The government knew months in advance the tax office might stop accepting credit card payments before leaders stepped in to postpone the plan after a business backlash.
Assistant Treasurer Daniel Mulino said his government became aware in July the Australian Taxation Office could potentially refuse to take the payment method when a Reserve Bank ban on card surcharges came into effect in October.
The tax office made a decision in late September to stop accepting credit cards.
But after an outcry from small business, Labor announced the government would step in and cover the fees incurred on the card payments until the end of the financial year.
Mr Mulino said the government had urged the ATO to continue negotiations with credit card companies to set up a transition period, rather than just implement a straight ban on the payments.
"Those discussions didn't get to the point where it was possible for that to occur and so the ATO made a call in late September to not accept credit cards," he told the ABC's Insiders program on Sunday.
"The two-month transition period was the busiest period of tax submission. So the original thinking by the ATO was that that would be a sufficient period.
"The transition period, as it turned out from stakeholder feedback, wasn't enough, and so that's where the government stepped in."
Despite the months-long notice period from the tax office, Mr Mulino denied the government had taken a hands-off approach to the change.
"It was an approach where we didn't get into all of the details," he said.
"Those discussions (between the ATO and credit card companies) did continue and have led to an improvement in the offer and they continue now."
The assistant treasurer said a transition period for the ATO to phase out accepting credit card payments was still the best approach.
"Accepting credit card payments going on indefinitely would have very serious fiscal ramifications for the budget," he said.
The fallout from the credit card payments bungle has led to criticism of the federal government that ministers did not understand the needs of small businesses.
Industry Minister Tim Ayres rejected the attacks, saying businesses had lower costs as a result of the surcharge ban.
However, he said the government was unlikely to permanently reverse the ATO's ban on credit card payments.
"I don’t think that there’s any prospect of this issue being managed that way," he told News24.
"It’s the right call to make in these circumstances but the underlying reform here has led to lower costs for small businesses across the board, and it’s the right thing to do for Australians to be able to see when they pay for a bill, exactly what the bill is."
