ATO debt loans vs payment plans: can deductible interest make a difference?

Interest on a private loan used to pay business-related ATO debt may be tax deductible where the borrowing is sufficiently connected with carrying on a business. That can change the comparison with an ATO payment plan, because ATO general interest charge incurred from 1 July 2025 is no longer deductible.

A higher private lending rate may therefore produce a lower after-tax interest cost in some circumstances. However, establishment fees, legal costs, minimum interest periods and repayment terms can outweigh that benefit.

Before committing to an ATO payment plan, it is worth speaking with Innovate Funding about available business finance and asking your accountant to compare the tax treatment. The right decision depends on the complete cost and your ability to repay.

Can you get a loan to pay ATO debt?

Eligible businesses can borrow to pay ATO debt, subject to lender assessment. An ATO debt loan replaces an eligible tax liability with a new loan that must be repaid under its own terms. Innovate Funding considers property-secured business finance, rather than unsecured personal loans.

A company seeking to refinance ATO tax debt needs sufficient acceptable property security, an evidenced business purpose and a credible repayment strategy. An ABN alone does not establish eligibility. Funding and any tax deduction are separate assessments.

ATO payment plan or private loan: what is the difference?

With an ATO payment plan, the debt remains with the ATO and is repaid through agreed instalments. With a private loan, loan proceeds pay the agreed ATO payout and the borrower owes the new lender. The new facility can have different cash-flow requirements, fees and property security obligations.

Compare both options over the same expected period using the same net ATO payout. If one option reduces principal monthly while the other leaves the full balance outstanding, comparing headline rates alone will give an incomplete result.

Is interest on an ATO payment plan tax deductible?

For taxpayers using the standard Australian financial year, ATO general interest charge (GIC) and shortfall interest charge (SIC) incurred on or after 1 July 2025 cannot be claimed as income tax deductions. This applies even where the original debt relates to an earlier year. Special timing applies to entities with substituted accounting periods.

An approved payment plan does not, by itself, stop GIC accruing. The ATO explains that tax debts on payment plans still attract GIC. Your actual interest depends on the applicable rates, daily compounding, repayments and any approved remission.

See the ATO's guidance on denying deductions for ATO interest charges.

Can private loan interest be deductible when paying ATO debt?

Potentially. The ATO's Taxation Ruling IT 2582 recognises that interest on money borrowed to pay income tax can be deductible where the borrowing is connected with carrying on a business that produces assessable income.

The relevant issue is the business connection, borrower and use of funds. Choosing a private lender does not automatically create a deduction. A company borrowing to pay its own business tax liability may qualify. A sole trader needs the tax debt to relate to their business activities, with any personal component considered separately.

Borrowing to pay an individual's personal income tax does not ordinarily qualify simply because a loan is secured against property. If a director borrows personally to pay a company's debt, the structure requires separate advice.

Ask your registered tax adviser to check the entity responsible for the debt, the proposed borrower and each component of the ATO balance, including tax, interest and penalties. Keep the loan agreement, ATO statements and evidence showing where the funds went.

A deduction reduces tax; it does not refund all your interest

If an eligible company incurs $10,000 of deductible interest and the applicable company tax rate is 25%, the potential tax reduction is $2,500. The after-tax interest cost would be $7,500, assuming the deduction can be fully used.

The lender still needs to be paid the full $10,000. A deduction does not provide an immediate dollar-for-dollar reimbursement. A business with tax losses may not receive an immediate cash benefit, and the timing of any benefit needs to be included in its cash-flow planning.

Can a higher private lending rate still cost less after tax?

Yes, in some cases. Consider this simplified comparison of two hypothetical options for a $100,000 debt over 12 months:

• ATO option: assume the actual non-deductible interest cost over the period totals $11,000.

• Private loan option: assume interest totals $14,000 and is fully deductible at a 25% tax rate.

• Potential tax reduction on the private loan interest: $14,000 × 25% = $3,500.

• Private loan interest after tax: $14,000 − $3,500 = $10,500.

On interest alone, the private loan has a $500 advantage despite charging $3,000 more before tax. But that advantage is small. If the private loan adds $4,000 of fees, its cost before allowing for any tax treatment of those fees becomes $14,500 after the assumed interest tax benefit. Even if those fees ultimately attract a full 25% tax benefit, the resulting $13,500 total exceeds the ATO option's $11,000.

These figures are illustrative, not current ATO rates or an Innovate Funding quote. The example assumes the same $100,000 remains outstanding for the full year, no principal repayments and a usable deduction. It does not model an amortising payment plan, daily GIC compounding or fees financed into the loan. Fees may have different deduction rules and timing. Compare actual dated cash flows before deciding.

Compare the full cost of refinancing ATO debt

When comparing an ATO plan with secured business finance, check:

• The net amount available to clear the ATO balance after deductions.

• Interest over the expected repayment period, including whether rates are monthly or annual.

• Establishment, brokerage, valuation, legal, account and discharge costs.

• Minimum interest, early repayment conditions and extension charges.

• Whether fees or interest are added to the loan and attract further interest.

• The value and timing of tax deductions confirmed by your accountant.

• Monthly commitments, the final payout and the consequences if the exit is delayed.

Property-backed finance also introduces security risk. If the loan is not repaid, the secured property may be at risk. An ATO payment arrangement may be the better option where it is affordable and has a lower total cost. Discuss any available interest remission or other assistance with the ATO or your tax agent.

When might private finance help with business tax debt?

A short-term business loan may suit a temporary funding gap where the business has sufficient property equity and a credible way to repay. The exit might involve a documented asset sale, a realistic refinance or identifiable business receipts.

Depending on existing debt and lender requirements, funding may use a first mortgage. A second mortgage may allow an eligible borrower to raise funds behind an existing first lender, subject to consent and other requirements.

For property owners, business equity release may provide access to capital tied up in property. It creates a new repayment obligation, so sufficient equity alone does not make a loan suitable.

Borrowing is unlikely to resolve an ongoing shortfall if the business cannot meet new tax liabilities and repay the new facility. A potential deduction should support the comparison, rather than drive the decision on its own.

How does refinancing ATO debt work?

1. Confirm the payout. Obtain current ATO balances and notices through your accountant or tax agent.

2. Compare the options. Review an available ATO arrangement alongside written finance terms, net proceeds, fees and repayment obligations.

3. Check the tax treatment. Have your accountant assess the borrower, debt components and availability and timing of deductions.

4. Complete lender requirements. These may include valuation, credit assessment, legal documents and existing mortgagee consent.

5. Coordinate settlement and repayment. Confirm how the ATO is paid, retain evidence of the payout and follow the agreed loan exit strategy.

Paying an existing tax balance does not remove the need to lodge and pay future tax obligations. Build those commitments into your cash-flow forecast alongside the new loan.

How Innovate Funding can assess your options

Innovate Funding arranges property-secured private lending across Australia through private and non-bank lending partners and directly funds selected suitable transactions. This service is for eligible business-purpose borrowing.

For an initial ATO debt funding review, provide:

• A current ATO statement, the entity owing the debt and any payment plan or relevant notices.

• The net amount needed and required payment date.

• The security address, estimated property value and existing secured debts.

• The proposed borrower and explanation of the business purpose.

• Your requested loan term and proposed repayment strategy.

We can assess potential funding options and outline indicative costs for you to discuss with your accountant. For a practical example, read our Northern Beaches ATO debt funding case study. Historical terms are specific to that transaction and are not a current offer.

Speak with Innovate Funding before choosing an ATO debt plan

The interest rate is only one part of the decision. An eligible private loan may offer a tax deduction and a funding structure that suits your business, even where its headline rate is higher. Equally, fees or a short repayment term may make an ATO plan more appropriate.

Submit your ATO debt funding scenario or call 02 8919 3639 to discuss the available options. Have your accountant confirm the tax treatment before committing. While exploring finance, continue responding to ATO notices and meeting any existing obligations.

Frequently asked questions

Can I get a loan to pay off tax debt?

Eligible businesses may be able to borrow to pay ATO debt. Innovate Funding assesses property-secured business finance based on the borrower, business purpose, acceptable security, existing debts and a credible repayment strategy. Approval and tax deductibility are separate questions.

Can I claim interest on a private loan used to pay ATO debt?

Potentially, where the borrowing is sufficiently connected with carrying on a business producing assessable income. The borrower, debt and use of funds need to be assessed. Personal tax debt does not automatically qualify.

Is ATO payment plan interest tax deductible?

For standard Australian financial-year taxpayers, GIC and SIC incurred from 1 July 2025 are not deductible. Agreeing to a payment plan does not change that treatment.

Does tax deductible interest mean I get all the interest back?

No. An eligible deduction reduces taxable income. The tax saving depends on the applicable tax rate and whether the deduction can be used. You must still pay the lender in accordance with the loan agreement.

Is a private loan always cheaper than an ATO payment plan?

No. A potential interest deduction can improve the comparison, but fees, minimum interest, loan duration, security risk and repayment obligations can outweigh it. Compare the complete after-tax cost of both options.

Can Innovate Funding consider business-related ATO debt?

Yes. Innovate Funding can assess eligible property-secured business funding scenarios involving ATO debt. Funding is subject to the borrower, business purpose, security, existing debts and proposed repayment strategy.

General information only, current at 30 October 2026. This article does not provide personal tax, legal or financial advice. Tax deductions depend on individual circumstances. Obtain advice from a registered tax adviser and review the full loan terms before proceeding.