ATO debt is something I’m having more and more conversations about at the moment, and what’s becoming really clear is that the way businesses have managed it in the past simply doesn’t stack up in today’s environment.
There’s always been a level of comfort around ATO debt. Unlike a bank chasing you, it doesn’t feel as urgent as a supplier, and for a long time, it was something that could be managed fairly easily in the background. What I’m seeing now, however, is that this mindset is starting to catch people out.
Not Just “Business Debt”
Part of the issue is that many business owners don’t fully appreciate how exposed they actually are until something goes wrong.
If you’re operating as a sole trader, there is no separation at all. The debt isn’t sitting somewhere off to the side in a business name. It’s yours. If it doesn’t get paid, the ATO doesn’t chase the “business”; they chase you. Your personal bank accounts, your refunds, your future income, all of it is on the table.
A lot of people don’t realise how far the ATO’s powers actually extend. If a debt sits unpaid for long enough, the ATO can issue a garnishee notice. In practice, that means they can go directly to your bank, or even to someone who owes you money, and require that the funds be paid to them instead. There’s no negotiation at that point. It’s not a reminder or a warning, it’s an action. I’ve seen situations where business owners expect cash to come in to cover wages or suppliers, but instead, a portion of it is redirected straight to the ATO.
A lot of people assume that operating through a company protects them from this, and to an extent it does, but only if everything is being done properly. The ATO is placing increasing emphasis on directors’ responsibilities, and where lodgements aren’t up to date, or obligations like PAYG withholding and super aren’t met, that protection can fall away. Once a Director Penalty Notice is issued, that company debt can very quickly become a personal problem.
Insolvent Trading
The other piece that doesn’t get spoken about enough is insolvent trading. This is where things move beyond tax and into much more serious territory. If a company continues to operate and incur debts when it doesn’t have the capacity to pay them, directors can be held personally liable for those debts. ATO debt is often one of the first indicators that something isn’t quite right with cash flow, but it’s rarely the only one. When it starts to build and isn’t addressed, it can be a sign that the business is trading while technically insolvent, even if it doesn’t feel that way day-to-day.
What makes this tricky is that none of it happens overnight. It creeps in slowly. A BAS gets deferred. A payment plan is set up. Cash flow is a bit tight one quarter, then the next. Before long, the ATO balance is sitting there in the background, and because nothing dramatic has happened yet, it doesn’t feel urgent.
Until it is.
That’s usually the point where people realise that this isn’t just a number on a statement. It’s something that can affect their ability to operate, their position, and, in some cases, their exposure as a director.
By that stage, it’s a lot harder to unwind than it would have been earlier on.
When Payment Plans Were Easy
When I first started Freshwater, the landscape was completely different. Payment plans were incredibly easy to obtain. A client could have a reasonably significant debt, explain that cash flow was tight, and the ATO would generally work with them without too much resistance. Long-term arrangements were common, and there wasn’t a huge amount of scrutiny around them.
As my firm grew, I took on a number of clients who came to me with existing ATO debt, and over time, I started to notice a pattern. For many of them, the debt wasn’t something they were actively working to clear. It had just become part of how they operated. They would enter into a payment plan, fall behind, reset it, and continue on. It wasn’t being dealt with; it was just being managed in a way that let it sit without causing too much immediate pressure.
COVID Changed the Rules
When COVID hit, and everything shifted again. Some industries, particularly hospitality, were hit incredibly hard and very quickly. The ATO, to their credit, were extremely supportive during that period. Payment plans were extended, enforcement was softened, and there was a genuine willingness to help businesses get through what was, for many, an impossible situation.
At the same time, measures like the instant asset write-off gave businesses a way to reinvest and reduce taxable income, which also helped cash flow.
What that period also did, however, was normalise the idea that ATO debt could sit for longer with fewer consequences. For some businesses, that mindset has carried through into today, and that’s where the disconnect is starting to happen.
The ATO Has Shifted Back to Enforcement
The ATO we’re dealing with now is not the same ATO. The approach has very clearly shifted back towards enforcement. Payment plans are no longer as easy to obtain or maintain, interest is being applied more consistently, and penalty remissions are not being handed out in the same way they were a few years ago.
There is a much stronger focus on compliance, particularly around lodgements, and businesses that are behind are finding it far harder to get the same level of flexibility they might have received in the past.
A Real Example: When Compliance Gets Missed
Recently, we took on a new client who set up a company some years ago that ultimately never traded. There was no bank account, no income, and no real activity. It simply didn’t get off the ground.
What also didn’t happen, though, was lodgement of the BAS. From the client’s perspective, there was nothing to report, so it didn’t feel urgent. From the ATO’s perspective, a registered entity was not meeting its obligations.
Over time, penalties were applied for failure to lodge, and by the time we became involved, those penalties had accumulated to around $20,000.
We were able to have those remitted, but it wasn’t straightforward. It took time, explanation, and a significant amount of back-and-forth. Unfortunately, this provides a good example of how the system operates now. (In fact, the ATO could easily have enforced that debt, and this client was indeed very lucky).
Payment Plans Aren’t a Strategy
What I think is most important for business owners to understand is that ongoing reliance on payment plans is not a strategy. It might feel like one, because it creates breathing room in the short term, but it doesn’t address the underlying issue.
If new debt continues to build while old debt is being paid down slowly, the position doesn’t improve; it just becomes more entrenched.
What Actually Works in Practice
One of the most effective shifts I see in clients who get on top of this is quite simple, but it requires discipline. It comes down to separating money and recognising that not all of the cash that hits your account belongs to you.
When everything sits in one account, it’s very easy to spend what looks available, only to find yourself short when the BAS or tax bill falls due. Creating separate accounts and consistently allocating a portion of income towards tax as it is earned completely changes that dynamic. It removes the element of surprise and forces a level of visibility that many businesses don’t currently have.
There’s also a mindset shift that needs to happen. Tax needs to be treated like any other fixed obligation of the business. It’s not optional, and it’s not something that can be deferred indefinitely without consequence. When it’s viewed in the same way as wages or rent, the decisions around spending and cash flow tend to improve naturally.
Equally, staying on top of lodgements, even when payment isn’t immediately possible, makes a significant difference. The ATO is far more willing to work with businesses that are compliant and communicating than those that are behind and silent. That distinction matters far more now than it did in the past.
Final Thoughts
What I’m seeing in today’s economy is a smaller margin for error. Costs are higher, interest rates have increased, and many businesses are operating with less buffer than before. In that environment, carrying ATO debt as a normal part of operations becomes much riskier.
The key message I want to get across is that while ATO debt can be managed, it must be managed deliberately and with a clear plan. Relying on ongoing payment plans without addressing the business’s underlying cash flow and structure is no longer sustainable in the current landscape.
The earlier that shift is made, the easier it is to get back on top of things before the position becomes difficult to unwind.
