ATO Tax Debt: What to Do When Your Business Owes Tax

Tax debt can become more expensive the longer it remains unpaid. If your business owes money to the Australian Taxation Office (ATO), addressing the debt early can help limit interest costs and give you more options for managing cash flow.

This has become more important since the tax treatment of ATO interest changed. General interest charge (GIC) incurred on or after 1 July 2025 is no longer income-tax deductible.

If your business is struggling to meet a tax payment, the priority should be understanding the debt, your current cash position and what you can realistically afford to pay.

Why carrying ATO debt now costs more

The ATO can apply general interest charge when a tax or other liability remains unpaid after its due date.

GIC compounds daily on the outstanding balance. This means the cost can continue to increase while the debt remains unpaid.

The change means businesses should reconsider treating an ATO balance as another source of business finance. The longer a debt remains outstanding, the more interest may accrue.

What should you do if your business owes the ATO?

Start by establishing exactly where the business stands. Avoid making a repayment commitment before checking whether the business can meet it alongside wages, super, suppliers and future tax obligations.

1. Confirm what you owe Review the outstanding balance, due dates and the liabilities that make up the debt.
2. Check that lodgments are up to date Outstanding returns or activity statements can make it harder to see the full position and determine what the business can afford.
3. Review business cash flow Look at available cash, expected receipts, payroll, super, suppliers, finance commitments and upcoming tax obligations.
4. Determine what can realistically be paid Consider whether the debt can be paid in full or whether a payment plan may be required.
5. Address the problem early Waiting can allow interest to accumulate and may reduce the options available to the business.

Can you arrange an ATO payment plan?

Eligible businesses may be able to arrange a payment plan with the ATO rather than paying the entire balance at once.

A payment plan breaks the debt into agreed instalments, generally paid weekly, fortnightly or monthly over a fixed period.

The repayment amount needs to be realistic. Agreeing to payments that the business cannot sustain can create another cash-flow problem and may put the payment arrangement at risk.

Before committing to a repayment amount

A tax debt should be considered alongside the business's wider financial position.

Should you consider other finance?

Depending on the business and its circumstances, it may be worth comparing the cost and terms of an ATO debt with other available funding options.

This does not mean replacing an ATO debt with another loan will always be the right decision. Interest rates, security requirements, loan fees, repayment terms and the purpose of the borrowing all need to be considered.

The tax treatment of interest on commercial finance also depends on how borrowed funds are used. Do not assume that refinancing an ATO debt will automatically produce a tax deduction.

Your accountant can help you understand the tax position, while an appropriately licensed finance professional can help assess available lending options.

Why ignoring a tax debt can create bigger problems

An unpaid ATO balance is not only an interest issue. Depending on the circumstances, continued non-payment can lead to stronger recovery action.

Possible consequences can include:

• continued general interest charge on outstanding amounts;
• ATO recovery action;
• garnishee notices in some circumstances;
• director penalty notices for certain unpaid company liabilities;
• possible disclosure of eligible business tax debts to credit reporting bureaus; and
• legal recovery action in more serious cases.

The action available to the ATO depends on the type of debt and the circumstances. Engaging early is generally better than waiting until recovery action has commenced.

Company directors should pay particular attention

Some company tax and super liabilities can create personal exposure for directors.

The ATO's director penalty regime can make directors personally liable for certain unpaid company amounts, including PAYG withholding, GST and super guarantee charge.

If your company is falling behind on these obligations, seek advice early. The options available can depend on what has been lodged, what remains unpaid and how long the amounts have been outstanding.

How to reduce the risk of another tax debt

Clearing an existing balance is only part of the job. The business also needs a process for meeting future obligations.

• Keep BAS and tax lodgments up to date.
• Set aside GST and PAYG amounts rather than treating them as available cash.
• Include tax and super in regular cash-flow forecasts.
• Review upcoming liabilities before major business purchases.
• Reconcile payroll, GST and tax accounts regularly.
• Review debtors and follow up overdue customer accounts.
• Update forecasts when revenue or costs change materially.
• Speak with your accountant before a payment problem becomes overdue debt.

Tax debt can be a cash-flow warning sign

Sometimes a tax debt results from a one-off event. In other cases, it can point to a wider cash-flow issue.

If a business repeatedly relies on money set aside for GST, PAYG withholding, super or income tax to meet operating expenses, it may be worth reviewing more than the outstanding ATO balance.

Look at margins, debtor collection, expenses, pricing, finance commitments and working capital. Understanding why the debt arose can help prevent the same problem returning after the current balance is cleared.

A practical tax debt review

Frequently asked questions