ATO payment plan or business loan: how to decide

When a business owes the ATO more than it can pay at once, two paths usually appear: an ATO payment plan or a business loan to clear the debt. Both can work. The right choice depends on the numbers, the business’s cash flow and, for companies, how director penalties affect the timing. This guide walks through the comparison.

Route A: pay the ATO by instalments

The ATO offers payment plans so businesses can pay a debt in instalments. Interest, the general interest charge, continues to accrue on the outstanding balance. While on a plan, you are expected to keep up with new lodgements and payments. Advantages: no lender assessment, no security, and it deals directly with the creditor. Disadvantages: interest accrues, the plan can be cancelled if you default, and the debt may still affect how other lenders view you.

Route B: borrow and clear the ATO balance

Borrowing settles the tax debt today and leaves you owing a lender instead. Owners tend to go this way for reasons like these:

• clearing the debt stops ATO interest and recovery action;
• one lender rather than the ATO, with defined repayments;
• clearing the ATO balance can help with other finance or a bank refinance;
• for companies, paying in full resolves director penalty exposure on those amounts.

Disadvantages: a lender’s cost, fees, possibly security, and a credit assessment. Our ATO tax debt loans review covers the product in detail.

The deductibility change

Under a recent change, GIC and SIC charged by the ATO on or after 1 July 2025 cannot be deducted. Interest on business finance used for business purposes may be treated differently. This can shift the comparison, so ask your accountant to confirm how it applies to you.

Comparing the two properly

Question	Payment plan	Business loan
Total cost over the period	Interest on the balance	Interest or margin plus fees
Tax treatment of the cost	GIC from 1 July 2025 not deductible	May be deductible; confirm
Repayment size and frequency	Set with the ATO	Set by the lender
Security	None	Possibly property or assets
Director penalty exposure	Continues until paid	Resolved on payout of those amounts
Effect on other finance	Balance remains	Balance cleared

Work out both totals over the same period. The true cost calculator handles the loan; your accountant can estimate the plan’s interest.

Director penalties and timing

Company directors face a further risk: the [director penalty regime] can make them personally answerable for unpaid wage withholding, net GST and super guarantee charge(https://www.ato.gov.au/individuals-and-families/paying-the-ato/if-you-don-t-pay/firmer-action-we-may-take/director-penalty-regime). Whether a penalty can be remitted by options other than paying in full depends on when the amounts were reported. Our guide to director penalty notices explains the rules. If a notice has been issued, time is short and advice is essential.

When a plan usually makes sense

• The debt is modest and the business can comfortably meet instalments.
• The business does not qualify for reasonable finance.
• There is no pressing director penalty or other reason to clear the debt immediately.

When a loan usually makes sense

• The loan’s total cost is competitive with the plan once tax treatment is considered.
• Director penalty exposure makes clearing the debt urgent.
• An ATO balance is blocking other finance or a refinance.
• Property security is available and the owner is comfortable using it.

Fix the cause

Neither option helps if the next quarter repeats the problem. Move tax money aside the day it comes in, put every BAS date in the cash forecast, and lift prices if the margin cannot absorb the tax. See planning cash for BAS and GST for a working method.

An illustrative example

A made-up plumbing company owes a quarter’s BAS plus PAYG withholding after a large customer paid late. The director compares a payment plan over a year with a loan secured against her home. Including the deductibility change and the director penalty exposure, she chooses the loan for the PAYG and GST portion, clears it immediately and puts a plan in place to separate tax money weekly.

Talking to the ATO first

Even if you are leaning towards a loan, contacting the ATO early is usually wise. Explaining the situation, lodging any outstanding statements and asking what arrangements are available keeps the relationship on track and may buy time while finance is arranged. A lender assessing a tax debt loan will also be more comfortable if the ATO account shows the business engaging rather than going quiet.

Weighing up your options?

To weigh up borrowing against an instalment plan for your tax balance, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a list. Mention roughly how much is owed and whether an arrangement is already running when you enquire. For tax advice, always speak with your accountant.