Only half of Australian small businesses have started using digital payroll systems despite it now being a legal requirement, with tax experts warning it's only a matter of time before stronger action is taken against those not on board.

The Australian Taxation Office said while it will not be issuing penalties for incorrect use of single-touch payroll processes during the first year of the program, it does know exactly which employers are engaging with the system and is now starting to make direct contact.

The Australian Taxation Office is under pressure to discuss penalties for non-compliance. Credit:Andrew Quilty

"The message for people is that we do know what their status," assistant commissioner Jason Lucchese said.

"We’re not looking to give penalties in the first 12 months... As it progresses, though, single touch payroll is a legal requirement, so we are keen to work with employers."