14/12/2025 • 17 min read
ATO Tax Debt Options for Businesses (2025)
ATO Tax Debt Options for Businesses (2025)
Dealing with tax debt in Australia is primarily a cashflow and compliance management exercise: a business that owes the ATO should immediately quantify the debt (GST, PAYG withholding, PAYG instalments, superannuation guarantee charge (SGC), income tax), lodge all overdue activity statements/returns, and then choose the most appropriate pathway—pay in full, negotiate a payment plan, seek temporary deferrals/remission of interest, or (where solvency is at risk) implement formal restructuring or insolvency options—because the ATO’s enforcement posture escalates quickly when lodgments are missing or the business is non-engaging. From an Australian accounting practice perspective, the optimal outcome is achieved by early engagement with the ATO, evidence-based proposals (cashflow forecasts), and strict on-time future lodgment compliance to avoid defaulting arrangements.
What should a business do first when it realises it owes the ATO?
The first step is to stabilise compliance and gather accurate numbers before negotiating anything. The ATO will typically take a firmer position where there are outstanding lodgments, repeated defaults, or signs of phoenixing risk.
Priority actions (in order):
- Confirm the debt composition and due dates
- Lodge all overdue BAS/IAS/returns immediately
- Stop the debt from growing
- Prepare evidence for a proposal
Authoritative practice note: The ATO’s public guidance on managing debts and payment plans emphasises early contact, lodging on time, and paying what you can by the due date to reduce interest and enforcement risk (see ATO guidance on “payment plans” and “if you can’t pay on time”).
What options are available to businesses that owe the ATO?
A business typically has one (or a combination) of the following options, depending on solvency, cashflow, compliance history, and debt type.
Option 1: Can the business pay the ATO debt in full (now or very soon)?
Paying in full is the fastest way to stop recovery action and reduce interest accrual. Where cash is available (or can be raised without jeopardising solvency), full payment is usually commercially optimal.
Practical methods commonly used:
- Immediate payment via EFT, BPAY, credit card (noting fees), or same-day bank transfer.
- Short-term funding:
- A café has an accumulated BAS debt after a poor season. The accountant identifies that debtor collections and an inventory run-down can clear the debt within 14 days. The business pays in full, avoids a payment plan default risk, and resets BAS funding discipline.
Option 2: How does an ATO payment plan work for tax debt?
An ATO payment plan is the most common solution where the business is viable but temporarily behind. The ATO generally expects a plan that is realistic, supported by cashflow evidence, and does not compromise future lodgments.
In practice, the ATO focuses on:
- Up-to-date lodgments: a consistent precondition to agreement.
- Affordability: repayments that fit demonstrated cashflow.
- Ongoing compliance: the business must keep paying and lodging new BAS/IAS on time while the plan runs.
- Security/enforcement risk: higher-risk debts may trigger tougher terms.
Key planning considerations for accountants:
- Repayment frequency: weekly/fortnightly often works better than monthly for volatile cashflow.
- Debt mix: prioritise higher-risk obligations (PAYG withholding and SGC exposures often require urgent triage).
- Default consequences: defaulting can trigger escalated recovery, including garnishees and director penalty actions.
ATO source note: The ATO provides specific online and phone pathways for entering payment plans, with additional requirements in more complex cases. Accountants should align proposals with the ATO’s published payment plan guidance.
Option 3: Can the ATO defer, vary, or remit interest and penalties?
Yes, but it is not automatic and must be evidence-based. Two common relief areas are:
- General Interest Charge (GIC) remission
- Penalty remission (administrative penalties)
The legal framework for interest/penalty administration is contained in the Taxation Administration Act 1953 (Cth), and the ATO also publishes administrative guidance on when remission may be considered (for example, where there were exceptional circumstances and the taxpayer took reasonable care).
In practice, remission is more likely where:
- The business had genuine exceptional circumstances (e.g., serious illness, natural disaster, major system failure).
- The business engaged early, lodged, and made reasonable efforts to pay.
- There is a clear compliance improvement plan.
Less likely where:
- There is repeated non-payment, non-lodgment, or poor recordkeeping without exceptional cause.
- The business used withheld amounts (especially PAYG withholding) for working capital as a “funding strategy”.
- A construction business missed BAS payments due to principal illness and hospitalisation, with evidence. The accountant lodges all BAS, establishes a payment plan, and submits a targeted GIC remission request citing the timeline, medical evidence, and improved controls.
Option 4: What if the business disputes the tax debt?
If the debt is not correct, the correct pathway is to review, object, or appeal rather than simply not paying. The process depends on whether the amount is an assessment, an amended assessment, or a BAS liability.
Practical dispute actions:
- Revise BAS/IAS where an error is identified (subject to revision rules and time limits).
- Lodge an objection against an assessment within the relevant time period.
- Seek review (and if necessary, litigation pathways) where warranted.
Practice warning: Even where an objection is underway, the ATO may still treat the amount as payable unless collection is formally deferred. It should be confirmed in writing whether recovery action is stayed.
Option 5: What if the business is not solvent (or close to it)?
If the business cannot meet debts as and when they fall due, insolvency risk must be addressed immediately. At this point, “more time” may not be a solution; it may increase director and advisor exposure.
Common pathways include:
- Small business restructuring (SBR) (where eligible) to compromise debts while continuing to trade under a restructuring plan.
- Voluntary administration leading to a DOCA (Deed of Company Arrangement), where appropriate.
- Liquidation, where the business is not viable.
Director risk must be actively managed:
- Director Penalty Notice (DPN) regime: Directors can become personally liable for certain company tax debts (commonly PAYG withholding and SGC). The regime is administered under the Taxation Administration Act 1953 (Cth), and the practical risk escalates sharply where obligations are not reported on time.
- Insolvent trading considerations: The Corporations Act 2001 (Cth) duties and safe harbour principles (where applicable) require proactive steps and proper advice.
Professional position: Where there is a solvency concern, a tax debt strategy must be integrated with insolvency advice. A payment plan that the business cannot maintain can worsen outcomes.
What enforcement actions can the ATO take if tax debt is ignored?
If a business does not engage, the ATO has broad recovery powers and will use them. The ATO’s published debt collection guidance outlines escalating actions, which in practice can include:
- Garnishee notices to banks or third parties owing money to the business.
- Offset of refunds (e.g., income tax refunds applied to BAS debt).
- Legal action and judgment debt recovery.
- Director-focused recovery (DPN-related consequences where applicable).
- Insolvency referrals in severe or persistent cases.
Practice point: Early engagement typically preserves options. Non-lodgment combined with non-payment is the most common trigger for rapid escalation.
How should accountants structure a “best chance” ATO payment proposal?
An ATO proposal is most successful when it is specific, measurable, and supported by documents. Vague statements like “cashflow is tight” rarely succeed without evidence.
A robust proposal should include:
- Debt schedule
- Funding plan
- Forward compliance controls
- 13-week cashflow forecast
- A transport operator owes $85,000 across GST and PAYG. The accountant proposes: $10,000 upfront, then $3,000/week, backed by signed contracts, a receivables collection plan, and a dedicated “tax set-aside” account. The plan includes a commitment to lodge and pay the next IAS on time. This is materially more credible than a request to “pause payments for 3 months”.
What common mistakes cause ATO payment plans to fail?
Payment plans usually fail because the business fixes the past but not the future. The ATO expects “arrears plus current” capability.
Most common failure points:
- Not provisioning GST/PAYG for the next BAS while repaying arrears
- Using net wages funding that implicitly relies on unpaid PAYG withholding
- Ignoring SGC exposure (super not paid by due dates can create SGC liabilities)
- Continuing loss-making trading without a turnaround plan
- Poor recordkeeping causing repeated BAS revisions and uncertainty
Recommended practice controls:
- Weekly “tax provision” transfer based on sales and wages
- Live bookkeeping and month-end lock processes
- Regular variance analysis against forecast
- Management accounts for early warning
How does automated reconciliation reduce ATO tax debt risk?
Automated bank reconciliation and BAS reconciliation reduce ATO debt risk by catching GST/PAYG issues early and preventing compounding errors. In practice, the fastest way to accumulate ATO debt is late, inaccurate bookkeeping that produces surprise BAS and cashflow shocks.
From a systems perspective (and relevant to “AI accounting software Australia” search intent), the operational goal is:
- Faster close
- More accurate GST coding
- Earlier visibility of liability position
- Fewer revisions and penalty exposures
This is where platforms designed for accounting automation materially improve outcomes.
How Fedix can help (MyLedger)
Fedix’s MyLedger is designed to reduce the operational causes of ATO debt—late reconciliations, manual working papers, and poor visibility—by automating core compliance workflows for Australian practices.
Practical advantages for practices managing clients with ATO debt:
- Automated bank reconciliation: MyLedger’s AutoRecon typically reduces reconciliation from 3–4 hours to 10–15 minutes per client (about 90% faster), supporting earlier BAS readiness.
- BAS reconciliation support: Built-in BAS summary workflow with GST enforcement, reducing coding errors that commonly cause unexpected liabilities.
- ATO integration accounting software capability: Direct ATO portal integration to pull client details and relevant ATO statement/transaction information, improving debt triage speed and accuracy.
- Working papers automation: Faster production of reconciliations and supporting schedules, reducing time leakage during debt management engagements.
- Cost model aligned to practices: All-in-one pricing expectations ($99–199/month unlimited clients when out of beta) versus per-client pricing typical of many platforms.
Next step: If your practice is spending too many hours per client getting BAS-ready before you can even address tax debt, review Fedix at home.fedix.ai and assess whether MyLedger’s automation can compress your monthly close and improve ATO debt outcomes.
What are the key takeaways for dealing with tax debt owed to the ATO?
The correct approach is structured and evidence-driven: lodge everything, quantify the debt, prevent new debt from arising, and engage the ATO early with a realistic plan supported by cashflow evidence. Where solvency is threatened, formal restructuring/insolvency advice must be considered immediately to protect directors and preserve viable business operations.
Disclaimer: Tax laws and ATO administrative practice are complex and subject to change. This information is general in nature and should not be relied upon as legal or financial advice. Businesses should obtain advice from a registered tax agent and, where insolvency risk exists, a qualified insolvency practitioner.