Sleek handles it all so you never miss a deadline.
Strategic tax planning to maximise deductions, manage cash flow, and structure your business for growth.
All-in-one accounting and bookkeeping support to reconcile your accounts and prepare your financial statements
Simple and upfront pricing with no hidden fees. Only pay for the services you need.

The goal isn’t just avoiding penalties, it’s building a business that runs confidently, compliantly, and without last-minute tax stress. Schedule a call now to get started.

Stay penalty-free all year

FAQs on ATO tax penalties and compliance

Can I appeal or challenge an ATO penalty notice?

Yes. You can object to an ATO penalty within the time limits stated in your notice, usually within 60 days. It’s best to respond promptly and provide supporting evidence (like corrected records or explanations of reasonable care). A tax accountant can prepare a strong, compliant objection and manage communication with the ATO on your behalf.

What qualifies as ‘reasonable care’ under ATO penalty rules?

Reasonable care means acting as a prudent business owner, keeping accurate records, verifying claims, and seeking professional help when uncertain.

If you can show you made a genuine effort to meet obligations (for example, relied on a registered agent or documented your calculations), the ATO may reduce or waive penalties.