Declined because of your ATO debt

Why do banks treat tax debt so seriously?

To a bank, an overdue tax debt signals two risks. First, it suggests cash flow has been tight enough that the business has fallen behind on obligations. Second, the ATO is a creditor with powerful collection tools, from garnishee notices to director penalty notices, that can take priority over everyone else.

So many banks apply a simple rule: no lending while there’s overdue tax. It doesn’t matter if the debt is a manageable amount, or if it arose from a single bad quarter. The policy is the policy.

That rule belongs to the bank, though. Alternative lenders see plenty of businesses with tax debt and have developed their own ways of assessing it.

How do lenders find out about tax debt?

In several ways:

• You tell them on the application, which is always the best approach.
• Your bank statements show ATO payments, or the lack of them.
• Your BAS and returns reveal liabilities and lodgement history.
• Your credit file may show it. The ATO can report business tax debts to credit reporting bureaus where the debt meets its published criteria and the business isn’t engaging to manage it. Businesses are notified before that happens. The ATO’s criteria for reporting business tax debts set out the details.

If you’re unsure of the exact figure, download a current statement of account from the ATO’s online services before you go any further. Lenders want a known number.

What makes a tax debt fundable?

Factor	More fundable	Harder to fund
Is the amount clear?	Current ATO statement	“Roughly” or unknown
Is it managed?	Payment plan in place and kept	No plan, ignoring letters
Are lodgements up to date?	All BAS and returns lodged	Several outstanding
What type is it?	Mainly income tax or GST	Large unpaid PAYG withholding or super
What supports the loan?	Property equity or strong trading	Neither

A business on a payment plan, with every lodgement complete and steady trading, is often a reasonable prospect for a cash-flow lender. A business that owes a larger amount but has property equity may be able to clear the debt in one step with a secured loan. Our page on business loans with ATO debt sets out the options.

Should you set up a payment plan first?

In most cases, yes. A plan converts an open-ended problem into a managed one. The ATO offers payment plans for business debts, and smaller debts can often be arranged through online services without a phone call. Our guide to getting an ATO payment plan in place before you borrow walks through the steps.

Two cautions. Keep to the plan, because a defaulted plan is worse than none. And keep current lodgements and payments up to date while you repay the old debt, because the ATO expects both.

If you’d rather explore clearing the debt with a loan instead, start an enquiry and we’ll talk through whether that makes sense for you.

What about director penalty notices?

If the debt includes unpaid PAYG withholding, GST or superannuation guarantee charge, company directors can become personally liable through a director penalty notice. That changes the urgency and the advice. Lenders will ask about it, and you should speak to your accountant promptly. Our guide on director penalty notices and borrowing explains why timing matters.

Illustrative example: A joinery company owes the ATO after a large customer paid months late. The bank declines. The owners have equity in their home behind an existing mortgage. A private second mortgage pays the ATO directly, the company resumes trading without the debt, and the owners plan to refinance once the next two years of clean returns are lodged.

What makes the ATO more or less likely to escalate

Lenders often ask where the ATO is up to with collection, because escalation changes urgency. While every case differs, the ATO generally responds better to businesses that engage early.

Business behaviour	Likely ATO response
Lodges on time, contacts the ATO about payment	Payment plan or arrangement often possible
Lodges on time, doesn’t pay, doesn’t respond	Reminder letters, then firmer action
Doesn’t lodge or respond	Estimates, penalties, and stronger recovery action
Breaks an agreed plan without contact	Plan may be cancelled and recovery resumed

If you’ve received firmer letters, such as a garnishee notice or a director penalty notice, tell any lender you approach. It doesn’t automatically stop finance, but it does change what’s needed and how quickly.

Getting your ATO paperwork lender-ready

Before you apply, download and save:

• a current statement of account for every relevant ATO account,
• your lodgement history showing what’s been lodged,
• any payment plan confirmation,
• recent ATO letters, particularly anything about escalation.

Put them together in one file. A lender who can see the whole tax picture in a few minutes is far more likely to keep going with your application.

What to do next

A tax debt is one of the most common reasons we hear about, and one of the most workable when it’s dealt with openly. Our enquiry is short, there’s no credit check at that first stage, and we won’t spread your details across a crowd of lenders. Someone who handles tax-debt files regularly will read yours and call you. Please include the approximate debt and whether a plan is in place, so we can match you correctly. Tell us about your tax position.