Am i likely to incur any penalty or downgrading if I sell small cheap items in an untracked envelope.

No. As long as you've selected "Australia Post Domestic Regular Letter Untracked" as your shipping method. Tracking is not required for untracked items - for obvious reasons.

I'd like to sell a few cheap items with untracked postage | Selling

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I'd like to sell a few cheap items with untracked postage | Selling | eBay Australia