What to Do When You Owe Tax Debt in Australia
ATO debt or tax debt is one of the worst kind of debts to owe. Not just for you or your business, but for the Australian economy too. Did you know that there is an estimated 19 billion dollars of outstanding tax owed to the ATO? Wowsers, that’s a lot!
But what can you do about a huge tax bill? There are options available but your individual circumstances will determine the best course of action to take.
Types of Tax Debt in Australia
Tax debt isn’t always as simple as owing income tax. The ATO can issue debts across several different categories, and understanding which type you have helps determine the best next step.
Common types of tax debt include:
Income Tax Debt
This is the most common form and usually results from unpaid tax after lodgement, incorrect withholding, or years of unlodged returns.
GST Debt
Businesses registered for GST must report and pay their GST liabilities regularly. Falling behind can trigger interest, penalties, and enforcement action.
PAYG Withholding Debt
If you employ staff, you’re required to withhold and remit PAYG to the ATO. Not paying it is a red flag to the ATO and can lead to Director Penalty Notices (DPNs).
Superannuation Guarantee Charge (SGC) Debt
Failing to pay compulsory employee super on time results in SGC obligations — these debts escalate quickly and can attract harsh penalties.
Director Penalty Notice (DPN) Debt
If you’re a company director and your business owes GST, PAYG or SGC, the ATO can make you personally liable by issuing a Director’s Penalty Notice (DPN).
Capital Gains Tax (CGT) Debt
CGT applies when you sell or dispose of an asset — like property, businesses, shares or cryptocurrency — for more than you originally paid. If you haven’t set aside enough money to cover the CGT when your tax return is lodged, you may end up with an unexpected tax debt. CGT debts can be large, and the ATO will pursue them in the same way as any other tax debt, including adding interest (GIC) and issuing recovery action if left unpaid.
Each tax type carries different consequences, timelines and enforcement powers — and some make directors personally responsible. This is why early action is critical.
What Happens If You Can’t Pay Your Tax Debt?
If you can’t pay your tax debt, the ATO encourages early engagement. The earlier you make contact, the more likely it is that a workable arrangement can be put in place. Ignoring tax debt generally results in additional interest, penalties, and the ATO considering firmer recovery options.
1. Interest and penalties continue to apply
The ATO charges the General Interest Charge (GIC) on unpaid tax debts. This interest compounds daily and continues until the debt is paid in full.
2. The ATO will continue contacting you
If the debt remains unpaid, the ATO may issue reminder notices, phone calls, and letters encouraging you to take action or propose a payment plan.
3. Stronger recovery action may be considered
If a debt remains outstanding and no reasonable arrangement has been made, the ATO may consider firmer options.
These can include (as stated on the ATO website):
- issuing a garnishee notice
- offsetting tax refunds against the debt
- referring the matter to an external collection agency
- issuing a Director Penalty Notice (for company tax debts)
- commencing legal recovery proceedings, including bankruptcy or liquidation action
4. Your options reduce if the ATO begins stronger action
Once certain recovery steps are underway (e.g., a garnishee or legal proceedings), the ATO may be less flexible about payment plans or extensions. The ATO explicitly states that they expect engagement before stronger action is taken.
5. Early action generally leads to better outcomes
The ATO’s published guidance repeatedly emphasises that engaging early and lodging all overdue returns is the best way to keep options open and avoid stronger recovery measures.
Can I get a loan to cover my tax debt?
That will depend on a number of factors. Based on our experience and the experience of our clients, obtaining an unsecured loan for tax debt is unlikely. Your ability to refinance a property will ultimately come down to equity and serviceability, in addition to other lending criteria.
If you have little-to-no assets and a large tax debt – lending isn’t likely to be an option.
Can I try to make an arrangement for my tax debt?
Yes, you can. You can do this by contacting the ATO and requesting a payment arrangement. In our experience, 24 months is commonly the longest duration for an ATO payment arrangement. Based on the experience of our clients, the ATO is unable to agree to arrangements that would otherwise be unsustainable or exceed a reasonable time frame ie 2 years. Granted, it may seem a bit unfair, but you’ve got to remember that the ATO isn’t a bank.
The tax office may request a lump sum payment and allow for the balance to paid over instalments. Alternatively, they may agree to instalments without any upfront payment but that’ll be for the ATO to decide.
Also, you’ll more than likely need to demonstrate that you not only have the ability to pay the debt back within a “reasonable” time frame but that you’re also able to meet any current and ongoing tax obligations at the same time.
If your tax debt is large, you’ll need to consider whether paying it off over 24 months (plus interest) is even mathematically possible.
If it’s not, you may have difficulty proving to the ATO that an arrangement is a reasonable option in the first place.
What can the tax office do if I don’t pay my tax debt?
Quite a lot actually.
They may initially choose to refer the debt to an external debt collection agency that’ll pursue you for the outstanding amount on the ATO’s behalf.
Recent changes in legislation now allow for the ATO to report outstanding business tax liabilities to credit reporting bureaus. This may occur if there’s been no attempt to resolve the debt or engage with the ATO on your end.
They may then take stronger action if;
- You’re unwilling to work with the ATO
- You default on any agreed payment arrangements
- You don’t have the ability to pay the debt and you don’t take steps to otherwise resolve the situation
- An audit revealed deliberate tax avoidance on your part and you are continuing to employ the same strategies
- It looks like you’re running a Phoenix company
Stronger action will typically involve:
- A Garnishee notice against wages through your employer or contractors, financial institutions with whom you hold accounts and people who owe you money from the sale of an asset ie purchasers, solicitors and real estate agents
- A Garnishee notice against trade debtors and merchant card facility suppliers if you’re running a business
- If you’re running a company, the ATO may issue a statutory demand. Should your company be unable to pay the outstanding debt in full or come to a suitable arrangement with the ATO, the tax office may use this as evidence that the company is insolvent in an application to wind up the company in the Federal Court
- A liquidator will be appointed to sell company assets if the court orders a wind-up
- You might receive a Directors Penalty Notice (DPN). The result is that directors may incur personal liabilities equal to the unpaid company PAYG and Superannuation guarantee
- You might receive a claim or summons issued by the court. Consequently, a judgment might be made against you
- A judgment will allow the ATO to issue a Bankruptcy Notice. If this happens, you’ll have 21 days to either pay the debt or make an arrangement with the ATO
- Should the 21 days pass without a suitable solution, the ATO may then issue a Creditor’s Petition through the Federal Circuit Court in order to make you bankrupt by sequestration order
Can I go bankrupt to clear my tax debt?
Yes, you can.
As a matter of fact, when you become bankrupt – all of your provable unsecured debt is no longer payable. Unsecured debt includes credit cards, personal loans, shortfalls and even tax debt. That means no more phone calls or threatening letters from creditors after you become bankrupt.
A Trustee in bankruptcy (like us) will be appointed to manage what will be known as “your bankrupt estate”. Bankruptcy generally lasts for 3 years and 1 day, but then you’ll be automatically discharged. If you’re looking for a more comprehensive outline of this option, we’ve got an entire section of our site devoted to covering what is bankruptcy?
How does bankruptcy work?
Whether or not your unsecured creditors receive any money from your bankrupt estate typically comes down to two key components:
- Do you earn enough money to have to make a payment towards your debt, and
- Do you own or have a financial interest in any assets that are not protected in bankruptcy
Making payments from your income in bankruptcy
Compulsory payments are based on your earnings and the number of dependants you support. Salary sacrifice, fringe benefits, allowances and child support payable will also be taken into account.
Assets and bankruptcy
If you own or have an interest in unprotected assets, they’ll “vest” in your bankruptcy trustee. ‘Vest’ is another way of saying ‘come into ownership of’. So when used in a bankruptcy context, it means that your interest in any unprotected asset will belong to your trustee after you become bankrupt.
When an asset vests in your bankruptcy trustee, he or she will need to realise the value of your interest in this asset for the purpose of making some money available to your bankrupt estate.
Protected assets include standard household items, normal/ordinary furniture and personal effects as well as tools used to earn an income and motor vehicles (to a limit). It also includes some life insurance and superannuation policies as well as some compensation, superannuation and life insurance payouts received after the date of bankruptcy.
If you own or have an interest in unprotected assets – don’t panic.
It doesn’t always automatically mean that you have to lose them. There can be options available depending on your circumstances.
MORE ON HOW BANKRUPTCY MIGHT AFFECT YOU
Overseas travel and bankruptcy
You’ll need consent from your trustee in order to leave the country. Luckily, the process is pretty straight forward and approval ordinarily depends on whether you’re meeting your obligation in bankruptcy.
Carrying on business while bankrupt
You won’t be able to be the director of a company while bankrupt. Although it can be possible to trade as a sole trader or a partnership – the partnership must be created after the date of your bankruptcy.
Bankruptcy and credit reports
Your credit report will show the bankruptcy listing for 5 years in total, but after that, it will disappear completely. There will also be a listing on the National Personal Insolvency Index (NPII). The Australian Federal Government manage this computerised database, which stores information on all past and present personal insolvencies in Australia.
MORE ON BORROWING AFTER BANKRUPTCY
Where to from here?
Getting some advice on your situation and the options available is a great place to start.
Call 1300 369 168, start a chat, or make an online enquiry to speak with a specialised insolvency professional now.