ATO credit card backflip a sign of ‘good government’
Prime Minister Anthony Albanese has defended the leadership abilities of his treasurer despite a botched ban on credit card use that would have hurt thousands of small businesses.
The Australian Taxation Office recently abruptly announced it would stop taking credit card payments after the Reserve Bank banned passing on surcharges to customers.
That was immediately criticised by business owners and the coalition, which said the changes would hurt families already doing it tough.
The bill has to be paid for the credit card free lunch
It’s not as simple as the popular narrative that small business are the good guys and the Tax Office are the bad guys.
There has been plenty of spin from the government and business on the surcharge ban and the Australian Taxation Office’s plan to stop accepting credit card payments.
The surcharge controversy implicates an extremely complex web of stakeholders, including the government, banks, credit card companies Visa and Mastercard, their regulator the Reserve Bank of Australia, payments platforms such as Square, merchants and the ATO.
After a very stable period for card fees, the financial services industry innovated to push up costs for merchants and consumers. Dominic Lorrimer
These special interests are not innocent bystanders and there is blame to be shared over where the convoluted system has ended up.
But it’s not as simple as the popular political narrative that has developed over the past week that small businesses are the hard-done-by good guys and the ATO are the bad guys.
The big mistake the Albanese government made in trumpeting the surcharge ban from October 1 was the dubious claim that it would help reduce prices for consumers by eliminating $1.6 billion in fees charged by merchants such as cafes, some retailers and, indeed, the ATO.
Economic common sense suggested the extra costs merchants would be forced to swallow were always going to be recovered by raising prices.
Indeed, the RBA publicly estimated that ending surcharges would result in a small, one-off increase to inflation of about 0.1 of a percentage point.
Perhaps the inflationary impact will be a bit bigger if businesses use the opportunity in an already high-cost environment to jack up prices even more.
Originally I was not sold on the idea of banning surcharges. Economic principles suggest that a user-pays system and cost recovery from the people using credit payments is sound.
That was the RBA’s long-standing position, too, since the early 2000s. Back then, more than 70 per cent of transactions were paid in cash and credit cards were a rare and relatively expensive form of payment. The RBA gave merchants the right to recover costs via surcharge.
Today, cash use has plunged to below 15 per cent and shoppers often carry only a phone to buy things, not a wallet with cash. After a very stable period for card fees, the financial services industry innovated to push up costs for merchants and consumers.
The number of transactions on which merchants added a surcharge doubled from about 8 per cent in 2022 to 16 per cent in 2025.
Non-bank payment service providers, such as Smartpay, entered the market offering merchants “free” payments systems. But the quid pro quo was the payments providers would control the merchant fee and pocket the charge to customers.
Others, such as Square and Stripe, offered flat-fee plans to merchants regardless of the type of card being used, such as lower-cost eftpos debit cards and higher-cost American Express credit cards.
The single price did not reflect the true cost in servicing different customers. Consumers began paying more than the real underlying cost and the user-pays system broke down.
Moreover, consumers accumulating reward points on credit cards were having their flights and holidays cross-subsidised by other consumers overpaying on fees. This was neither a fair nor economically efficient way to run a payment system. Particularly when people with high reward point balances were generally higher income and being cross-subsidised by unsuspecting ordinary consumers.
Hence, the RBA’s simple solution was to ban surcharges. The advertised price will be the price consumers pay.
The transition will undoubtedly be disruptive, as evidenced by the ATO, some private schools and rent platforms refusing to accept credit card payments.
To help merchants digest the cost, the RBA reduced the cap on interchange fees paid to banks issuing the credit cards from 0.8 per cent to 0.3 per cent.
But merchants will still have to pay other fees to Visa and Mastercard, as well as to payments services providers such as Square or banks offering payment platforms. The total fees incurred by small merchants could be up to 1.7 per cent.
Now that merchants can no longer pass on these fees to customers, they will have a financial incentive to shop around for cheaper payment providers. The hope is this will inject more competition into the payments system and reduce costs.
Despite the howls of protest from small business, there is merit in Taxation Commissioner Rob Heferen’s decision to stop accepting credit card payments. Sure, the snap November 30 deadline was arguably not enough time to transition, but the revised June 30 2027 timeline seems reasonable.
Undoubtedly, there is a double standard in the government requiring merchants to absorb the costs of credit card fees and its monopoly tax collector not allowing credit payments.
Previously, the ATO charged taxpayers between 0.9 per cent and 1.5 per cent to pay monthly, quarterly and annual PAYG and GST bills by credit card.
Heferen estimates it would cost the ATO $200 million a year to absorb the cost of fees to accept credit cards.
The cost could rise significantly over time as more taxpayers wake up to the revelation they can pay their tax bill on credit.
And what rational person in debt to the ATO would not choose this option? They would pay no surcharge, collect credit card reward points and benefit from an interest-free period of 30 to 45 days before having to repay the credit card balance.
The losers? The other mug taxpayers who don’t have a tax debt or are not paying their bills by credit. Why should they cross-subsidise people paying tax by credit?
The ATO estimates that only 2 per cent of individuals and 5 per cent of small businesses have been paying their tax bills by credit card. So more than 90 per cent of taxpayers do not benefit.
Moreover, the dirty little secret is that many businesses and individuals paying their tax bill by credit card do so to accumulate reward points. It’s another cross-subsidy that regular taxpayers don’t benefit from.
Usually, it makes sense to pay a tax bill by credit card only if you pay it off within the interest-free period and avoid the 20 per cent to 25 per cent interest rates.
However, if business taxpayers do incur interest on their credit card for a tax bill, they can claim the interest expense as a tax deduction. That tax deduction opportunity will disappear in nine months, consistent with general interest charges directly from the ATO no longer being tax-deductible since a rule change in 2025.
Undoubtedly, there will be some short-term cashflow adjustments for small business under the pending new regime. For most of those using credit, it will bring forward their cash liability by 30 to 45 days.
But innovative options already exist that will enable taxpayers to pay tax bills by credit.
Third-party payment platforms such as pay.com.au enable customers to pay their tax bills via credit card, in return for a processing fee of 1 per cent to 2 per cent (technically not a surcharge).
Pay.com.au settles the tax bill on behalf of the client via a low-cost channel such as Bpay. Credit card reward points continue to be accumulated by the customer.
Other innovative fintech companies will surely emerge to offer similar competing services to small business.
The market will develop solutions in response to the RBA’s surcharge ban and the ATO’s phase-out of credit payments.
