Tax Debt Financing: Why More Australian Businesses Are Replacing ATO Debt With a Business Loan

If your business is carrying ATO debt, the ground shifted on 1 July 2025 and the cost of doing nothing went up.

For years, the interest the ATO charged on unpaid tax was at least softened by one thing. You could claim it as a deduction. That is no longer the case. The General Interest Charge the ATO levies, estimated at $3.5 to $4.5 billion across Australian taxpayers each year, is no longer tax-deductible. Every dollar of it is now a real, after-tax cost, which is exactly why more businesses are looking at tax debt financing.

If you are a business owner or director carrying ATO tax debt, this article explains what that change actually costs you, how replacing the debt with a business loan can work, and when it makes sense to do it.

What is tax debt financing?

The debt remains; it just migrates. Instead of owing the ATO at General Interest Charge rates, you owe a lender at a commercial rate. While this may seem like just a small change, it has far-reaching implications, because by borrowing funds to settle an ATO debt, you make three changes instantly: the applicable interest rate, its tax deductibility, and the risks of being pursued by the ATO.

The real cost of carrying ATO tax debt in 2026

The General Interest Charge currently sits at 10.96% per annum for the April to June 2026 quarter. It is reviewed every quarter, and it compounds daily, so the balance you owe grows a little every single day it stays unpaid.

Before 1 July 2025, this impact was partially mitigated, as the General Interest Charge (GIC) was tax-deductible. Consequently, the effective cost was typically reduced depending on the taxpayer’s marginal tax rate. However, from 1 July 2025 onwards, this deduction is no longer available. As a result, the full amount of the GIC now represents a direct and non-deductible expense.

An example will illustrate the difference. If an ATO debt amounts to $100,000 and it generates interest at the rate of 10.96%, that interest will total some $10,960 annually. Once adjusted for daily interest, the figure might be slightly higher. None of that expense is tax-deductible.

Every business is different and the right number for you depends on your balance and your tax rate. But the direction is the same for everyone. Real tax debt relief now usually means tackling the interest rate and the deductibility together, which is exactly what financing does.

Why the ATO is no longer a “soft” creditor

It used to be reasonable to think of the ATO as the most patient creditor on your books. That is no longer a safe assumption.

• The ATO is actively pursuing overdue debts through Director Penalty Notices, which can make directors personally liable for company tax debts, and through garnishee notices that redirect funds straight from your bank account.
• It reports business tax debts to credit reporting bureaus where the debt is at least $100,000, more than 90 days overdue, and the business is not effectively engaging with the ATO. Once listed, your creditworthiness takes a direct hit.
• GIC tracks the 90-day bank bill rate plus a 7 percentage point margin, which has historically run well above commercial lending rates.
• The forbearance many businesses saw through 2020 to 2022 has clearly ended. The ATO’s current posture is firmer, and its published data backs that up.

Put together, these shifts are why ATO tax debt finance has moved from a niche idea to a mainstream conversation. The ATO has real enforcement teeth now and leaving an ATO debt to drift is far riskier than it was even a few years ago.

The tax advantage of financing ATO debt with a business loan

This is where the strategy earns its keep and it comes down to one question: Is debt financing tax deductible?

For a business loan used to repay ATO debt, the answer is generally yes.

Interest on a loan taken out for a genuine business purpose is deductible under section 8-1 of the Income Tax Assessment Act 1997. Because your original ATO debt arose from running your business, a loan used to clear it usually keeps that business character and the interest stays deductible. Set that against GIC, which is now explicitly not deductible, and the tax benefits of debt financing become clear.

In plain terms: with an ATO debt loan, you may be paying a similar or even lower interest rate and a meaningful slice of that interest comes back to you as a deduction. The ATO debt is paid in full, the enforcement risk goes away, and your interest cost works harder. That combination is the whole case for tax debt financing.

Who should consider tax debt financing?

Financing is not the right answer for every business . Here is a quick way to tell which side of the line you are on.

It is usually worth considering if you:

• Carry $20,000 or more in ATO debt that has been outstanding for more than 90 days.
• Have steady enough cash flow to comfortably meet regular loan repayments.
• Are facing Director Penalty Notice risk, or your debt is climbing toward the credit reporting threshold.
• Want to consolidate ATO debt and other trade or creditor debt into one manageable facility.

It is probably not the right fit if you:

• Are in genuine financial distress, where taking on any new repayment is not viable. In that case, formal insolvency or restructuring advice is a more honest path than tax debt relief through borrowing.
• Are a sole trader with a small balance, where the cost difference is too minor to justify the effort.
• Cannot service a commercial loan from current cash flow.

Being honest about suitability is part of being a good adviser. Our role is to recommend what genuinely fits your circumstances, even when that means telling you financing is not the right move.

How tax debt financing works, step by step

If financing looks like a fit, the process is usually more straightforward than people expect.

1. 1. Assess where you stand. Confirm your current ATO balance, how much GIC is accruing, and whether you already have an ATO payment plan in place.
   2. Check serviceability. Review your business financials to confirm you can comfortably meet a loan repayment.
   3. Find the right product. A finance broker or lending adviser identifies suitable business loan options from across the market, rather than whatever a single bank happens to offer.
   4. Pay out the ATO. Use the loan funds to clear the ATO balance in full, which exits the payment plan and stops GIC in its tracks.
   5. Service the loan. Repay the business loan on commercial terms, this time with the benefit of fully deductible interest.

For a business with stable cash flow, this is usually a clean, quick process. The best first step is a conversation with a finance or tax adviser who can look at your actual business numbers.

For most businesses, the 1 July 2025 change made carrying ATO debt more expensive than it needs to be, because the interest no longer offers any tax benefit. Where cash flow allows, tax debt financing gives Australian businesses a real alternative: a business loan at a comparable rate, with deductible interest, and the ATO balance paid out in full.

As one of our advisers puts it, it is easy to advise a business when it is making money. A true adviser brings their A-game in the challenging and uncertain times. If you are carrying ATO debt and want to know where you stand, contact our Melbourne tax advisers for a no-obligation assessment of your position and your options.

Frequently Asked Questions

Is debt financing tax deductible?

Generally, yes, when the loan funds a genuine business purpose. Interest on a business loan used to repay an ATO tax debt is deductible under section 8-1 of the Income Tax Assessment Act 1997, because the original liability arose from your business activity. This deductibility is one of the main tax benefits of debt financing, and it is the key difference from leaving the debt sitting with the ATO.

Is ATO interest still tax deductible in Australia?

No. From 1 July 2025, the Australian Government removed the deductibility of the General Interest Charge and Shortfall Interest Charge on unpaid tax debts. Until then, businesses could claim it, which lowered the real cost by around 25% to 30%. Today every dollar of GIC is a real, after-tax cost, which is what makes tax debt relief through financing worth a serious look.

Can a business loan get me off an ATO payment plan?

Yes. Using a business loan to pay your ATO balance in full lets you exit the ATO payment plan and stops the General Interest Charge from compounding. The debt shifts to a commercial lender, where the interest is deductible. For many businesses, an ATO debt loan ends up costing less in real terms than staying on the plan.

What is the ATO’s General Interest Charge rate right now?

The GIC rate is set each quarter at the 90-day bank bill rate plus 7 percentage points, and it compounds daily. For the April to June 2026 quarter it is 10.96% per annum. Because it changes every quarter, check the current rate on the ATO website before relying on it.

Will the ATO report my tax debt to credit bureaus?

It can. The ATO may report a business tax debt to credit reporting bureaus where the debt is at least $100,000, more than 90 days overdue, and the business is not effectively engaging with the ATO. Paying it out, including through financing, removes that trigger.

This article provides general information only and does not constitute personal financial advice. It does not consider your individual objectives, financial situation or needs. You should seek professional advice before making any financial decisions.