The Scale of the Problem
The Australian National Audit Office recently confirmed that Australian small businesses owe $35.9 billion in collectable ATO debt. That's not total outstanding tax — that's the amount the ATO has assessed and is actively working to collect.
The figure reflects what has been building since the COVID-19 period, when the ATO significantly reduced its enforcement activity to support businesses through an unprecedented disruption. Between 2020 and 2022, payment arrangements were extended, interest and penalties were remitted, and many businesses deferred their tax obligations — some deliberately as a cash management strategy, others because the operational challenges of the pandemic left little bandwidth for compliance.
That leniency has ended. The ATO has returned to active debt collection with increased funding and sharper enforcement tools, and the businesses that accumulated ATO debt during the COVID period are now facing the consequences.
<cite index="46-1">The number of companies with ATO tax defaults climbed from roughly 30,000 to about 36,000 — nearly a 20% increase — over six months.</cite> And the consequences of those defaults are severe: <cite index="46-1">33.6% of private businesses with an ATO tax default exceeding $100,000 that was more than 90 days overdue had either become insolvent or voluntarily closed during the past year.</cite>
One in three. That's not a distant risk. That's the survival rate for businesses with significant ATO debt in the current environment.
Why ATO Debt Is More Expensive in 2026 Than It Has Ever Been
This is the change that most business owners have not caught up with — and it materially changes the cost-benefit calculation around carrying ATO debt.
From 1 July 2025, the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC) are no longer tax-deductible. This change was legislated through the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, and it applies to all GIC and SIC incurred on or after that date — regardless of which year the underlying debt relates to.
What the GIC Rate Is Right Now
<cite index="55-1">The General Interest Charge is 10.96% per annum for the April to June 2026 quarter, compounding daily.</cite> The rate is reset every quarter by the ATO.
Compounding daily at 10.96% per annum means an unpaid $50,000 tax debt accumulates approximately $5,480 in interest over 12 months — and that interest is now compounding on the growing balance, not on the original amount.
The Real Cost of Non-Deductible GIC
Before 1 July 2025, GIC was at least partially offset by its tax deductibility. A business paying 25% company tax could deduct GIC, reducing the effective cost by 25%. For a taxpayer on the 47% marginal rate, the effective cost was reduced even further.
That offset no longer exists. Every dollar of GIC now hits your business's after-tax cash directly. For a company paying 25% tax, the removal of deductibility increases the effective cost of GIC by approximately 33%. For an individual on the top marginal rate, the cost increases by nearly 90%.
<cite index="57-1">Since GIC and SIC are no longer tax deductible from 1 July 2025, managing ATO debt by way of making a payment plan is no longer a preferred option</cite> in the way it once was. A payment plan is still far better than ignoring the debt — but the economics of stretching a plan over 24 months are materially worse than they were before July 2025.
How ATO Debt Escalates: The Enforcement Pathway
Understanding how the ATO escalates from a late BAS to a Director Penalty Notice helps you understand why acting early is so critical.
Stage 1: Overdue Lodgement or Payment
The ATO issues a payment reminder or overdue notice. At this stage, the debt is accruing GIC from the original due date. Failure to Lodge (FTL) penalties may also apply — $330 per 28-day period, up to $1,650 for small businesses — even if the underlying BAS results in a nil or refund outcome.
The right action: Lodge everything outstanding immediately. The ATO will not enter a payment arrangement for a business with outstanding lodgements. Lodging stops the FTL penalty from accruing further and opens the door to a payment plan.
Stage 2: Credit Bureau Disclosure
<cite index="55-1">Business tax debts of $100,000 or more overdue by 90 days can be disclosed to credit bureaus if you are not engaging.</cite>
A credit disclosure affects your ability to secure finance, negotiate supplier terms, and in some cases retain clients who conduct credit checks. Once disclosed, it can take months to clear even after the debt is paid. The disclosure threshold is $100,000 — a figure many small businesses reach through accumulated BAS arrears, PAYG, and super obligations before they realise the exposure.
Engaging with the ATO before the 90-day mark is the only way to prevent disclosure. If you are actively negotiating a payment plan, the ATO has discretion to delay or withhold disclosure.
Stage 3: Garnishee Notices
If a business fails to engage, the ATO can issue a garnishee notice directly to the business's bank, requiring the bank to pay the ATO from the business's account balance or future deposits — without notice to the business owner.
Garnishee notices can be issued to banks, customers, and anyone else who owes money to the business. A garnishee on a business bank account can leave the business unable to pay wages, suppliers, or other creditors. In many cases, the first sign a business owner has that a garnishee has been issued is when their bank account is frozen.
Stage 4: Director Penalty Notices
<cite index="45-1">The ATO has not signalled any softening of its enforcement posture. The Tax Ombudsman has announced a formal review of Director Penalty Notices in response to the 136% surge, but that review is about process fairness, not about reducing enforcement.</cite>
A Director Penalty Notice (DPN) makes a company director personally liable for:
- Unpaid PAYG withholding
- Unpaid superannuation guarantee contributions
- In some circumstances, unpaid GST
The personal liability is not limited to the director's shareholding or investment in the company. It extends to their personal assets — home, savings, personal vehicles. DPNs are issued when the company has failed to either pay the relevant obligations or report them within certain timeframes.
The critical timing rule for DPNs: There are two types of DPN — lockdown and non-lockdown. If PAYG and super are reported through STP and BAS on time but simply not paid, directors have 21 days from the DPN to either pay the debt, appoint a voluntary administrator, or appoint a liquidator. If the obligations are also not reported on time — that is, if lodgements are outstanding — the DPN is lockdown, meaning the director is personally liable with no ability to avoid the penalty through subsequent action.
This is why lodging on time, even when you cannot pay, is so important. A lodged but unpaid BAS preserves your options if the situation worsens. An unlodged BAS eliminates them.
The Payment Plan Option: What It Is, What It Costs, and How to Get One
An ATO payment plan is a formal agreement to pay an assessed debt in instalments over an agreed period. The Commissioner of Taxation has statutory power to accept payment by instalments, and the ATO is generally willing to negotiate — provided the business is engaging proactively and has current lodgements.
What the ATO Will Want to Know
Before approving a payment plan, particularly for debts above $50,000, the ATO will typically request:
- Recent bank statements (usually three months)
- A cash flow forecast showing income and expenses
- A summary of assets and liabilities
- Details of any other creditors
For smaller debts, self-service payment plans can be set up through the ATO's Online Services for Business portal without needing to speak to an officer.
How Long Can a Payment Plan Last?
<cite index="60-1">While the ATO prefers payment plans to be completed within 24 months, the duration can be longer depending on your circumstances and the size of the debt.</cite>
Shorter plans are strongly preferable because GIC continues to accrue daily on the outstanding balance throughout the plan. A 24-month payment plan on a $100,000 debt at 10.96% GIC generates approximately $10,000 to $12,000 in additional interest over the plan period — none of which is deductible.
Interest-Free Payment Plans
The ATO offers interest-free payment plans for overdue activity statement (BAS) amounts in certain circumstances. If you qualify, this eliminates the GIC burden entirely for the duration of the plan. Eligibility criteria apply — ask specifically about this option when negotiating with the ATO or engaging a registered agent to negotiate on your behalf.
Tips for Negotiating a Payment Plan
Lead with an upfront payment. Even a modest upfront payment — 10% to 20% of the outstanding balance — signals commitment and immediately reduces the GIC-accruing balance.
Propose instalments that align with your cash flow timing. The ATO is more flexible than most business owners realise about payment frequency. If your income is concentrated mid-month or weekly, say so. A proposal that matches your actual cash cycle is more likely to be maintained than one based on an arbitrary monthly date.
Lodge everything first. The ATO will not negotiate a payment plan if there are outstanding lodgements. Lodge all overdue BAS and returns before contacting the ATO, even if you cannot pay. This is non-negotiable.
Be accurate about capacity. Overstating your repayment capacity to secure a more favourable plan and then defaulting on it puts you in a worse position than negotiating a realistic plan from the start. A defaulted plan makes future negotiations harder and accelerates enforcement.
Request penalty remission at the same time. When negotiating a payment plan, also request remission of FTL penalties that may have accrued during the period of non-lodgement. The ATO considers remission separately from the principal debt, and there is no penalty for asking. If your circumstances — a serious illness, a natural disaster, or an ATO-acknowledged error — contributed to the late lodgement, document this clearly in your remission request.
Can the ATO Reduce or Waive the Debt?
The primary tax debt itself — the original GST, PAYG, or income tax assessed — is not negotiable. The ATO does not write off or reduce the principal amount except in very limited serious hardship circumstances.
However, the penalties and interest components are different:
GIC remission: The ATO can remit (reduce or cancel) GIC where circumstances beyond the taxpayer's control caused the payment delay — natural disaster, serious illness, ATO error. Evidence is required. The ATO's guidance at QC33808 details the required content for a remission application, including a specific application form. Remission requests that don't use the form are commonly returned.
FTL penalty remission: Where the failure to lodge was caused by circumstances outside the business's control, or where the business has a good prior compliance history, FTL penalties can be remitted in full or in part.
The evidence standard is high. The ATO does not grant remission because a business found it difficult to pay. The standard is exceptional circumstances — genuinely outside the business's control. Documenting what occurred, when, why, and what action has since been taken to fix the underlying issue is essential.
Small Business Restructuring: The Option Many Directors Don't Know They Have
If your ATO debt has grown to the point where a payment plan is not feasible, and the business is technically insolvent or at risk of becoming so, Small Business Restructuring (SBR) is a formal insolvency pathway introduced in January 2021 that allows eligible companies to restructure their debts while directors retain control of day-to-day operations.
SBR is available to incorporated companies with total liabilities below $1 million. It allows the business to put a restructuring plan to creditors — including the ATO — that may involve paying a portion of the debt over time while the balance is released.
<cite index="51-1">RSM Australia national head of restructuring and recovery Jerome Mohen noted that the ATO has taken a tougher approach to their approval of Small Business Restructure proposals, general interest charge remittance requests and payment plan requests. "Early and qualified professional advice is even more critical as alternate restructuring or recapitalisation mechanisms may need to be considered," he said.</cite>
The key condition for SBR: the company must be insolvent or likely to become insolvent, and the director must not have used SBR or voluntary administration in the past seven years. It is not a mechanism for viable businesses with a temporary cash flow problem — it is for businesses where the debt burden has become genuinely unmanageable.
If SBR is not available or appropriate, voluntary administration and creditors' voluntary liquidation are the alternative pathways. The right choice depends on whether the underlying business is viable — whether the trading operation is profitable if the debt burden is resolved — and this is a question that requires qualified insolvency advice.
The Warning Signs Your Business Is in ATO Trouble
Most businesses don't go from healthy compliance to ATO enforcement overnight. The warning signs appear months — sometimes years — before a crisis point. Recognising them early means you still have options.
You are behind on BAS lodgements. Even one quarter behind is a warning sign. Two quarters behind, and the debt is compounding with GIC and FTL penalties simultaneously.
You have been using GST and PAYG as working capital. This is more common than most business owners admit. The money collected on behalf of the ATO is held in the same account as operating funds, and when cash is tight, it gets spent. The BAS arrives, and the money isn't there. This is one of the most reliable pathways to significant ATO debt.
You haven't opened ATO correspondence. The ATO escalates through letters before enforcement. A business owner who is not opening mail or checking their ATO online account is missing critical notices and deadlines.
Your payroll obligations are behind. Unpaid PAYG withholding and super are the most dangerous ATO debts because they attract Director Penalty Notices. Unlike income tax or GST, these obligations were collected from employees or accrued for their benefit — the ATO treats non-remittance with particular seriousness.
Your BAS figures have been inconsistent. If your BAS lodgements have been rushed, estimated, or not reconciled against your actual books, errors may have accumulated over multiple quarters. An ATO review triggered by one inconsistency can snowball into a broader audit.
The Prevention Strategy: How Clean Books Stop ATO Debt Before It Starts
Every business owner who has faced serious ATO debt will tell you the same thing: it didn't happen overnight, and it didn't have to happen at all.
The mechanism that converts cash flow pressure into ATO debt is almost always the same: the business doesn't have clear, real-time visibility of its tax obligations, so those obligations accumulate alongside other spending rather than being set aside. By the time the BAS arrives, the money is gone.
The prevention is equally consistent: separate accounts for tax obligations, up-to-date bookkeeping that makes each quarter's BAS liability visible weeks before it falls due, and a registered BAS agent who lodges on time regardless of whether the underlying payment can be made in full.
The single most important thing: lodge on time, every time, even if you cannot pay. Lodging on time:
- Stops FTL penalties from accruing
- Preserves your ability to negotiate a payment plan
- Prevents lodgement-locked DPNs
- Maintains your compliance record, which the ATO considers when assessing remission requests and payment plans
A business with a history of on-time lodgements that occasionally needs a payment arrangement is treated very differently from a business with multiple overdue lodgements.
Frequently Asked Questions
I have ATO debt. What should I do first? Lodge any outstanding BAS and returns immediately. The ATO will not negotiate until all lodgements are current. Then contact the ATO — or engage a registered BAS agent to do so on your behalf — to discuss a payment arrangement before enforcement action begins.
Can I set up a payment plan myself, or do I need an agent? For debts under $200,000, you can set up a payment plan through the ATO's Online Services for Business portal without professional help. For larger debts, complex situations (multiple overdue periods, outstanding lodgements, existing DPNs), or if you want to request penalty remission alongside the payment plan, a registered BAS agent or tax agent significantly improves your negotiating position.
Will a payment plan stop the interest from accruing? No. GIC continues to accrue daily on the outstanding balance throughout the life of the payment plan. It is a repayment arrangement, not an interest-free loan. This is why shorter plans and upfront payments reduce the total cost significantly.
Can the ATO take money from my bank account without warning? Yes. Garnishee notices can be issued to your bank without prior warning if you have not engaged with the ATO about an outstanding debt. The bank is legally required to comply. This is one of the most disruptive enforcement actions the ATO uses and is entirely avoidable through early engagement.
I'm a company director. Am I personally liable for my company's ATO debt? For PAYG withholding and superannuation guarantee obligations — yes, through Director Penalty Notices. For GST, in certain circumstances. Your personal assets are at risk for these obligations if the company fails to meet them. The protection depends on the obligations being lodged on time, even if not paid — which is another reason timely lodgement is critical even when payment is not immediately possible.
How does the ATO find out about undeclared income? The ATO's data-matching systems cross-reference bank deposits, payment platform data (Stripe, Square, PayPal, EFTPOS), industry benchmarks, TPAR reports, and STP payroll data against declared income and BAS figures. Discrepancies are flagged and can trigger a review or audit independently of any outstanding debt.
Getting Back on Track — and Staying There
ATO debt is stressful, expensive, and in 2026, more dangerous to ignore than at any point in the past decade. But it is manageable — if you act early, engage proactively, and get the right support.
The businesses that resolve ATO debt successfully have one thing in common: they stopped avoiding the problem and started addressing it. That usually means lodging everything outstanding, calling the ATO or engaging an agent, and setting up a payment arrangement structured around their actual cash flow.
The businesses that prevent ATO debt have something even simpler in common: their books are up to date, their BAS is lodged on time every quarter, and their tax obligations are visible and set aside before the due date arrives.
Girl Friday Australia keeps the books for small businesses, sole traders, and tradies across Australia — ensuring BAS is lodged on time every quarter, GST and PAYG are correctly tracked and set aside, and your ATO position is never a surprise.
✅ Registered BAS Agent — all lodgements handled directly with the ATO ✅ Xero Certified Advisor & Gold Partner ✅ BAS preparation, review, and on-time lodgement ✅ Payroll and Payday Super compliance ✅ 20+ years experience with Australian small businesses ✅ 100% remote, Australia-wide ✅ No lock-in contracts
Get a free quote or book a discovery call — and make sure your ATO position is one less thing to worry about.