Many Australian businesses are still dealing with lingering ATO debt following the COVID-19 period. While temporary deferrals provided short-term relief, those obligations have now fallen due, often alongside accumulating interest and penalties.
As a result, what was once manageable tax debt has, for many businesses, become an ongoing cash flow pressure. At the same time, the Australian Taxation Office has increased its focus on collection activity, meaning businesses that have not actively addressed their position are now facing greater scrutiny and enforcement action.
Why ATO debt is becoming a bigger problem
The issue is no longer just the original tax debt. It is the cost of holding that debt over time.
The ATO’s General Interest Charge (GIC) is currently over 11% per annum, compounding daily. This means balances can grow quickly, even where repayments are being made.
For example, a $100,000 ATO debt can generate more than $11,000 in annual interest. For many businesses, this represents a significant ongoing cash flow cost that is not reducing the principal debt.
How the General Interest Charge (GIC) really works
GIC is often misunderstood, which leads to poor decision-making.
- It accrues daily on outstanding ATO debt
- It is not tax deductible
- It continues to apply even when you are on a payment plan (unless specifically addressed)
As a result, businesses can find themselves in a position where they are making consistent payments, but the total balance is not reducing as expected.
Example: When a payment plan doesn’t solve the problem
A professional services firm entered into a two-year ATO payment plan to manage a $120,000 debt. The monthly repayments were manageable. However, GIC was not addressed as part of the arrangement.
After 12 months:
- The business had paid down approximately $60,000
- However, interest of approximately $12,000 had still accrued over the period, as GIC continued to apply on the outstanding balance
Despite doing the “right thing,” the remaining balance was still higher than anticipated. This placed renewed pressure on cash flow and required the plan to be renegotiated.
Can ATO interest and penalties be reduced?
In certain circumstances, yes.
The ATO has discretion to remit GIC and penalties, particularly where there is evidence of genuine hardship or events outside the business’s control.
However, this is not a simple request. It requires:
- Accurate and up-to-date financial records
- Clear evidence of cash flow constraints
- A well-prepared submission explaining the circumstances
Without proper documentation, remission requests are rarely successful.
What happens if ATO debt is ignored?
Ignoring ATO debt is where the real risk begins.
The ATO has broad enforcement powers, including:
- Director Penalty Notices (DPNs), which can make directors personally liable
- Garnishee notices issued to banks or customers
- Legal recovery action, including wind-up proceedings
These actions can escalate quickly. In many cases, they occur after a period of limited engagement from the business.
Example: Escalation due to inaction
A construction business carried ATO debt of approximately $250,000 following COVID.
Initially, the business deferred action, assuming it could “catch up later.” Over time, GIC increased the total liability significantly.
After failing to engage with the ATO:
- A garnishee notice was issued to the business bank account
- Cash flow was immediately restricted
- The business was forced into reactive negotiations under pressure
Earlier engagement could have resulted in a structured plan and potential interest remission. Instead, the situation became far more difficult to manage.
Are ATO payment plans always the right solution?
Payment plans are often the first step, but they are not always the best solution.
Key risks include:
- Ongoing GIC increasing the total debt
- Repayments that do not align with business cash flow
- Default risk, which can trigger immediate recovery action
A payment plan should be part of a broader strategy, not the strategy itself.
A smarter approach to managing ATO debt
ATO debt needs to be approached commercially, not just from a compliance perspective.
This means:
- Understanding the true cost of the debt, including interest
- Assessing whether remission is achievable
- Structuring repayment strategies that align with cash flow
- Considering external funding options, such as bank finance or a line of credit, where appropriate
In some cases, refinancing ATO debt through banks or using a line of credit can be more effective than an ATO payment plan. Interest on commercial funding may be tax deductible, and repayment terms can often be structured over a longer period, providing greater flexibility.
While the ATO may allow payment plans of up to three years, external funding can sometimes reduce pressure on cash flow and improve financial control.
Each business will have different pressures, risks, and opportunities. A tailored approach is critical.
What This Means for Your Business
ATO debt is not just a tax issue. It is a business risk.
Left unmanaged, it can impact cash flow, limit growth, and expose directors to personal liability. Managed early, it can be stabilised and resolved.
How Equil Advisory can help
At Equil Advisory, we work with businesses to take control of ATO debt before it becomes unmanageable. If your business is carrying ATO debt, now is the time to act.
Get in touch with Equil Advisory to map out the smartest path forward and regain control of your financial position.
