Last reviewed: August 2026. This is general information, not tax or financial advice; decisions about tax debt should be made with your accountant or a registered tax agent.
An ATO payment plan is generally the first option worth investigating for manageable tax debt, because a payment plan avoids replacing the debt with a new commercial loan. A business loan may be considered where an ATO arrangement is unavailable, where the required repayments do not fit the business's cash flow, or where the tax debt is blocking another clearly defined business outcome, such as an equipment purchase or a bank refinance. The right choice in the ATO payment plan vs business loan decision comes down to total cost, repayment fit and what the business needs next.
The short version
- An ATO payment plan lets a business pay tax debt in instalments directly to the ATO; it is generally the first option to investigate.
- Unpaid tax generally accrues the General Interest Charge (GIC), and from 1 July 2025 GIC is generally no longer tax deductible, which changed the cost comparison.
- A business loan can clear the ATO in full, but the debt does not disappear: it moves to a commercial lender, usually with fees and its own interest cost.
- The ATO can disclose some larger, unmanaged business tax debts to credit reporting bureaus; an active payment plan generally prevents that.
- Neither option fixes a business that cannot cover its ongoing tax as it falls due; that is a pricing, margin or cash-flow problem.
Should you deal with the ATO first or borrow first?
For most businesses with a manageable tax debt, talking to the ATO (directly or through a registered tax agent) is generally the sensible first step. A payment plan keeps the debt where it started, involves no establishment fees or brokerage, and requires no new credit application. A business loan becomes worth comparing when a suitable ATO arrangement cannot be agreed, when the instalments the ATO expects would strain cash flow, or when clearing the tax debt unlocks something specific, such as satisfying a bank condition or freeing the business to take on new work.
How does an ATO payment plan work?
An ATO payment plan is an agreement to pay a tax debt in instalments over time, set up through ATO online services, by phone, or by a registered tax agent on the business's behalf. The ATO generally expects the plan to be realistic, an upfront amount in some cases, and, importantly, all new tax obligations (activity statements, superannuation and new liabilities) to be lodged and paid on time while the plan runs. Eligibility, plan length and any upfront component depend on the amount owed and the business's history, so check the ATO's current guidance at ato.gov.au rather than relying on secondhand summaries. Interest generally continues to accrue on the outstanding balance while the plan runs.
How does tax-debt business funding work?
Tax-debt funding is a business loan (commonly from a non-bank lender) used to pay out the ATO in full, after which the business repays the lender in instalments. Some lenders decline applications where the purpose is tax debt; others lend for exactly this purpose and treat an ATO payout as a routine use of funds. The practical differences from a payment plan: the ATO is fully paid (which can matter for bank conditions, tenders or supplier confidence), the business takes on establishment fees and commercial interest, and the repayment schedule is fixed by contract rather than negotiated with the ATO. Our guide to working capital loans where ATO debt is involved covers the lender landscape in more detail.
Which generally costs more?
There is no universal answer; the comparison moved after mid-2025 and depends on the rates and fees actually offered.
The cost of staying with the ATO is primarily the General Interest Charge (GIC), which accrues daily on unpaid tax. The GIC rate is set quarterly and published by the ATO; check the current rate at ato.gov.au rather than relying on any figure in an article, because it changes. The significant recent change: from 1 July 2025, GIC and the shortfall interest charge (SIC) are generally no longer tax deductible (last verified August 2026; confirm the current treatment with your accountant). Before that date, deductibility softened the after-tax cost of ATO interest; now the ATO's headline rate is generally closer to its true after-tax cost, which has made commercial loans comparatively more attractive for some businesses than they once were.
The cost of a business loan is its interest or factor cost plus establishment and account fees. Interest on money borrowed for business purposes, including to pay tax debts of a business, is generally deductible, but confirm your situation with your accountant before assuming it. Compare the two the same way you would compare any facilities: total dollars out over the life of the arrangement, as covered in how to compare business loans and the true cost of a business loan.
A loan does not make tax debt cheaper by default, and a payment plan does not make it painless. Whichever path you take, the same dollars still have to come out of the business's cash flow. Run both sets of numbers with your accountant before signing anything.
How does each option affect cash flow?
An ATO payment plan's instalments are negotiated and can sometimes be renegotiated if circumstances change, but the ATO also expects every new obligation to be paid on time alongside the plan, which is often the hard part. A business loan usually has fixed weekly or monthly repayments over a defined term; there is less flexibility, but also certainty, and the term can sometimes be set longer than the ATO would agree to, lowering each instalment (while generally increasing total interest). Map both against your worst trading weeks, not your average ones.
Can the ATO report tax debt to credit bureaus?
Yes, in defined circumstances. The ATO can disclose business tax debts to credit reporting bureaus where, broadly, the debt is $100,000 or more, has been overdue for more than 90 days, and the business is not effectively engaging with the ATO to manage it (last verified August 2026; check the ATO's disclosure of business tax debts guidance for the current criteria). A business that is engaging, for example through an active payment plan, is generally not reported. Once disclosed, the debt can appear to lenders and trade credit providers, which materially affects borrowing capacity.
How does tax debt affect future borrowing?
Most lenders ask about ATO arrears in the application or see evidence of them in bank statements and financials. Some lenders, particularly banks, treat unmanaged tax debt as a decline reason; others price for it or lend specifically to clear it. An active, well-conducted payment plan generally reads far better than an ignored debt. If the goal is a bank refinance or property-secured facility later, ask the target lender how it treats tax debt before deciding which path to take now. Lenders also assess the usual serviceability and documentation requirements on top of the tax position.
What should you ask your accountant and the lender?
Ask your accountant: what instalment level is realistic alongside ongoing obligations; whether interest on each option is deductible in your circumstances; whether the debt signals a deeper pricing or margin problem; and whether a payment plan or a payout better suits your plans for the next two years. Ask the lender: the total repayable and all fees; whether the loan purpose (tax debt) is acceptable; what security or guarantees are required; and what happens if you repay early.
When does neither option fix the problem?
If the business cannot pay its tax as it falls due in a normal quarter, a plan or a loan only buys time. Recurring tax debt is usually a symptom: prices too low, margins too thin, drawings too high, or debtors paying too slowly. Solving the symptom twice is a warning sign worth acting on, with your accountant, before the debt grows.
What are the next steps?
Get an up-to-date payout figure for the tax debt, ask the ATO (or have your agent ask) what plan is available, and price a loan alternative against it on total cost. Funding Loop arranges and compares business finance from a panel of lenders, including lenders that accept tax-debt purposes; the lender assesses the application and provides the finance, and checking your options does not involve a credit check. Whatever the numbers say, read them alongside your accountant's advice: tax debt decisions are tax decisions first and finance decisions second.
Frequently asked questions
Can I get a business loan with ATO debt?
Generally yes, depending on the lender. Some banks decline applications where there is unmanaged tax debt, while a number of non-bank lenders accept ATO arrears or lend specifically to pay them out. An active payment plan and clean recent lodgements generally improve the options available.
Does an ATO payment plan affect loan approval?
It can, in both directions. Lenders generally view an active, well-conducted plan more favourably than an ignored debt, but the plan's instalments are counted as a commitment when serviceability is assessed, which reduces borrowing capacity. Disclose the plan upfront; lenders generally find it in bank statements anyway.
Is ATO interest tax deductible?
Generally no longer. From 1 July 2025, the General Interest Charge and shortfall interest charge are generally not deductible (last verified August 2026). Interest on a business loan used for business purposes generally remains deductible. Your accountant can confirm how the rules apply to your situation; see the ATO's guidance at ato.gov.au.
Can a loan pay overdue BAS or GST?
Generally yes. Lenders that accept tax-debt purposes will typically fund overdue BAS, GST, PAYG withholding and income tax amounts, usually by paying the ATO directly or funding the business to do so. The loan purpose must be disclosed honestly in the application.
What happens if I default on an ATO plan?
Generally the plan may be cancelled, the full outstanding amount becomes payable and GIC continues to accrue. The ATO may then take stronger recovery action, and a larger unmanaged debt may become disclosable to credit reporting bureaus. If a plan is becoming unaffordable, contact the ATO or your agent before missing an instalment; renegotiation is generally easier than reinstatement.
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