ATO Debt Is Becoming More Expensive, But Businesses Still Have Options
For many Australian small businesses, owing money to the Australian Taxation Office has become an unfortunate part of managing cash flow.
But two significant changes are making that debt harder and potentially more expensive to manage.
From 1 July 2025, the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) incurred on ATO debts ceased to be tax deductible.
Now, businesses face another change, with the ATO planning to stop accepting direct credit card payments after 30 June 2027.
For businesses already struggling with cash flow, these changes deserve attention.
The real cost of an ATO debt
For the October to December 2026 quarter, the ATO's General Interest Charge is 11.51% annually, compounding daily.
A business owing $100,000 could accumulate approximately $12,200 in interest over twelve months if that rate remained unchanged and no repayments were made.
That money does not purchase stock, employ staff or generate income. It simply increases an existing debt.
Previously, businesses could claim a tax deduction for ATO interest charges. That tax benefit has now disappeared.
According to the Australian National Audit Office, small businesses accounted for $35.9 billion of the ATO's $54.2 billion collectable tax debt at 30 June 2025.
These figures demonstrate just how significant the problem has become.
Refinancing can restore a tax deduction for the interest expense.
One important consideration is that while the ATO's interest charges are no longer tax deductible, interest on a commercial loan used to pay a business tax debt may still qualify for a tax deduction.
For example, a company owing $100,000 to the ATO might refinance that liability through a commercial lender.
If the borrowing qualifies as a business expense for taxation purposes, the interest charged by the lender may be tax deductible, even though the ATO's General Interest Charge would not be.
This distinction can substantially change the real cost of borrowing.
It can apply to companies, trusts, partnerships and sole traders carrying on a business, depending on the nature of the tax liability and the borrowing arrangements.
However, the same treatment does not automatically extend to personal tax debts.
For example, an employee borrowing money to pay tax owing on their wages would not ordinarily be entitled to claim the loan interest as a tax deduction.
For sole traders with both business and personal income, the position requires careful consideration.
Refinancing should therefore be examined with an accountant before any loan agreement is signed.
Another problem: credit cards
The ATO has also announced changes to how taxpayers can pay their debts.
Following changes to credit card surcharge rules, the ATO initially proposed ending direct credit card payments from December 2026.
After concerns were raised by small business groups, the government extended the arrangement until 30 June 2027.
The issue arose because the ATO was no longer prepared to absorb the substantial merchant fees associated with accepting credit card payments.
For some businesses, credit cards have provided an important short-term cash flow option.
Rather than allowing an ATO debt to continue accumulating interest, businesses could pay the liability using a credit card and then manage the balance through their banking arrangements.
Where the credit card borrowing relates to qualifying business tax obligations, the interest may also be tax deductible.
From July 2027, businesses wanting to use credit cards will generally need to consider third-party payment providers, with their associated fees and conditions.
This adds another layer of complexity and potentially additional costs for businesses managing their tax obligations.
Is the problem cash flow or profitability?
Not every business with an ATO debt is poorly managed.
Some are profitable but waiting on customers to pay. Others experience seasonal fluctuations or unexpected expenses.
However, there is a substantial difference between a temporary shortage of cash and a business that consistently spends more than it earns.
Borrowing to address a temporary cash flow problem may be sensible.
Borrowing to support a business that cannot meet its ordinary operating expenses simply moves the problem from one creditor to another.
And where the loan is secured against business assets or the family home, the risks can become considerably greater.
The danger of doing nothing
ATO payment arrangements remain available, but interest generally continues accumulating unless a specific remission or interest-free arrangement applies.
There are also consequences beyond interest.
Company directors can become personally liable for certain unpaid PAYG withholding, GST and superannuation guarantee obligations.
Significant unpaid tax debts may also be reported to credit reporting agencies when the relevant legislative conditions are met.
After more than 25 years operating an accounting practice, I have seen how quickly tax debt can become a serious financial problem when it is left unattended.
The answer starts with understanding whether the business is genuinely profitable and whether it can meet both its existing debts and future tax obligations.
Sometimes the solution will be an ATO payment arrangement. Sometimes refinancing may provide a lower-cost and tax-effective alternative.
Occasionally, the business itself needs restructuring.
The ATO should never become a business's permanent source of working capital.
Tax debt is not free money, and the financial consequences of ignoring it are becoming increasingly difficult to justify.
For small businesses already facing rising wages, insurance, energy and operating costs, every dollar matters.
Understanding the options before the debt becomes unmanageable is not simply good tax planning. It is good business management.