By Kim Woodward, Founder & Director, Woodward Finance
Borrowing to pay tax debt is a question more Australian business owners are asking as ATO debt levels continue to rise. Rising costs, higher interest rates and ongoing cash flow pressure have left many business owners falling behind on BAS, PAYG and other tax obligations.
At the same time, the ATO is taking a firmer approach to debt recovery. Businesses with outstanding tax debt are increasingly facing payment demands, director penalty notices and stronger enforcement action where debts remain unresolved.
As a commercial finance broker, I am regularly asked the same question:
“Is it ever a good idea to borrow to pay tax debt?”
The answer depends on your circumstances. In some situations, replacing expensive ATO debt with a structured business finance solution can help improve cash flow and provide greater certainty. In others, borrowing may simply delay a deeper financial problem.
This guide explains what is driving the rise in ATO debt, how the ATO is responding, and the funding options available to Australian businesses looking to regain control of their cash flow and tax obligations.
Quick Summary if You Want the Essentials:
ATO debt has risen significantly across Australia, with small businesses accounting for a large share of outstanding tax obligations.
Unpaid tax debt can become increasingly expensive due to the ATO’s General Interest Charge, which compounds daily.
Borrowing to pay ATO debt may be worth considering where it helps replace costly tax debt with a structured finance solution and a manageable repayment plan.
The right solution will depend on your business’s cash flow, profitability and overall financial position.
The ATO may offer payment plans and support for businesses that engage early, however enforcement activity has increased for businesses that ignore outstanding obligations.
If ATO debt is placing pressure on your business, it is important to seek advice early and understand all available funding and repayment options.
Need Funding to Clear ATO Tax Debt?
Access funding solutions through our panel of 60+ lenders and explore options to improve business cash flow.
Why More Australian Businesses Are Struggling With ATO Debt
In recent years, ATO debt has become a growing concern for Australian businesses. Total collectable tax debt has risen significantly since the COVID period, with small and medium-sized businesses accounting for a large proportion of outstanding obligations.
At the same time, rising costs, higher interest rates and tighter lending conditions have placed additional pressure on business cash flow. Many business owners are being paid later by customers, while still needing to meet wages, supplier invoices, rent and tax obligations.
The challenge is that tax debt is no longer a cheap source of short-term funding. The General Interest Charge applied by the ATO is currently above eleven percent and compounds daily. From 1 July 2025, that interest is also no longer tax deductible, increasing the real cost of carrying outstanding tax debt.
Put simply, leaving tax debt unpaid has become far more expensive than many business owners realise.
How the ATO Treats Tax Debt
The ATO continues to encourage businesses to engage early when they are experiencing difficulty meeting their tax obligations. In many cases, payment plans may be available for eligible businesses.
However, where businesses fail to engage, miss agreed repayments or ignore outstanding obligations, the ATO can escalate its recovery actions. These may include:
- Applying compounding interest through the General Interest Charge.
- Issuing Director Penalty Notices in certain circumstances, potentially making company tax debts a personal liability for directors.
- Commencing debt recovery action for significant or long-standing arrears.
This is why ATO debt should be treated as a priority rather than something left at the bottom of the pile.
The earlier a business addresses tax debt, the more options are typically available. Waiting until the ATO has escalated recovery action can make funding and repayment solutions more difficult.
When Does Borrowing to Pay Tax Debt Make Sense?
There are situations where borrowing to pay tax debt can be a disciplined and effective strategy. For example:
- The underlying business is profitable, but a temporary event such as a delayed contract, unexpected cost increase or bad debt has created a short-term cash flow issue.
- The ATO interest rate is significantly higher than the interest rate available through a business loan or line of credit.
- The ATO is seeking faster repayment than the business can comfortably manage, and funding may help avoid further enforcement action.
In these situations, restructuring tax debt into a business loan or revolving facility may reduce the overall cost of the debt and provide breathing room for the business.
The key is ensuring the business remains fundamentally viable and has a realistic plan to meet future repayments.
You can learn more about available Business Finance solutions and funding options for Australian businesses through our Business Finance page.
When Borrowing Can Make Things Worse
Borrowing to pay tax debt can become dangerous when it simply delays a deeper financial problem. Warning signs include:
- The business is consistently losing money rather than experiencing a temporary cash flow issue.
- There is no clear strategy to improve profitability.
- The new loan carries excessively high interest rates or significant upfront fees.
- Personal guarantees or security are being offered without fully understanding the potential risks.
In these situations, adding more debt may increase pressure on cash flow and place personal assets at risk.
For some businesses, working with an accountant, restructuring adviser or insolvency specialist may be a more appropriate first step than taking on additional debt.
Common Ways Businesses Borrow to Pay Tax Debt
Every business is different, however common funding options include:
- Unsecured business loans used to clear ATO debt and convert it into structured repayments.
- Secured business loans supported by property, equipment or other assets.
- Invoice finance or debtor finance facilities for businesses with strong receivables.
- Equipment refinance, where existing machinery, vehicles or equipment are refinanced to release equity and improve cash flow.
The most suitable solution will depend on the size of the tax debt, the strength of the business, available assets and the urgency of the situation.
Our Business Finance and What We Finance pages provide further information on funding solutions that may assist businesses managing tax debt and cash flow pressure.
What Lenders Look At When You Have Tax Debt
Not all lenders are comfortable with ATO arrears, however many will consider an application where:
- The tax debt is disclosed upfront and supported by current ATO statements.
- The business is trading profitably or demonstrating positive cash flow.
- Recent bank statements show strong turnover and responsible financial management.
- There is a clear strategy to improve the business’s financial position.
- BAS statements, financial information and trading history support the funding request.
Transparency is important. Lenders generally respond more positively when there is a clear explanation of the circumstances and a practical plan moving forward.
Case Study: Turning a Tax Problem into a Structured Plan
A Sydney-based construction business approached us with a significant BAS and PAYG debt. The ATO had moved beyond reminders and was beginning to take a firmer approach to recovery.
While the business remained profitable, it had been impacted by delayed customer payments and rising material costs, creating pressure on cash flow.
Working closely with the client’s accountant, we confirmed the business remained fundamentally viable. We then arranged a business loan that cleared the ATO debt and refinanced several higher-cost facilities.
The new repayments were structured around the client’s cash flow and project pipeline, creating a more manageable repayment arrangement.
The key factors were honest disclosure, realistic forecasting and selecting a funding solution that matched the business’s circumstances.
Today, the business is focused on growth and operations rather than responding to ATO recovery notices.
How Woodward Finance Can Help
If ATO debt is placing pressure on your business, understanding your options early can make a significant difference.
At Woodward Finance, we work with a panel of more than 60 bank and non-bank lenders and regularly assist Australian businesses seeking funding to improve cash flow, consolidate debt or manage tax obligations.
Every enquiry is personally managed by Kim Woodward, providing clients with experienced guidance and direct communication throughout the process.
Need Help Managing ATO Debt?
If outstanding tax obligations are affecting your cash flow, now is the time to understand your options.
Whether you need a second opinion, want to explore funding solutions or simply want to understand what may be available, our team is happy to have a confidential discussion about your situation.
Complete the enquiry form or call 0439 313 541 to discuss your options.
Frequently Asked Questions
Yes, some lenders will consider providing business finance where the funds are used to repay ATO debt. Approval will typically depend on factors such as the business’s trading performance, cash flow, financial position and ability to service the new loan.
In some situations, borrowing to pay tax debt can be a sensible strategy, particularly if it replaces high-cost ATO interest with a structured repayment arrangement. However, every business is different, and borrowing should only be considered as part of a broader financial plan.
If the ATO debt is paid in full, the outstanding obligation is generally resolved. However, businesses should ensure they can comfortably manage the new finance repayments and remain up to date with future tax obligations.
Ignoring ATO debt can lead to escalating consequences, including ongoing interest charges, payment demands, Director Penalty Notices, debt recovery action and legal proceedings. Contacting the ATO early often provides access to more options.
Potentially. Some lenders will consider applications from businesses that have an existing ATO payment arrangement in place. The outcome will depend on factors such as turnover, profitability, cash flow and the overall financial position of the business.
The ATO applies a General Interest Charge (GIC) to outstanding tax debts. The rate is reviewed regularly and compounds daily, which can significantly increase the cost of leaving tax debt unpaid over time.
In some circumstances, businesses can refinance vehicles, machinery, trucks or equipment that have available equity and use the released funds to improve cash flow or address outstanding tax obligations.
Many lenders will consider businesses with tax debt, particularly where the business is trading profitably and there is a clear strategy to improve its financial position. Different lenders have different policies regarding ATO arrears.
Requirements vary between lenders but may include bank statements, ATO statements, BAS information, financial statements, identification documents and details regarding how the funds will be used.
Yes. It is generally a good idea to speak with your accountant or tax adviser before making decisions about tax debt. They can help assess your position and work alongside a finance broker to determine whether borrowing is an appropriate option.
