Financing ATO Debt: Why the ATO Is So Ruthless, and Why Its Interest Is No Longer Tax Deductible

For a few years, the ATO was the most patient creditor a business could have. During COVID it largely paused debt collection, and many businesses got used to letting GST, PAYG withholding and income tax run behind.

That era is over. The ATO is now one of the toughest creditors you can owe money to, and since 1 July 2025 carrying tax debt has become more expensive, because the interest it charges is no longer tax deductible. For many businesses, refinancing ATO debt with a commercial lender is now the cheaper and safer option.

Why the ATO Has Become So Ruthless

The ATO's collectable debt book grew to tens of billions of dollars, most of it owed by small businesses. Under pressure to bring it down, the ATO resumed firm collection action and has kept it up. It also has powers no ordinary creditor has:

• Director penalty notices. Directors can be made personally liable for the company's unpaid PAYG withholding, GST and superannuation guarantee charge. If those amounts aren't reported within three months of their due date, the penalty becomes a "lockdown" DPN, which can't be wiped by putting the company into administration or liquidation.
• Garnishee notices. The ATO can direct your bank, or your customers, to pay money owed to you straight to the ATO, without going to court.
• Credit reporting. The ATO can report business tax debts of $100,000 or more, overdue by more than 90 days, to credit reporting bureaus where the business isn't engaging with it. That shows up when you next apply for finance, or when a supplier checks your credit.
• Withholding refunds. Any refunds owed to you can be applied against your tax debt.
• Winding up. In serious cases, the ATO can issue a statutory demand and apply to wind up the company.

ATO Interest Is Expensive, and No Longer Tax Deductible

The ATO charges the general interest charge (GIC) on overdue tax. The rate is the 90-day bank bill rate plus 7 percentage points, and it compounds daily. With bank bill rates around 4.5%, that's roughly 11.5% a year, and more once daily compounding is included. The shortfall interest charge (SIC), applied when an amended assessment increases your tax, is calculated on a similar basis.

Until recently, the sting was softened because GIC and SIC were tax deductible. That changed from 1 July 2025: GIC and SIC incurred in income years starting on or after 1 July 2025 are no longer deductible. For a company paying 25% to 30% tax, the after-tax cost of carrying ATO debt has jumped.

By contrast, interest on a business loan used for business purposes is generally deductible. Refinancing ATO debt with a lender can therefore lower the true cost of the debt, as well as removing the enforcement risk. Your accountant should confirm how this applies to your circumstances.

Your Options for Dealing With ATO Debt

• An ATO payment plan. Smaller debts can often go on a payment plan, sometimes set up online. GIC keeps accruing, and is no longer deductible, but a plan stops escalation as long as you keep to it and stay up to date with new lodgements and payments.
• Refinancing with a lender. A loan pays the ATO in full and replaces it with a lender on agreed terms. This removes the director penalty and enforcement risk and can lower the after-tax cost.
• Releasing capital from assets. Equipment or property equity can be used to clear the debt. See releasing cash tied up in equipment.
• Restructuring advice. If the debt is larger than the business can realistically service, speak to an accountant or restructuring adviser early, while you still have options.

Who Lends to Pay Out ATO Debt?

Most major banks are reluctant to lend to pay out tax debt, and an overdue ATO balance can be enough on its own for a bank to decline. Second-tier banks will sometimes help where there's strong property security and a clear explanation. The bulk of this lending comes from non-bank lenders and private credit funds:

• Property-secured loans, including first or second mortgages, which offer the lowest pricing outside the banks for larger debts.
• Unsecured or cash flow loans for smaller amounts, assessed on the business's trading. See non-bank cash flow finance.
• Private credit for complex situations or tight deadlines, such as an issued DPN. See private credit.

What Lenders Need to See

• An ATO statement of account showing the full debt, and any payment plan in place.
• All lodgements up to date. Lenders want to see the business is back in control.
• A clear explanation of how the debt arose, whether rapid growth, a bad debt, a one-off loss or COVID-era deferrals, and what has changed.
• Recent financials and bank statements showing the business can service the new loan.
• Details of any security available, and whether any DPNs have been issued.

Act early. Once a director penalty notice has been issued or the debt has been reported to credit bureaus, your options narrow and the cost of finance rises. A business that approaches lenders while it's still on a payment plan, with lodgements up to date, will get far better terms than one under active enforcement.

Fix the Cause, Not Just the Debt

Refinancing clears the ATO, but it doesn't stop the debt coming back. Most tax debt starts as a working capital problem: GST and PAYG collected and spent on operating costs because the business was short of cash. Pair the refinance with a working capital facility sized properly for the business, and a separate account for tax, and you're far less likely to end up back where you started. See working capital finance.

How We Help

We know which lenders will fund ATO debt, how they price it, and how to present the file so it reads as a business back in control rather than one in trouble. We tender the facility across non-banks, private credit and, where possible, banks, so you get the lowest-cost option your position allows.

Book a free, no-obligation consultation. The sooner we talk, the more options you'll have.