What to do if you cannot pay your tax debt

Lodge the return or activity statement on time even if you have no way of paying what it produces. A lodgement is a declaration of what you owe; it is not a promise to pay it that day. The failure-to-lodge penalty and the general interest charge are separate impositions, and stopping lodgement to avoid a bill does not stop the bill — it adds a penalty on top of interest that would have run regardless.

The practical reason matters more than the principled one. A payment plan, a deferral of a due date, a remission of interest, a compromise and a release from tax debt are all things the ATO will consider only once your lodgements are current. The ATO states plainly that before applying for release you must have lodged all outstanding tax returns and activity statements, and that you should keep your contact details up to date. Non-lodgers are not eligible for the mechanisms that exist to help them.

If you genuinely cannot lodge by the due date — illness, family violence, a death, a disaster, a business in crisis — contact the ATO before the date rather than after it. The ATO publishes lodgement support that includes extra time to lodge or pay, and gives a worked example of a taxpayer hospitalised with pneumonia receiving a five-week deferral for a business activity statement. A deferral requested in advance is an administrative decision; a deferral requested after a penalty has issued is a remission argument.

Do not confuse a payment problem with a dispute. If you believe the assessment is wrong, amend the return or object to the decision; those are separate processes with their own time limits. The ATO is explicit that even while you are disputing an assessment you must still pay the outstanding amount by the due date unless you have a deferral or a 50:50 arrangement in place. Objecting is not a stay of execution.

If the bill has already landed, check what it actually is before you plan around it. A notice of assessment can contain income tax, a Medicare levy surcharge, a compulsory study loan repayment, PAYG instalments and interest, and the relief available differs by component. You can see the balance and the due date through ATO online services in myGov; businesses use Online services for business or phone 13 28 66.

For most people the first and best move is a payment plan. The ATO says that if you owe $200,000 or less you may be able to set one up yourself, either online or through the self-help phone line, without ever speaking to a person. Individuals and sole traders go to ATO online services through myGov and follow Tax, then Payments, then Payment plans; businesses use Online services for business under Accounts and payments, then Payment plans.

The system proposes an upfront amount and an instalment amount, and lets you adjust both within limits. The ATO also publishes a payment plan estimator showing the upfront payment, the minimum instalment, how long the debt will take to clear and how much interest will accrue. Run it before you commit, because the interest figure decides whether a long plan is sensible or ruinous.

You can attach a direct debit when you set the plan up, from a bank account or a credit or debit card, and the ATO notes that only the card holder can set up a direct debit plan using a card. Use it: the most common way a plan fails is a missed instalment nobody noticed, and the consequences of default are disproportionate to the size of the miss.

The self-service route closes in two situations worth knowing in advance. If you owe more than the self-service threshold, you have to negotiate the plan with the ATO rather than generate it. And if you have defaulted on or cancelled two or more payment plans in the past 12 months, the ATO directs you to the lodge and pay enquiry line on 13 11 42 instead of the online tool. A third attempt is a conversation, not a form.

A payment plan carries two ongoing conditions. Interest keeps running — the ATO states that tax debts on a payment plan continue to accrue the general interest charge, and that it compounds daily — and you must keep every future obligation current. Miss a later lodgement or let a new debt go unpaid and the plan may default, at which point the ATO says the full overdue balance becomes immediately payable. One late BAS can undo a two-year arrangement.

Where an ordinary plan will not work, ask about the alternatives rather than defaulting into silence. The ATO publishes alternative payment plan arrangements alongside the standard product, and for taxpayers it identifies as experiencing vulnerability it describes tailored support including more time, remission of interest and remission of penalties. Those outcomes are not on a self-service screen; they come from phoning 13 11 42 and explaining the circumstances.

The general interest charge applies when an amount of tax or another liability remains unpaid after the date it should have been paid. The ATO calculates it on a daily compounding basis on the amount overdue, adds it to your account periodically, and reviews the rate quarterly. Because it compounds, the cost of a tax debt is not linear in time — the second year of a plan costs more than the first on the same starting balance.

A separate charge, the shortfall interest charge, applies where a return is amended and your liability increases. It is imposed when the notice of amended assessment is served. The two charges are administered differently and carry different review rights when the ATO refuses to remit them.

The deductibility change is the biggest development in this area in years. Following an announcement on 13 December 2023, the law now denies income tax deductions for ATO interest charges, and applies to assessments for income years starting on or after 1 July 2025. The ATO states that any GIC or SIC incurred on or after 1 July 2025 is not deductible regardless of when the underlying debt arose. Charges incurred before that date remain deductible for the 2024–25 and earlier income years.

There is a matching change on the other side of the ledger. Where a deductible pre-1 July 2025 charge is later remitted, the remitted amount has to be included in your assessable income in the year the remission occurs. Where a non-deductible post-1 July 2025 charge is remitted, it does not need to be included as income. This is worth checking before you celebrate a remission on an old debt, because part of it can come back as income.

Remission is discretionary and you have to ask for it. For GIC the ATO looks at whether the delayed payment was outside your control or attributable to you, at your compliance history over recent years, and at whether the late payment is an anomaly in otherwise timely behaviour. It states that for GIC amounts of $2,500 or less a positive compliance history will strongly influence the decision — which makes a first, modest, well-explained request materially more likely to succeed than most people expect.

Write the request properly. The ATO asks for the specific event or circumstances that caused the delayed payment, an explanation of how that prevented you paying on time, the steps you took to mitigate the effects, and supporting evidence. A hospital discharge summary, a bank statement showing a debtor's failure, a police event number or a letter from an employer does more than a paragraph of general hardship. The underlying policy is set out in PS LA 2011/12 for GIC and PS LA 2006/8 for the shortfall interest charge.

Know your review rights before you frame the argument. On a GIC remission refusal there is no objection and no Administrative Review Tribunal path — the only avenue is judicial review in the Federal Court under the Administrative Decisions (Judicial Review) Act 1977. On a shortfall interest charge refusal, you can object where the remaining SIC exceeds 20 per cent of the shortfall, and request an external review where it is 20 per cent or less. A GIC remission request is effectively your one substantive bite, so put the evidence in the first time.

Some tax debts are not actively pursued. The ATO describes a debt on hold as a tax debt where it has paused taking action to collect, done where it is not cost effective to collect the debt at the time. The wording that matters is what follows: the debt remains due and legally payable. It has not been remitted, waived or written off, and it can be pursued again.

The practical bite of a debt on hold is the offsetting. The ATO applies refunds and credits against it automatically and by law, and it does so across accounts — its own example is a GST credit being used against an income tax debt on hold. People discover this when a refund they had budgeted for simply does not arrive, and there is no discretion in it to appeal to.

The treatment changed recently. From 2025 the ATO began including debts on hold in account balances, showing them as an existing debt on hold included in account balance, where previously they did not appear in the balance at all. It sends a notification letter when it does this. If a balance has suddenly appeared against you that you do not recognise, an old debt on hold surfacing is the first thing to check — through ATO online services or by phoning 1800 305 499.

Offsetting is not confined to tax. The ATO's guidance on not paying explains that it is required by law to use refunds or credits you become entitled to towards the debt, and it publishes separate material on offsetting against family tax benefit debts, including circumstances in which that decision can be reconsidered. If a family payment is what is keeping the household running, raise it before the offset rather than after.

A deferral is a different instrument again. It moves a due date rather than pausing collection, and it is the thing to ask for when the problem is timing — a settlement that lands next month, a large receivable, a return to work in eight weeks. The ATO's vulnerability support material describes granting extra time to lodge or pay in exactly this kind of situation, and pairs it with priority processing of a return where the refund itself is the source of relief.

Priority processing is genuinely useful and almost unknown. If you are in financial hardship, you can phone 13 11 42 after lodging and ask for your return to be processed as a priority, or have a registered tax professional request it. The ATO warns it will not necessarily be fast if the return needs checking, if several years were lodged at once, or if you have outstanding tax debts — and that it does not guarantee a refund, because credits may be offset.

The ATO contacts you soon after the due date by SMS, a myGov message, a letter or a phone call. If you do not respond, you may be sent a pre-referral warning letter and then referred to an external collection agency acting on its behalf. From there it escalates to what it calls firmer action, and then to legal action. Each step is preceded by a warning, and each is avoidable by engaging.

A garnishee notice requires a third party who holds or owes you money to pay it to the ATO instead. It is issued under section 260-5 of Schedule 1 to the Taxation Administration Act 1953, and can go to your bank, your employer, a business that owes you money, a merchant card provider, or a solicitor, agent or purchaser handling a property sale. The ATO sends a warning letter first and serves you a copy of the notice. For a bank account it can take the available balance or the debt, whichever is less; from wages it is usually up to 30 cents in the dollar of after-tax pay. A garnishee can be varied or withdrawn if you negotiate a suitable alternative arrangement — call the moment one lands.

Business tax debts can be reported to credit reporting bureaus, often the most commercially damaging step of all. The ATO's published criteria are that you have an ABN and are not an excluded entity, that you have at least $100,000 overdue by more than 90 days, that you are not effectively engaging about the debt, and that you have no active Tax Ombudsman complaint about the intended disclosure. You get a written notice of intent and 28 days to act. Effective engagement — a payment arrangement you are complying with, an application for release, an active objection or review, or an Ombudsman complaint — stops it, and the listing is removed once you no longer meet the criteria.

Company directors carry personal exposure through the director penalty regime. A director penalty notice covers unpaid PAYG withholding, GST and the super guarantee charge, and gives 21 days from the day the notice is posted or left at the address registered with ASIC. Where the amounts were reported within three months of the due date, the penalty can be remitted by the company paying, appointing an administrator, appointing a small business restructuring practitioner or beginning to wind up. Where they were reported late, the only remission is payment in full — the so-called lockdown notice. New directors are not liable for pre-appointment debts if one of those steps happens within 30 days of appointment, and there are limited defences including illness that prevented participation in management.

A departure prohibition order stops you leaving Australia while a tax liability is outstanding. The ATO describes it as an order used where you have an outstanding liability and the order is desirable to ensure that liability is paid or properly addressed, and says explicitly that it is not a penalty. It stays in force until the debt is paid or a satisfactory arrangement is made. A departure authorisation certificate can permit a limited trip without cancelling the order, and leaving in breach of a DPO is an offence that can carry penalties or imprisonment.

Legal action is the end of the road and it is orderly. The ATO may file a claim or summons in a state or territory court; interest imposed by the court is not tax deductible. Against an individual it can then issue a bankruptcy notice requiring payment within 21 days, and file a creditor's petition seeking a sequestration order in the Federal Court. Against a company it can issue a statutory demand requiring payment or an arrangement within 21 days, non-compliance with which is evidence of insolvency, and then apply to wind the company up and have a liquidator sell its assets.

Two mechanisms can reduce the principal rather than the interest, and they are frequently confused. Release from tax debt writes off some or all of a liability on serious hardship grounds. A compromise of tax debt is an agreement under which the Commissioner accepts a lesser amount to satisfy an undisputed debt and agrees not to pursue the balance. Release is a hardship remedy for individuals; a compromise is a commercial settlement available more broadly.

Release is limited by who you are and by what you owe. The ATO says you can apply if you are an individual or the trustee of the estate of a deceased person; companies, trusts and partnerships cannot apply, though they can discuss options on 13 11 42. Income tax, PAYG instalments, fringe benefits tax, Medicare levy and surcharge, withholding taxes on dividends, interest or royalties and some associated penalties and interest may be considered for release.

The exclusions are the part that catches people. The ATO lists GST, PAYG withholding, excess contributions tax, Division 293 liabilities, the super guarantee charge and director penalty notice amounts as debts that cannot be released. In blunt terms, money you collected or withheld on behalf of someone else — your employees' tax, your customers' GST, your staff's super — is not forgiven on hardship grounds, and a small business owner whose debt is mostly PAYG withholding and GST needs to know that before building a strategy around release.

The assessment looks at three things. Income and expenditure: your household's fortnightly position and what capacity it leaves to repay. Assets and liabilities: whether selling something could repay the debt, with the ATO noting that owning a home, a vehicle, household goods and modest savings is normal and reasonable, but that buying assets while aware of a tax debt may not be. And a set of other factors — how the debt arose, whether you disposed of funds or assets without providing for tax, other debts such as amounts owed to Services Australia, whether release would meaningfully improve your position, whether the hardship is temporary, your compliance history, and whether you have made provision for future tax.

Prepare before you apply. Lodge everything outstanding, make sure your contact details are current, and wait for any pending dispute or compensation claim with the ATO to resolve, because release is assessed against a settled liability. The ATO provides a debt release tool that establishes eligibility and produces the application form, and invites questions on 13 11 42 beforehand. Treat the income-and-expenditure statement as the document that decides the outcome, because it usually is.

A compromise is a harder sell and a different argument. The ATO's criteria include that the debt is undisputed, that the amount offered is not less than your total net assets, that the arrangement will not prejudice other proceedings, that alternative recovery avenues such as director penalties or bankruptcy would return less, that your compliance history is not problematic, and that you have not had an earlier compromise, bankruptcy or debt agreement in the preceding five years. Hardship is relevant but cannot be the only reason supporting the proposal. Applications go in writing to the Commissioner of Taxation, PO Box 1129, Penrith NSW 2740.

Before either application, the ATO says it looks at whether penalties and interest can be remitted, whether a payment arrangement or deferral would resolve matters, whether the debt qualifies for release, and what bankruptcy or liquidation would yield. Sequence your own approach the same way: remission and a plan first, release if the numbers genuinely do not work, compromise only where there is a real lump sum on the table.

A compulsory study loan repayment is the classic surprise bill. Your employer withholds extra tax once you tell them you have a HELP or similar debt, but the ATO applies nothing to your loan account until you lodge and it calculates the compulsory repayment. The balance does not fall each payday; it falls in one lump after assessment. If the extra withholding was short — you changed jobs, worked two jobs, had investment income, or never told the employer at all — the gap turns up as a bill on your notice of assessment.

From 2025–26 the compulsory repayment is worked out on a marginal basis, applying only to the portion of repayment income above $67,000, with the repayment rising as income rises. Repayment income is not just salary, which is why people with reportable super contributions, reportable fringe benefits or a rental loss can owe a repayment they did not see coming. The threshold is set annually — confirm the current figure with the ATO rather than relying on last year's.

The relief for a compulsory repayment is a deferral rather than a payment plan. You apply on the ATO form to defer or amend your compulsory repayment or overseas levy, NAT 2471, on the ground that making the repayment would cause serious hardship, or because of special circumstances such as a natural disaster, a death, serious illness or domestic violence. For hardship the ATO wants a detailed statement of household income and expenditure justifying the claim, and may ask for recent payslips or further financial documents.

Division 293 tax is the other common shock, and it is structurally different. It is an additional tax on concessional super contributions for people whose combined Division 293 income and contributions exceed $250,000, charged at 15 per cent on the lesser of the excess over the threshold and the taxable contributions. The notice arrives after the ATO has both your return and your fund's contribution reporting, which is why it can land long after you thought the year was closed.

The relief here is not hardship-based at all — it is a release from super. You can elect to have the money released from your superannuation fund to pay the Division 293 liability, using the election in ATO online services under Super, then Manage, then Division 293 election. You have up to 60 days from the date of assessment to make the election, but the ATO is explicit that the 60 days is a decision window and does not change the due date for payment, and that an election once made cannot be withdrawn or reversed. Division 293 is also on the list of liabilities that cannot be released on serious hardship grounds, so the super election is effectively the mechanism.

PAYG instalments produce a quieter version of the same problem. They are prepayments toward the coming year's tax, and a business or investor whose income has fallen can find themselves paying instalments calculated on a better year while trying to clear a debt from that better year. Instalments can be varied, and unlike GST and withholding, PAYG instalment liabilities are on the ATO's list of debts that can be considered for release. If a mixed debt is what is breaking the cash flow, work out its composition first, because a strategy built for the income tax half will do nothing for the GST and withholding half.

The National Tax Clinic program is the most under-used resource in this whole area. It is government funded, operates independently of the ATO through university and TAFE campuses, and is free. Clinics exist in every state and territory, run by students under the supervision of qualified tax professionals, and they take people who cannot readily get tax advice because of financial, social or personal circumstances and who are not already represented by a tax professional. Eligibility varies by clinic; the program directs you to nationaltaxclinics.gov.au to check eligibility and find a clinic, including virtual options.

For simpler lodgement problems the ATO's own Tax Help program runs from July to October with trained volunteers in capital cities and regional areas, aimed at people on lower incomes with straightforward affairs. It will not negotiate a debt for you, but getting several years of outstanding returns lodged is often the precondition for everything else, and Tax Help can do that at no cost.

For the household budget around the debt, a financial counsellor is the right professional and the service is free. The National Debt Helpline is on 1800 007 007, weekdays 9:30 am to 4:30 pm, with live chat available longer, and it publishes guidance on tax debts among the other debt types it covers. Financial counsellors do not lend money or sell anything and work only in your interest — which is the reason to call one before calling anyone who advertises tax debt solutions for a fee.

Inside the ATO there is a specific front door for people in crisis. The Emergency Support Infoline is 1800 806 218, and the ATO also runs an Indigenous Helpline on 13 10 30 and provides interpreters through TIS National on 13 14 50. For debt-specific conversations the lodge and pay enquiry line is 13 11 42 and the general individuals line is 13 28 61, both 8:00 am to 6:00 pm Monday to Friday; businesses use 13 28 66.

When the ATO's own handling is the problem — a garnishee you were not warned about, a payment plan refused without explanation, a disclosure notice you dispute — the Tax Ombudsman, also known as the Inspector-General of Taxation, investigates complaints about ATO administration. It is on 1300 448 829, at GPO Box 551, Sydney NSW 2001. There is a concrete tactical point here: an active Tax Ombudsman complaint about an intended disclosure of a business tax debt is one of the listed circumstances in which the ATO will not report the debt to credit reporting bureaus.

Finally, if the arithmetic simply does not work, formal insolvency is a legitimate answer, and better entered deliberately than arrived at through a creditor's petition.