Picture two small business owners. Same industry, similar turnover, and each owes the Australian Taxation Office about $70,000, which is close to the median tax debt reported by the Small Business Debt Helpline in 2025. One sets up an ATO payment plan. The other borrows to clear the debt in a single payment.
Two years later, their total costs can look quite different. So can their risk. The size of the debt isn’t what separates them. What separates them is how the debt was handled, how quickly, and on what terms.
For a growing number of Australian businesses, this isn’t a hypothetical. Small businesses account for $35.9 billion of the ATO’s $54.2 billion in collectable debt, according to a 2026 report by the Australian National Audit Office. The ATO is now under pressure to collect more of it, and to collect it faster.
Why tax debt got more expensive
Unpaid tax attracts the general interest charge (GIC). It is set quarterly and compounds daily. For July to September 2026, the rate is 11.43% a year, and the ATO publishes the next quarter’s rate in early October.
Two things make GIC more costly than it first looks. First, it keeps running even when a business is on a payment plan. Second, GIC and shortfall interest charges incurred from 1 July 2025 are no longer tax-deductible. Before that change, a business could at least claim the interest as an expense. Now it can’t, so the real cost of carrying tax debt has gone up.
Enforcement has also stepped up. The ATO issued more than 84,000 Director Penalty Notices in 2024–25, a 136% jump on the year before. These notices can make company directors personally liable for unpaid PAYG withholding, GST and superannuation guarantee amounts. Garnishee notices, which let the ATO take money directly from a business’s bank account, are back in regular use. And calls to the Small Business Debt Helpline rose 21% in 2025, with most involving money owed to the tax office.
How an ATO payment plan works
A payment plan splits a tax debt into weekly, fortnightly or monthly instalments. For many businesses, it’s the first option the ATO will suggest, and smaller debts can often be set up online without speaking to anyone.
The advantages are real. There’s no credit application, no lender fees and no new creditor. The business also keeps an open line with the ATO, which matters if things get harder later.
The drawbacks are just as real. GIC continues to accrue on the remaining balance for the life of the plan. Missing an instalment can cause the plan to be cancelled, which puts the full debt back on the table. For larger debts, or for businesses with a history of falling behind, the ATO may ask for a sizeable upfront payment or other conditions before agreeing to a plan.
How a tax debt loan works
The other route is to borrow from a bank or non-bank lender and pay the ATO in full. Once the debt is cleared, GIC stops accruing and the threat of ATO enforcement action falls away.
These loans come in several forms. Unsecured loans are assessed mainly on trading history and cash flow. Secured loans, backed by property or business assets, usually allow larger amounts and lower rates. Some businesses use a line of credit or an overdraft instead, especially when tax bills recur every quarter. For businesses weighing this route, lenders and brokers that specialise in tax debt loans outline how eligibility, security and repayment terms typically work.
Borrowing has its own trade-offs. Loans often carry establishment and other fees. Rates vary widely, and businesses with weaker credit or no security can be offered rates well above the GIC. A loan also turns a debt to the government into a commercial debt, with its own contract, repayment schedule and consequences for default. If property is used as security, that property is at risk.
Running the numbers
Take a $70,000 debt repaid in equal monthly instalments over 24 months.
On a payment plan at the current GIC rate of 11.43%, compounding daily, total interest comes to roughly $8,700.
A loan over the same term produces a very different range of outcomes depending on the rate:
- At 9% a year, total interest is about $6,750.
- At 12% a year, it’s about $9,100.
- At 18% a year, it rises to about $13,900.
These figures exclude fees, which can easily add hundreds or thousands of dollars to the cost of a loan. They also assume the GIC rate stays where it is, when in practice it changes every quarter.
The takeaway is that neither option is automatically cheaper. A loan only beats the GIC when the business can secure a rate meaningfully below it, after fees. For a business with strong trading history or good security, that may be achievable. For one without, a payment plan may cost less, provided it can keep up with the instalments.
The factors that tip the decision
Cost is only part of the picture. Accountants and restructuring advisers tend to look at a few other questions.
Is this a one-off or a pattern? A single large bill after an unusually strong year is a different problem from a business that has fallen behind on BAS for several quarters. Borrowing to clear a recurring shortfall can simply move the problem somewhere else.
Has enforcement already started? If a Director Penalty Notice or garnishee notice has been issued, time matters more than a small difference in interest. Directors have a limited window to act on a DPN before personal liability locks in.
What does the credit file look like? Tax debts over $100,000 that are more than 90 days overdue can be reported to credit bureaus if the business isn’t engaging with the ATO. That can limit borrowing options later.
Is the business still viable? This is the hardest question. If the business can’t cover its ongoing costs, neither a payment plan nor a loan fixes the underlying problem. In that situation, a registered restructuring or insolvency practitioner is usually the better first call.
Acting early matters most
There’s no single right answer for every business. What the numbers do show is that waiting is the most expensive option. GIC compounds daily, enforcement tools get tougher over time, and the range of choices narrows once the ATO moves to formal action.
Business owners who are behind can contact the ATO directly or speak with a registered tax agent or accountant before deciding which way to go.
This article provides general information only and does not take into account your individual circumstances. It is not financial, tax or legal advice. Figures are illustrative and based on rates current at the time of writing.