ATO tax debt funding: clear the debt and stop the interest compounding

Tax debt has a way of growing quietly. A missed BAS here, a PAYG amount there, and the balance creeps up — then the general interest charge starts compounding on top. If your business owes the ATO, using finance to clear it can be one of the most sensible uses of a business loan. It isn’t always the right answer, but it’s worth understanding properly.

Why does an ATO debt get more expensive every day?

The ATO charges general interest charge (GIC) on overdue amounts, and it’s calculated on a daily compounding basis. The ATO reviews the GIC rate each quarter. Two changes have made carrying a tax debt costlier:

• No deduction. GIC incurred on or after 1 July 2025 can’t be claimed as a tax deduction. Before that date, many businesses effectively got some of it back at tax time.
• Firmer collection. The ATO has been clear that it expects businesses to engage early. In a 2025 small business update, it encouraged owners carrying tax debt to make payments or arrange payment plans, and to talk to a registered tax professional about alternatives — including business loans.

The longer the debt sits, the more it costs — and the more likely firmer action becomes.

What can the ATO do about an unpaid business debt?

Beyond GIC, the main levers that affect a business’s finance options:

ATO action	What it means
Credit reporting	If the business has an ABN, at least $100,000 is overdue by more than 90 days and it isn’t engaging, the ATO can report the debt to credit bureaus — after 28 days’ notice
Director penalty notices	Directors can become personally liable for unpaid PAYG withholding, GST and super guarantee — see director penalty notice
Offsetting refunds	Refunds can be applied against debts
Garnishee and legal action	Possible for serious, unmanaged debts

A debt that appears on a credit report can make other finance harder to get, which is a strong reason to act before the 90-day mark.

Payment plan or loan — how do you choose?

The ATO says that if you owe $200,000 or less you may be able to set up a payment plan yourself through online services or its self-help phone line. That’s a genuine option, and for some businesses it’s the right one. Compare:

	ATO payment plan	Business loan to clear the debt
Debt cleared	Gradually	Immediately
GIC	Keeps accruing on the balance	Stops (the loan has its own cost)
Credit reporting risk	Reduced if you stick to it	Removed once paid
Flexibility	Must keep up with new lodgements too	Loan terms apply
Speed	Set up quickly online for eligible debts	$20k–$250k possible same day with property

Questions worth asking yourself: Can the business meet plan instalments and new BAS amounts as they fall due? Is a director penalty notice in play? Would a single lower-pressure repayment schedule be easier to manage? Your accountant can help weigh the total cost of each path.

If finance looks like the better fit, you can start an application and mention the ATO balance on the form.

Which loans are used to pay tax debt?

• Property-secured loans are the most common for larger debts. A caveat loan or second mortgage can fund quickly and allow time to restructure.
• Unsecured or cash flow loans can work for smaller debts, where bank statements show the business can carry the repayments.
• A refinance of existing business debt that rolls the tax debt in, for larger or more complex situations.

Lenders will want an ATO statement of account showing the exact balance, confirmation that lodgements are up to date (or a plan to bring them up to date), and often your accountant’s details.

How fast can the ATO be paid?

With property security, $20k to $250k is possible on the same day, and funds can be paid straight to the ATO at settlement so there’s no doubt where the money went. Unsecured funding for smaller debts can also be same-day when statements are ready. The main delays are unlodged returns — lenders want to know the full position — and title issues on the security property.

An illustrative example: a Sydney labour-hire company owes $185,000 in GST and PAYG withholding after a major client went into administration. The directors are worried about director penalties and the debt approaching the 90-day reporting mark. A 12-month second mortgage over one director’s home pays the ATO in full within two days. The business then repays the loan as it rebuilds its client base, without GIC compounding in the background.

What should you check with your accountant first?

Before using finance to clear a tax debt, a short conversation with your accountant or registered tax agent is worth having. Questions to cover: Are all returns and BAS lodged, so the debt figure is final? Are there amounts that could be disputed or remitted? Is a payment plan realistic given upcoming BAS? Would clearing the debt now change anything else in your tax position? The answers make the funding decision — and the application — much faster and more certain.

Clear the debt and get back on the front foot

If an ATO debt is weighing on your business, there may be a faster way through it than you think. Enquiring won’t touch your credit file, your details stay with one team rather than going out to a pile of lenders, and a real person will look at the whole tax position with you. Please give the true ATO balance and lodgement status on the form — it’s how we find the right fit first time. Apply now.