How to deal with an ATO debt before it deals with you

If you’re reading this with an ATO statement open in another tab, you’re in large company. Financial Counselling Australia reported that its Small Business Debt Helpline handled more than 6,000 cases in the year to 31 December 2025, up 21% on the year before, and ATO debt was the most common debt in 64% of them.

It rarely arrives all at once. One lean quarter, a BAS paid late, a big income tax bill that arrived with no money set aside. The good news is that the ATO is one of the more predictable creditors you’ll ever deal with. It publishes its options and its escalation steps, and it treats owners who engage very differently from owners who don’t.

What should you do first?

Do these in order. The first two cost nothing and do more to protect you than any other step here.

1. Lodge everything that’s overdue. Every BAS, instalment activity statement, income tax return and super guarantee statement. Lodge even if you can’t pay a cent. For a company, lodging within three months of the due date keeps any later director penalty in the less severe category, and it’s a precondition for most ATO help.
2. Find out the true number. Open the ATO’s business portal yourself, or have your agent pull the integrated client account, and read the balance line by line. Separate the tax from the general interest charge and any penalties.
3. Make contact before the ATO escalates. A phone call, a message through online services, or your agent reaching out on your behalf. Owners who engage early get more options.
4. Decide how you’ll clear it. That’s where the options below come in.
5. Stop new debt forming. Set aside GST and withholding in a separate account each week so next quarter doesn’t add to the pile. Our guide to GST cash flow tips for small business has a simple method.

Why does speed matter more than it used to?

Overdue tax attracts the general interest charge, which compounds every day at a rate the ATO resets quarterly. For years, businesses could at least claim that interest as a tax deduction.

That ended on 1 July 2025. Any GIC charged since then is non-deductible. In effect, carrying a balance with the tax office got dearer overnight, and the comparison with other ways of paying changed too. The ATO has also said that cash flow pressure caused by losing the deduction is unlikely, on its own, to be grounds for remitting the interest.

A quick way to see how the interest builds on your balance is our ATO debt calculator.

Which options can you use, and what do they cost?

Option	Best for	Likely cost	Catch
Pay in full	Debts you can clear from cash or savings	Just the tax and any GIC to date	Don’t drain the cash buffer you need to keep trading
Standard ATO payment plan	Modest debts you can clear over months, not years	GIC keeps accruing on the balance	Upfront payment usually required; new tax must be paid on time
Interest-free small business plan	Turnover under $2m, activity statement debt of $50k or less	GIC remitted if you keep to the plan	Must be unable to get finance through normal channels and show viability
Business loan to pay the ATO	Larger debts, or where escalation has started	Interest plus fees, totalled in dollars across the loan	Compare total cost, not just the instalment
Security offered to the ATO	Larger debts where a plan can’t otherwise be agreed	GIC continues	ATO may accept a mortgage over property or a bank guarantee
Remission request	Interest or penalties caused by events outside your control	Free to ask	Cash flow trouble alone rarely qualifies
Small business restructuring	Companies with liabilities of $1m or less that need debts compromised	Practitioner fees	A formal process with eligibility rules; it won’t remit a lockdown director penalty

The details of each plan type, including what triggers a default, are in our guide to ATO payment plans explained.

One detail on the interest-free plan is easy to miss: one of the ATO’s tests is that the business can’t get a loan or similar funding the usual way. If you’ve been declined by your bank, that decline is relevant evidence.

Should you borrow to clear the tax office?

Banks are often the cheapest place to borrow, and some will fund a tax debt for a profitable business with a payment plan it’s keeping to. If your bank says yes, take the offer seriously.

Borrowing tends to make sense when:

• The ATO has already escalated. A director penalty notice, a garnishee on your account or an intent-to-disclose letter changes the maths. Speed is worth paying for.
• The plan instalments don’t fit your cash flow. A loan over a longer term can carry lower monthly repayments than a short ATO plan.
• You’ve defaulted on plans before. The ATO limits new plans if you’ve defaulted more than twice in two years on the same account.
• Property equity is available. A property-secured loan can clear a large debt in days and usually costs less over time than unsecured options.

It’s less likely to make sense for a small debt you could clear inside a year on an ATO plan, or if the business isn’t viable and the loan would only postpone a harder decision. Lenders that work with tax debt are profiled in ATO tax debt business loans and tax debt loans. For a side-by-side view, see business loan vs ATO payment plan.

If the ATO is already writing to you about firmer action, tell us where things stand. Asking doesn’t involve a credit check.

What does the ATO do if you don’t engage?

The steps aren’t always in this order, but this is the escalation owners describe most:

1. Reminders. Letters, texts and calls about the overdue balance.
2. Refund offsetting. Any refund owed to you can be applied to the debt.
3. Disclosure to credit bureaus. For an ABN holder owing $100k or more that’s been overdue past 90 days, and with no real engagement such as a plan, the ATO may report the debt once a 28-day notice period has passed.
4. Garnishee notices. The ATO can instruct your bank, or a client with an unpaid invoice to you, to send that money straight to the tax office. Our page on handling an ATO garnishee notice covers the next steps.
5. Director penalty notices. A company’s unpaid withholding, GST and super can be shifted onto its directors personally. Our guide on what a director penalty notice means for you explains the 21-day window.
6. Legal recovery. Statutory demands, court proceedings, bankruptcy notices for individuals and wind-up applications for companies. In serious cases, the ATO can also apply to stop a person leaving Australia.

Every step down this list removes options. A business with a plan in place is almost never reported to credit bureaus; one that’s been garnished may struggle to get a bank to talk to it.

A worked example: one owner, two paths

Consider an illustrative case. A Hobart joinery company owes $96k: $58k in GST and withholding from the last three quarters and $38k in company income tax. Everything is lodged. Turnover is $1.6m and the company has a contract that will lift revenue from February.

Path one: an ATO plan. The ATO agrees an 18-month plan after an upfront payment. Instalments run to roughly $5,500 a month, plus the GIC still accruing on the balance, which over 18 months adds several thousand dollars, none of it deductible now. Any slip with a future BAS risks defaulting the plan.

Path two: a loan. The director owns a home with equity. A second mortgage over three years clears the ATO in full at settlement. Monthly repayments are lower than the ATO instalments, but the total cost over the term is higher, and the home is now security.

There’s no universal right answer. Path one is usually cheaper if the business can comfortably meet the instalments. Path two buys breathing room and stops the ATO clock, at a price. Running both through the loan cost comparison calculator puts the totals side by side in dollars.

Mistakes that make an ATO debt harder

• Not lodging because you can’t pay. It turns a payment problem into a compliance problem, and for directors it can turn a recoverable penalty into a lockdown one.
• Setting up a plan you can’t keep. A defaulted plan makes the whole balance payable at once and limits future plans.
• Paying the old debt with next quarter’s GST. It only moves the problem forward three months.
• Waiting for the “right” time to call. The ATO’s options narrow as the debt ages.
• Letting the credit card date sneak up. If your instalments come off a credit card, switch before the first one due after 30 June 2027 or the plan may fall into arrears.

If you’d like a script for the conversation itself, our guide on how to talk to the ATO about a debt covers what to say and what to have ready.

Tax debt doesn’t scare us off

Owners with tax arrears are a big part of who we help, and an ATO balance on its own won’t make us back away. Plenty of the lenders we work with will pay the ATO directly at settlement, and some of them specialise in exactly this.

The enquiry form takes around sixty seconds, and sending it leaves no trace on your credit report. We keep what you tell us in-house rather than firing it off to dozens of lenders, so there’s no barrage of cold calls. Then someone on our team, an actual human, studies the details and phones you. Give us the real figure owed, say whether a plan is running, and mention any letters from the ATO; honest numbers let us match a suitable lender straight away instead of after three false starts.

Find a way to clear my ATO debt →