Published: April 2026
Liabilities are one of the most misunderstood concepts in small business finance. Many business owners hear "liabilities" and think "debt" or "problems." In reality, liabilities are simply financial obligations your business has agreed to pay. Every business that employs staff, rents premises, buys on credit, or collects GST has liabilities. They are not inherently bad. They are inherently normal.
What matters is not whether you have liabilities, but whether you understand them, track them accurately, and manage them proactively. The businesses that get into trouble are not the ones with liabilities. They are the ones that do not know what they owe, to whom, and when.
This guide explains every common liability an Australian SME carries, how they appear on your balance sheet, the ones that catch owners off guard, and how to keep them under control.
A liability is any financial obligation your business is required to pay in the future. It represents money you owe to someone else, whether that is a supplier, the ATO, an employee, or a lender.
Liabilities sit on the right side of the balance sheet equation: Assets = Liabilities + Equity. If your business has $500,000 in assets and $200,000 in liabilities, the remaining $300,000 is equity, which represents the owner's residual interest in the business.
This matters because liabilities directly affect your business's net worth, borrowing capacity, and financial health. A lender assessing your loan application looks at your liabilities before anything else. So does a potential buyer or investor evaluating your business for acquisition. See our guide on what investors look at in your books for more on this.
Liabilities vs expenses: the distinction matters. An expense is money you have already spent (rent for the month just ended, wages already paid). A liability is money you owe but have not yet paid (rent due next week, wages accrued but not yet processed). Expenses reduce your profit. Liabilities sit on your balance sheet until they are settled.
Current liabilities are obligations your business expects to settle within one year. These are the liabilities that affect your day-to-day cash flow and require active management.
Accounts payable. Money you owe to suppliers for goods or services already received. If you bought $10,000 of materials on 30-day terms, that $10,000 sits in accounts payable until you pay it. In Xero, this is a system account that updates automatically when you enter supplier invoices.
GST payable. When you charge GST on your sales, you are collecting that 10 per cent on behalf of the ATO. It is not your money. It sits as a liability until you lodge your BAS and pay the net amount owing. For a business with $100,000 in quarterly sales (GST inclusive), roughly $9,091 in GST collected is a liability. After deducting GST paid on expenses, the net amount goes to the ATO. See our BAS guide for how this works.
PAYG withholding payable. When you pay employees, you withhold tax from their wages on behalf of the ATO. That withheld amount is a liability sitting in your accounts until you remit it (reported through your BAS or IAS). For a business with $50,000 in monthly wages, PAYG withholding might be $10,000 to $15,000 per month depending on employee tax brackets.
Superannuation payable. Employer super contributions (currently 12 per cent of ordinary time earnings for 2025-26) accrue each pay cycle but are only required to be paid quarterly (by the 28th day after the end of each quarter). From 1 July 2026, Payday Super changes this to payment within 7 days of each pay run, which fundamentally changes the cash flow timing of this liability.
Worked example: A $4 million services firm with 25 employees on average salaries of $75,000 has approximately $225,000 in total annual super liability (25 x $75,000 x 12%). Under the current quarterly system, up to $56,250 can accrue as a liability before each quarterly payment. Under Payday Super from July 2026, the maximum accrual drops to roughly one pay cycle's worth: approximately $4,327 fortnightly. The liability is smaller at any given time, but the cash outflow is more frequent.
Provision for annual leave. Every employee accrues annual leave as they work. The dollar value of that untaken leave is a liability on your balance sheet. It does not go away. It only grows until the employee takes leave or is paid out on termination. For a 25-person business with an average salary of $75,000, annual leave accrual runs approximately $144,230 per year (four weeks per employee). If employees are not taking their leave, this liability compounds. Read our analysis of annual leave as a financial time bomb.
Provision for long service leave. In most Australian states, long service leave accrues after 7 to 10 years of continuous service. However, the liability begins accruing from day one. Depending on the state, a proportion of the long service leave entitlement may become payable if employment ends after a qualifying period (often 5 to 7 years). This is a liability most SMEs do not track until it becomes a significant number.
Credit card balances. Outstanding balances on business credit cards are current liabilities. If you carry a $15,000 balance on a business credit card at 20 per cent interest, the monthly cost is $250 in interest alone.
Short-term business loans or lines of credit. The current portion (due within 12 months) of any business loan, overdraft, or line of credit.
Payroll tax payable. If your business exceeds your state's payroll tax threshold, the tax accrues on every dollar of wages above the threshold. In NSW, the threshold is $1.2 million in total wages. In Victoria, it is $900,000. Many growing businesses cross the threshold without realising it, creating an unexpected liability. See our payroll tax guide for state-by-state thresholds.
Non-current liabilities are obligations due more than one year from the balance sheet date.
Business loans (long-term portion). A five-year term loan of $200,000 might have $40,000 due within 12 months (current) and $160,000 due beyond 12 months (non-current). The split matters for calculating your current ratio.
Equipment finance and leases. Chattel mortgages, hire purchase agreements, and equipment leases. Under current accounting standards, most leases are recognised on the balance sheet as a liability.
Director loans. If a director has lent money to the business with no fixed repayment date, this sits as a non-current liability. The treatment of director loans has specific rules, particularly for companies. Your accountant should advise on the Division 7A implications for company structures.
Some liabilities do not feel like liabilities until they become a crisis. These are the ones to watch.
Unpaid superannuation and Director Penalty Notices. If super is not paid by the quarterly due date, the ATO can issue a Director Penalty Notice (DPN) making directors personally liable for the unpaid amount plus the Superannuation Guarantee Charge (which includes the shortfall, interest of 10 per cent per annum, and an administration fee of $20 per employee per quarter). DPNs can be "lockdown" notices, meaning personal liability cannot be avoided even by placing the company into liquidation if the super was not reported to the ATO within 28 days of the due date. The ATO has been increasing enforcement activity in this area.
Leave liabilities that compound over years. A 25-person business where the average employee has 6 weeks of accrued annual leave (instead of the standard 4 weeks) is carrying an excess leave liability of approximately $72,000. This is real money that must be paid when employees take leave or exit.
GST on unpaid invoices (accrual basis). If you report GST on an accrual basis, you owe the ATO the GST on invoices you have issued, even if the customer has not paid you yet. For a business with $50,000 in aged receivables, up to $4,545 in GST may have already been remitted to the ATO on money you have not received. This creates a working capital squeeze.
Payroll tax threshold creep. Businesses that grow steadily can cross the payroll tax threshold mid-year without realising it. The liability is retrospective to the start of the financial year (or the month the threshold was exceeded, depending on the state). An unexpected payroll tax bill of $10,000 to $30,000 can be a nasty surprise. Our payroll tax threshold calculator helps you model this.
Two ratios give you a quick read on whether your liabilities are manageable.
Current ratio = Current Assets / Current Liabilities. This measures your ability to pay short-term obligations. A ratio above 1.5 is generally healthy for Australian SMEs. Below 1.0 means you may not have enough liquid assets to cover what you owe in the next 12 months.
Example: $300,000 in current assets (cash + receivables + prepayments) divided by $200,000 in current liabilities (payables + GST + super + leave provisions) = 1.5. Healthy.
Quick ratio = (Current Assets minus Inventory) / Current Liabilities. Strips out inventory (which may not be easily convertible to cash) for a more conservative view. Above 1.0 is solid.
If your current ratio is declining quarter over quarter, that is a warning sign even if the absolute number looks fine. The trend matters as much as the snapshot.
Your ATO debt exceeds $50,000 and is growing. Your aged payables are consistently creeping beyond 60 days. You are regularly dipping into the GST or PAYG withholding you have collected to fund operations. Super payments are late more than once in the past 12 months. You are using new debt to pay old debt. Your leave liabilities have not been reviewed in more than a year. You cannot produce a balance sheet showing your total liabilities within 10 business days of month-end.
If three or more of these apply, your liabilities are not just obligations. They are becoming a risk to the business. Get professional help.
Set aside GST and PAYG weekly. When you receive customer payments, transfer the GST component (approximately 9.1 per cent of GST-inclusive revenue) and your estimated PAYG withholding into a separate bank account immediately. This prevents the common problem of spending money you owe the ATO.
Track super in real-time, not quarterly. Even before Payday Super takes effect in July 2026, track your super liability each pay cycle. Know exactly what you owe at any given time. Xero calculates this automatically if payroll is set up correctly.
Review your balance sheet monthly. Not just your P&L. The balance sheet shows what you owe. If you only look at profit and ignore liabilities, you can be "profitable" and insolvent simultaneously. See our guide on how to read a profit and loss statement and our balance sheet health score tool.
Enforce annual leave policies. Require employees to take their leave entitlement each year. This is not just an HR issue. It is a balance sheet management issue. Unchecked leave accruals are a growing cash liability.
Know your payroll tax threshold. If your annual wages bill is within $100,000 of your state's threshold, model the full-year impact now rather than being surprised at year-end.
Are business liabilities the same as business debt?
Not exactly. Debt (loans, credit cards) is one type of liability. But liabilities also include accounts payable, GST owing, super payable, leave provisions, and other obligations that are not "debt" in the traditional sense. All debt is a liability, but not all liabilities are debt.
How do liabilities affect my ability to get a loan?
Lenders assess your current ratio and debt-to-equity ratio. High liabilities relative to assets reduce your borrowing capacity. Outstanding ATO debt is a particularly strong negative signal to lenders.
What happens if I cannot pay my BAS on time?
The ATO charges General Interest Charge (GIC) on late BAS payments, currently 10.96 per cent per annum for Q2 2026. You may also receive penalty notices. If you cannot pay in full, contact the ATO to set up a payment plan before the due date. Our BAS due dates article has the full timeline.
Can directors be personally liable for company debts?
Directors can be personally liable for unpaid superannuation, PAYG withholding, and GST through the Director Penalty Notice regime. This is one of the most significant personal risks for SME directors. Speak to your accountant or lawyer about your specific exposure.
How does Payday Super change my super liability?
From 1 July 2026, super must be paid within 7 days of each pay run instead of quarterly. This means your super payable liability at any point in time will be much smaller (one pay cycle rather than one quarter), but the cash outflow frequency increases significantly. Budget accordingly.
What is a healthy level of liabilities for a small business?
There is no single number. The current ratio (above 1.5) and quick ratio (above 1.0) are the best guides. Liabilities that are predictable, well-tracked, and paid on time are healthy. Liabilities that are growing, overdue, or untracked are dangerous.
Should I pay off all liabilities as fast as possible?
Not necessarily. Some liabilities (like trade payables on standard terms, or low-interest business loans) are useful cash flow tools. Paying a supplier on 30-day terms rather than COD preserves working capital. The goal is to manage liabilities strategically, not eliminate them entirely.
How often should I review my balance sheet?
Monthly, at minimum. Your balance sheet is the only financial statement that shows what you owe. If you only review your P&L, you are seeing half the picture.
Pull up your latest balance sheet in Xero (Reports > Balance Sheet). Check three numbers: total current liabilities, your super payable balance, and your leave provisions balance. If any of these are higher than you expected, or if you have not looked at your balance sheet in more than three months, that is the sign you need to pay more attention to this side of your finances.
Scale Suite is a Sydney-based provider of outsourced finance teams and fractional CFO services for Australian SMEs. We deliver weekly bookkeeping, payroll, BAS/IAS lodgement, cashflow reporting, management accounts, and strategic fractional CFO oversight as a fully embedded team that works inside your business.
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Learn more about our embedded finance model at scalesuite.com.au/services/finance
Disclaimer: This article provides general information only and does not constitute financial, legal, or professional advice. Scale Suite Pty Ltd (ABN 16 684 424 771) recommends seeking advice tailored to your specific circumstances, particularly regarding director personal liability and tax obligations. Liability limited by a scheme approved under professional standards legislation.
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Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
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