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Published Monday, 20th July 2026
If your business is carrying a debt with the Australian Taxation Office (ATO), or you have lodgements that are behind, the cost of leaving that in place has risen. Interest on ATO debts is now more expensive than it once was, late lodgement carries its own consequences, and for company directors the exposure can extend to personal liability. This article sets out what to review this tax time, across three areas: the real cost of an ATO debt, the effect of late lodgement, and the specific risk directors face.
What an ATO debt now costs
Carrying a debt with the ATO is more expensive than many business owners realise. The general interest charge (GIC) rate for the quarter beginning 1 July 2026 is 11.43% per annum, it compounds daily, and it can no longer be claimed as a deduction. That combination means the cost of leaving a debt in place has risen compared with prior years.
Because the interest is not deductible, it has to be paid out of after-tax dollars. In practice, this means the real cost is higher than the headline rate suggests, because you first have to earn, and pay tax on, the income needed to cover it. For a business or individual on a higher marginal tax rate, the effective cost of carrying the debt is higher again.
A common misunderstanding is that entering into a payment plan with the ATO pauses or reduces the interest. It does not. The general interest charge continues to accrue on the outstanding balance for the life of the payment plan. For many taxpayers, this makes an extended ATO payment arrangement a more expensive way to manage a debt than it once was.
Interest charged by the ATO is the specific issue here. If you instead borrow from a bank or other lender to pay off a tax debt, the interest on that loan is treated under the normal rules and may still be deductible, depending on your circumstances. Whether that approach suits your business depends on your situation.
Why ATO interest is no longer deductible
The reason the interest cannot be claimed comes down to a change that has been in place since the start of the previous financial year. Until 30 June 2025, the general interest charge and the shortfall interest charge (SIC) applied by the ATO could be claimed as a deduction. The Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025 removed that deduction, so any GIC or SIC incurred on or after 1 July 2025 is not deductible, regardless of the income year the underlying debt relates to.
The general interest charge applies when a tax amount remains unpaid after its due date. The shortfall interest charge applies when an amended assessment reveals that too little tax was originally paid. It is the date the charge is incurred, not the date it is paid, that determines whether it is deductible. Charges incurred before 1 July 2025 remain deductible in the return for the income year in which they were incurred, so the change does not apply retrospectively to interest already incurred.
Late lodgement and the failure to lodge penalty
Separately from interest, the ATO can apply a failure to lodge (FTL) penalty when a return, business activity statement, or similar document is lodged after its due date. For a small entity, the penalty accrues at one penalty unit for each 28-day period, or part of a period, that the document remains outstanding, up to a maximum of five penalty units. Where a return also results in an amount payable, a general interest charge applies to the unpaid tax from its original due date.
The penalty is multiplied by two for medium entities and by five for large entities, so the exposure scales with the size of the business. The ATO generally does not apply the penalty in isolated cases of late lodgement, and it will issue a warning before applying a penalty notice. However, where a pattern of non-compliance exists, the ATO may apply the penalty without further warning. Keeping lodgements current is the most reliable way to avoid both the failure to lodge penalty and the interest that follows an unpaid liability.
Director penalty notices and lodgement timing
Company directors face a specific and separate exposure that is worth understanding. Where a company has unpaid Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), or Super Guarantee Charge (SGC), the ATO can issue a director penalty notice (DPN) that makes the director personally liable for those amounts. This applies to current and former directors alike.
The key factor that determines what options a director has is whether the company lodged its obligations on time. If PAYG withholding or GST was reported within three months of the due date, the director can avoid personal liability by paying the debt, appointing an administrator, appointing a small business restructuring practitioner, or beginning to wind up the company, all within 21 days of receiving the notice. These are meaningful options that preserve the ability to manage the situation.
If the obligation was reported more than three months after the due date, or was never lodged at all, the only way to remit the director penalty is to pay the company liability in full. Appointing an administrator or winding up the company will not assist in that situation. The same three-month threshold applies to SGC obligations, measured from the SGC due date rather than the BAS due date.
This is why lodgement timing matters beyond just the failure to lodge penalty. A company that falls behind on reporting, even temporarily, can convert a manageable debt into a situation where the director has no avenue other than full payment. For directors of companies with any outstanding PAYG, GST, or super obligations, speaking with an accountant sooner rather than later is advisable.
What you can do
If you own or operate a business, or are considering owning or leasing one, and you have outstanding lodgements or an ATO debt, there are practical steps worth reviewing:
Confirm whether any lodgements are overdue, so the position is clear before penalties accumulate. Where you are carrying an ATO debt, consider whether financing it outside the ATO would suit your circumstances, given that interest paid to a lender may still be deductible while ATO interest is not. Factor1 Finance can talk through the borrowing options with you, and your accountant can advise whether this makes sense in your case. You can book a time with our finance team here: Finance Bookings
Where a genuine difficulty exists, speak with your accountant early. Remission of GIC, SIC, or failure to lodge penalties may be available in limited circumstances, but there are two conditions worth understanding before making a request. First, outstanding documents must be lodged before the ATO will consider a remission application. Lodging the overdue obligation is the prerequisite, not a step that can follow. Second, remission requests are assessed on the individual facts of each case. Circumstances that may support a request include serious illness, a natural disaster, or events genuinely outside the taxpayer’s control. Ordinary business pressure, being away, or not receiving reminders are unlikely to be accepted. Requests involving amounts above $2,500 are referred to a dedicated ATO team and will not receive an immediate decision. There is no guaranteed outcome, and the ATO retains full discretion.
Acting before further interest accrues generally leaves more options open than waiting.
If your business would like practical support with overdue lodgements or an ATO debt, the Factor1 team would be happy to help. Speak with your accountant before making any decisions.
For general information only. Individual circumstances differ, and the tax treatment of interest and penalties depends on your specific facts. Speak with a qualified adviser before acting on anything in this article.