ATO payment plan or business loan: how to choose when tax is overdue

An overdue tax debt has a way of dominating a director’s thinking. There is the amount, the notices, the worry about what the ATO will do next and the knowledge that the business needs to keep trading. Two practical routes tend to come up: arrange a payment plan with the ATO, or borrow to clear the debt. Neither is always right. This guide sets out how to compare them.

Step one: lodge, whatever you decide

Before anything else, make sure your lodgements are up to date. The ATO is generally far more willing to talk to a company that has lodged, even if it cannot pay in full, than to one that has not. Lodging also keeps both options open, since lenders and the ATO will both ask. See the ATO’s pages on business activity statements.

Option one: an ATO payment plan

The ATO offers payment plans in many circumstances. The company agrees to pay the debt in instalments over an agreed period, while keeping current obligations up to date.

Where it works well

• The debt is manageable relative to monthly cash flow.
• The company is up to date with lodgements.
• You can afford the instalments plus ongoing tax.

Where it is harder

• The debt is large or growing.
• Other debts need paying at the same time.
• Cash flow is too uncertain to commit to a schedule.
• Previous plans have been defaulted on.

Interest generally continues to accrue on the unpaid balance while on a plan, so check the current position with the ATO. A plan is often the lowest-cost route on paper, because it involves no new lender, but it keeps the debt on the books for longer.

Option two: a secured business loan

A secured loan clears the debt in one payment. Company Cash lends $20,000 to $50,000 secured on property or an unencumbered company vehicle, with no cash flow evidence, and funding can happen in as little as 24 hours once approved. The ATO is paid, and a single weekly repayment to the lender follows, after up to three months of prepaid interest.

Where it works well

• You want the debt gone, and the notices to stop.
• You have several debts, and one loan can clear them all.
• A plan is not available, or the terms would not fit.
• Cash flow is unpredictable, and a plan might be defaulted.

Where it is harder

• You have no suitable security.
• The total cost of the loan would exceed the cost of a plan, and you can manage a plan.
• The underlying business is not viable, so the loan only delays the issue.

Comparing them honestly

Question	Payment plan	Secured loan
Speed	Needs agreement with the ATO	As little as 24 hours once approved
Debt cleared	Gradually	Immediately
Cost	Interest accrues on the balance	New loan costs and fees
Security at risk	No	Yes, property or a vehicle
Flexibility	Depends on the ATO	Depends on the contract

Questions to ask yourself

1. Can I afford the plan’s instalments plus current tax, every period?
2. Do I have other debts I also need to clear?
3. How quickly do I need this over?
4. Am I comfortable putting property or a vehicle on the line?
5. How will the loan be repaid: from cash flow, or by refinancing?

If you cannot answer the last question, do not borrow yet. Talk to an accountant.

Warning: director penalties and solvency

Tax debts can bring personal liability for directors in some circumstances, and persistent inability to pay debts raises solvency issues. We do not give tax or legal advice. If you have received a director penalty notice or a statutory demand, speak to an accountant or lawyer immediately.

What each option looks like in practice

Consider a company with a $32,000 tax debt and healthy but lumpy cash flow. On a payment plan, the director agrees a monthly amount with the ATO, interest continues to accrue, and the debt is cleared over many months. If a month goes badly, the plan can be at risk, and further tax obligations still fall due on top.

On the loan route, the same company borrows $34,000 secured on the director’s property, pays the ATO in full the same week and then has a single weekly repayment after the prepaid interest period. The ATO file is clean, but the company now owes a lender and its property is security. Neither route is free, and neither is right for everyone. The choice depends on cost, certainty and how much risk you are comfortable with. The figures are illustrative only.

Questions to ask the ATO

When you call, ask: what are the options for this amount, what is the current interest position, what does the plan require of me each period, and what happens if I miss an instalment? Write down the answers. If you are unsure about anything, ask for it in writing or have your accountant call with you.

Questions to ask a lender

Ask what the total repayment will be, whether the lender will pay the ATO directly, how the loan is secured, what happens if a repayment is missed and what the terms are if you repay early. A good lender answers plainly. A lender who dodges is telling you something.

When to get advice first

Get advice before borrowing if the debt is large, if you have received a director penalty notice, if you are behind on several lodgements, or if you suspect the company cannot pay its debts as they fall due. A registered tax agent or accountant can tell you what the ATO is likely to accept, and a lawyer or registered liquidator can advise on solvency. Taking advice early usually widens your options, not narrows them.

A sensible order of play

1. Lodge everything that is outstanding.
2. Call the ATO and ask what a plan would look like.
3. Compare that with a loan, using total cost and speed.
4. If you borrow, pay the ATO directly where possible and keep the receipt.
5. Put tax aside every week afterwards. Our guide on the tax time cash crunch explains how.

Whatever you choose, treat it as a reset, not a rescue. The aim is to get back to paying tax as it falls due, with a buffer built from each week’s takings.

Where Company Cash fits

If you decide a loan is right, the application form is short: choose “up to $50,000”, answer a few questions and a person will call you. See also loans to pay overdue tax and business debts. Lending is subject to assessment, and nothing here is tax, legal or financial advice.