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Published Monday, 20th July 2026
An unpaid debt with the Australian Taxation Office (ATO), or a set of overdue lodgements, now sits heavier on a business than it used to. The interest on ATO debts has become more costly to hold, late lodgement brings consequences of its own, and for company directors the reach can extend to personal liability. The sections below cover the three areas worth reviewing this tax time: the real cost of an ATO debt, the effect of late lodgement, and the specific risk directors carry.
What an ATO debt now costs
Few business owners appreciate how expensive an ATO debt has become to hold. For the quarter beginning 1 July 2026, the general interest charge (GIC) rate is 11.43 per cent per annum, it compounds daily, and it can no longer be claimed as a deduction. Together, those three features push the cost of leaving a debt in place well above where it sat in earlier years.
The loss of the deduction has a knock-on effect. Non-deductible interest has to be funded from after-tax dollars, which means the income needed to cover it must first be earned and taxed. The real cost therefore runs higher than the headline rate implies, and higher again for a business or individual on a higher marginal tax rate.
Payment plans do not change this. A frequent misunderstanding is that an arrangement with the ATO pauses or reduces the interest. It does not. GIC keeps accruing on the outstanding balance for the life of the plan, which now makes a drawn-out ATO arrangement a costlier way to manage a debt than it once was.
The rule applies to ATO interest specifically. Borrowing from a bank or another lender to clear a tax debt falls under the ordinary rules, and that interest may still be deductible depending on the circumstances. Whether that approach suits a particular business is a question for its own situation.
Why ATO interest is no longer deductible
The reason the deduction has gone traces back to a change that took effect at the start of the previous financial year. Up to 30 June 2025, both the general interest charge and the shortfall interest charge (SIC) were deductible in a tax return. 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, whatever income year the underlying debt relates to.
The two charges arise in different situations. GIC applies where a tax amount stays unpaid past its due date, while SIC applies where an amended assessment shows too little tax was originally paid. Deductibility turns on when the charge is incurred rather than when it is paid, so charges incurred before 1 July 2025 remain deductible in the return for that income year. The change does not reach back to interest already incurred.
Late lodgement and the failure to lodge penalty
Interest is not the only cost of falling behind. The ATO can also apply a failure to lodge (FTL) penalty where a return, business activity statement, or similar document is lodged late. A small entity is charged one penalty unit for each 28-day period, or part of a period, the document stays outstanding, capped at five penalty units. If the return also produces an amount payable, GIC runs on that unpaid tax from its original due date.
Exposure grows with the size of the business, since the penalty is doubled for medium entities and multiplied by five for large ones. In practice, the ATO tends not to penalise an isolated late lodgement and will usually warn before issuing a penalty notice, though a pattern of non-compliance can see a penalty applied without that warning. Staying current on lodgements is the surest way to avoid both the penalty and the interest that follows an unpaid liability.
Director penalty notices and lodgement timing
Directors carry a distinct exposure that deserves attention. Unpaid Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), or Superannuation Guarantee Charge (SGC) can prompt the ATO to issue a director penalty notice (DPN), making the director personally liable for those amounts. Current and former directors are both caught.
Everything hinges on whether the company reported on time. If PAYG withholding or GST was reported within three months of the due date, a director who receives a notice can still avoid personal liability by paying the debt, appointing an administrator, appointing a small business restructuring practitioner, or beginning to wind up the company, provided this happens within 21 days. These routes keep the situation manageable.
Miss that three-month window, or fail to lodge at all, and the position narrows sharply: the only way to remit the penalty is to pay the company liability in full, and appointing an administrator or winding up the company will not help. SGC obligations carry the same three-month threshold, measured from the SGC due date rather than the business activity statement due date.
The lesson runs deeper than the failure to lodge penalty. A short lapse in reporting can convert a workable debt into one where a director has no option but full payment. Any company sitting on outstanding PAYG, GST, or superannuation obligations is better served by getting advice early.
What you can do
A few practical steps are worth reviewing if you run a business, or are considering one, and you have overdue lodgements or an ATO debt.
Start by confirming whether anything is overdue, so the position is clear before penalties build. If a debt exists, weigh whether financing it away from the ATO would suit you, since lender interest may remain deductible where ATO interest does not; your accountant can advise whether that fits your case.
Where genuine hardship is involved, raise it with your accountant early. Remission of GIC, SIC, or FTL penalties is possible in limited cases, subject to two points. Outstanding documents must be lodged before the ATO will look at a remission request, so lodging comes first rather than after. And each request is judged on its own facts: serious illness, a natural disaster, or events truly beyond the taxpayer’s control may support one, while ordinary business pressure, absence, or missed reminders generally will not. Requests above 2,500 dollars go to a dedicated ATO team and will not be decided on the spot. Nothing is guaranteed, and the ATO keeps full discretion.
The pattern across all of this is the same: acting before more interest accrues tends to leave more options open than waiting. If you are unsure how any of it applies to you, speak with your accountant before taking action.
For general information only
This article is general information only. It does not take account of your circumstances, and the tax treatment of interest and penalties depends on your specific facts. Seek advice from a qualified adviser before acting on anything set out here.