For years, plenty of Australian businesses quietly treated the ATO as their most flexible lender. Fall behind, cop the interest, claim it back at tax time, carry on. It was never a great habit, but the maths made it survivable.
As of 1 July 2025, that game is over. A change to the law has made carrying an ATO tax debt genuinely expensive, and the ATO is chasing harder than it has in years. If you’re carrying an ATO tax debt, or you can see one coming, here are six smart moves to deal with it before it grows, and an honest look at when finance helps and when it doesn’t.
Why ATO tax debt just got more expensive
Here’s the change that caught a lot of owners off guard. For decades, the interest the ATO charges on late payments, the general interest charge or GIC, was tax deductible. That quietly softened the blow. A business paying GIC and deducting it at the company tax rate wore an effective cost well below the headline rate, which is exactly why so many treated the ATO as a cheap line of credit.
That deduction is gone. Under the ATO’s confirmed rules, general interest charge and shortfall interest charge incurred on or after 1 July 2025 are no longer deductible. There’s no grandfathering and no size threshold. It applies even to interest accruing now on a debt from years ago, and to every type of entity: companies, trusts, sole traders and partnerships alike.
With GIC set quarterly by the ATO and sitting above 11 per cent, compounding daily, and no deduction to take the edge off, an ATO tax debt is now one of the most expensive forms of money a business can hold. That single change flips a lot of old assumptions, and it’s the reason this is worth your attention today rather than next quarter.
The ATO is also chasing harder
The cost is only half the story. Alongside the interest change, the ATO has hardened its collection approach across the board, and an ATO tax debt you leave to drift can now bite in ways it wouldn’t have a few years ago.
The agency is more willing to issue director penalty notices, which can make company directors personally liable for certain unpaid amounts. It is also disclosing significant business tax debts to credit reporting bureaus once the debt is more than $100,000 and over 90 days overdue and you’re not effectively engaging with them. That means a tax debt can now show up on your business credit file, which quietly affects your ability to borrow from anyone else. The lesson is simple: an ATO tax debt is not one to leave in the too-hard basket.
6 smart ways to deal with an ATO tax debt
The right move on an ATO tax debt depends on your situation, but the options follow a rough order of preference, cheapest and simplest first.
1. Pay it if you possibly can
It sounds obvious, but it’s worth saying plainly now the interest isn’t deductible. Every day an ATO tax debt sits there, it costs you the full freight. If you have the cash, or can free some up, clearing the debt is almost always the cheapest option on this list. Paying even part of it reduces the daily interest it is charged on.
2. Set up an ATO payment plan
If you can’t pay in full, the ATO can often arrange a payment plan to clear the ATO tax debt in instalments. It’s far better to engage early and set one up than to wait for the ATO to come looking. One catch worth understanding: GIC keeps accruing on the outstanding balance while you’re on a plan, so a payment plan is not free money. Keep the timeframe as short as you can realistically manage, because a longer plan means more non-deductible interest.
3. Ask the ATO to remit the interest
This one gets overlooked. The ATO has discretion to remit, meaning reduce or cancel, general interest charge in certain circumstances, particularly where the delay was outside your control or you’ve otherwise done the right thing. The rules on remission haven’t changed. It’s always worth asking, ideally through your accountant, rather than assuming the interest is set in stone.
4. Consider financing the debt
Here’s where the deductibility change flips the maths. Interest on a loan taken for a genuine business purpose, including paying out a business tax debt, is generally still tax deductible. The ATO’s own interest is not. So refinancing an ATO tax debt into a structured business loan can, in the right circumstances, work out both cheaper and more deductible than leaving it with the ATO, while giving you a clear, fixed repayment path instead of an open-ended balance. It is not automatically the right move, and we’ll come back to when it isn’t, but the old assumption that an ATO tax debt is the cheapest option no longer holds.
5. Look at restructuring if you’re in real trouble
If the ATO tax debt is part of a bigger problem and the business genuinely can’t service it, more borrowing is not the answer. For eligible small companies, formal options like small business restructuring can pause interest and reduce debts under a plan. This is specialist territory, so speak to a registered professional. Free help is covered below, and it’s the right first call if you’re feeling underwater.
6. Get lodgements up to date and plan ahead
Whatever else you do, keep your lodgements current, even if you can’t pay yet. The ATO treats a business that lodges on time and engages very differently from one that goes quiet. Going forward, the fix that prevents all of this is setting aside GST, PAYG withholding and super as you go, ideally in a separate account, so the money is there when the bill lands. Our guide to business finance moves for the new financial year covers building that habit in.
Should you finance an ATO tax debt?
Now the honest version, because a broker telling you to always borrow would be doing you a disservice.
Financing an ATO tax debt tends to make sense when the debt is a one-off or a timing problem rather than a symptom of a failing business, when a commercial loan is genuinely cheaper once you account for the lost deduction on GIC, and when a fixed repayment path gives you certainty the ATO won’t. In that situation, moving the debt off the ATO’s books can be a smart, clean fix. A business consolidation loan or an unsecured business loan can do the job, and if your bank has already said no, our guide on what to do when a business loan gets rejected covers the specialist lenders who understand ATO arrears.
It does not make sense when the tax debt is a symptom of a business that isn’t covering its costs. Borrowing to pay tax you can’t afford, in a business that will just rack up more tax debt next quarter, digs the hole deeper. New debt never fixes a structural problem. It amplifies it. If that’s closer to your situation, please read the next section before you do anything.
When to get help, not more debt
If an ATO tax debt has you lying awake, the smartest move is not another loan. It’s a conversation with someone whose job is to help, for free.
The Small Business Debt Helpline on 1800 413 828 offers free, confidential financial counselling for small business owners, and they’ve seen every version of this. The Australian Small Business and Family Enterprise Ombudsman also provides free guidance on managing ATO obligations and disputes. Your accountant should be your first call on the tax specifics, including any remission request. Reaching out early, before the ATO escalates, keeps the most options on the table. If you’re weighing up taking on finance while under pressure, read our warning about borrowing first. There is no shame in asking for help, and it’s what these services exist for.
Your ATO tax debt action plan
- Act now, not next quarter. Non-deductible interest makes waiting the most expensive option.
- Pay what you can to reduce the balance the interest is charged on.
- If you can’t pay in full, set up a payment plan over the shortest timeframe you can manage.
- Ask the ATO, through your accountant, whether the interest can be remitted.
- Weigh financing the debt, since a deductible business loan may now beat non-deductible GIC.
- Keep lodgements current and set aside tax as you go to stop it happening again.
- If the debt signals a deeper problem, get free help before taking on more debt.
Final Thoughts
The rules changed, and the old habit of treating the ATO as a cheap overdraft doesn’t work any more. An ATO tax debt now carries full, non-deductible interest and a more determined collector behind it, so the worst thing you can do is nothing. The good news is you have real options: pay it down, arrange a plan, ask for remission, or move it to finance that actually suits your business, and free help if you need it. Deal with it early and on your terms, and it stays a manageable problem rather than becoming a crisis. If financing is the right answer for you, that’s where we can help, and our guide to business finance for the new financial year puts the whole picture together.
Disclaimer
The information in this article is general in nature and does not take into account your objectives, financial situation or needs. It is not personal advice, tax advice, legal advice or a recommendation to apply for any product. Tax laws and interest charges can change, so confirm the current position with the ATO and seek independent financial, legal and tax advice before acting. If you are experiencing financial difficulty, free support is available through the Small Business Debt Helpline on 1800 413 828.
Get A Loan Finance Pty Ltd is not a lender. We are an accredited finance broker and work with a panel of lenders and finance providers. Product features, eligibility criteria and availability can change without notice, and all finance is subject to lender approval.
