What happens when you owe the ATO money?
The ATO has the right to recover the debt as an unsecured creditor of the taxpayer, whether the taxpayer is a company, a sole trader or an individual. The ATO has certain statutory powers available to it in debt recovery. These powers vary as to who actually owes the money.
If this is an individual or sole trader, the ATO can:
- Take money straight from your bank account (this is also known as a Garnishee Notice). They can send a notice to your bank or someone who owes you money and take what you owe the ATO. This can happen suddenly and cause cash flow problems.
- Keep your tax refund. Whilst the ATO is an unsecured creditor, it does hold some special powers whereby they have the ability to withhold tax refunds in their entirety that would otherwise be available to you the taxpayer and offset them against the tax debt owed.
If the taxpayer is a corporation, the process is a little different. The ATO generally use three tools when chasing payment of an outstanding corporate debt. This includes
- Issuance of a Garnishee Notice – Similar to the above individual example, the garnishee process is the same however we have also seen these garnishees extended to funds processed through EFTPOS machines in some corporate cases.
- Director Penalty Notices (DPNs) – The ATO can issue the director a DPN making the director personally liable for a corporate tax debt. This can expose assets like the family home which otherwise would be protected. An important thing to note with DPN is that they are posted to the directors’ home address on ASIC and therefore maintaining current details with ASIC is vital. For more information on DPN, click here.
- Report a tax debt to credit reporting agencies – The ATO can report your unpaid tax debt to credit reporting agencies. This can damage your credit score, making it harder to borrow money. It can also make suppliers nervous—they may stop giving you credit and only supply goods on a Cash-On-Delivery (COD) basis, or stop trading with you altogether.
All of the recovery actions for debts owed could ultimately lead to the liquidation of a company or the bankruptcy of a personal taxpayer. The ATO generally will not settle or compromise debts. However, in some cases they may be prepared to waive interest and penalties that accrued; however, in the current climate, this is becoming harder. It is important to note that if the debt remains unpaid, the ATO is highly likely to take legal action to recover the amount owed.
That’s why it’s critical to seek the right advice early as these issues can be managed, but timing is everything.
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Can you pay off an ATO debt? How long does the ATO give you to pay a tax debt?
The ATO will consider payment plans for past due debts and it may be possible to pay a tax debt off over a period of time. How long the ATO will give you to pay a tax debt will depend on the taxpayer’s compliance history and the amounts involved. Each situation is assessed individually based on the circumstances. It’s also important to understand that since 1 July 2025, interest charged on an ATO payment plan is not tax deductible, which can significantly increase the overall cost of repayment. The ATO does not want to act as a bank and therefore encourages taxpayers to borrow the money elsewhere.
We’ve seen cases where the ATO has required real property security, such as a second mortgage over a property, for longer-term payment arrangements. However, it’s important to understand that offering up an asset which would otherwise be protected may convert an unsecured debt into a secured one, potentially putting that asset at risk.
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Are there alternatives to ATO payment plans?
The only real alternatives for ATO payment plans are to raise additional finance to pay the debt out in full or consider an insolvency based strategy. Borrowing however could be turning an unsecured debt into a secured debt so should be thought through very carefully.
Insolvency, such as Small Business Restructure (SBR), liquidation or personal bankruptcy, will deal with any outstanding tax debt at that time, and are very popular alternatives for dealing with insurmountable debts. These options are increasingly being used by thousands of business owners facing unmanageable tax debts. In many cases, it’s possible to legally and commercially restructure a business and resolve the tax debt by settling it for just cents in the dollar, bringing much-needed finality to the outstanding company tax debt and a clear path forward for the directors.
That’s why it’s so important to explore all your options early. Whether it’s refinancing or a formal restructure, the right strategy can reduce the debt, protect your assets, and help you move forward with confidence. At de Jonge Read, we can help you assess the best path forward and guide you every step of the way.
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Can you go to jail for not paying tax in Australia?
No – you cannot go to jail if you are unable to pay your taxes in Australia. If the issue is simply that you cannot afford to pay, you will not be imprisoned. However, tax fraud, also known as tax evasion, is a serious crime with the maximum penalty including a term of imprisonment. This is fraud though, which involves the illegal abuse of the tax system, rather than a simple inability to pay.