Receiving a tax bill instead of a refund can be an unpleasant surprise.
It can happen for many reasons. You may have earned income from multiple jobs, operated as a sole trader, received investment income, sold assets, had insufficient tax withheld or simply ended the financial year with more tax payable than expected. The important thing is not to ignore the debt.
If you cannot pay your Australian Taxation Office bill in full by the due date, you may be able to arrange an ATO payment plan and repay the balance through instalments.
However, a payment plan does not make the debt disappear, and delaying action can make the situation more expensive.
Here’s what you need to know.
What Is an ATO Payment Plan?
An ATO payment plan allows an eligible taxpayer to pay an outstanding tax debt through smaller instalments instead of paying the entire balance immediately.
Depending on the arrangement, payments may be made:
- weekly
- fortnightly
- monthly
The ATO generally expects the debt to be repaid over the shortest manageable period.
Payment plans can potentially be available to eligible individuals, sole traders and businesses.
Should You Still Lodge Your Tax Return If You Can’t Pay?
Yes, inability to pay and your obligation to lodge are separate issues.
Do not deliberately delay lodging a tax return or activity statement simply because you believe you will owe money.
The ATO advises taxpayers to lodge and pay their obligations on time where possible and to discuss payment options if they are experiencing difficulty.
Lodging gives you a clearer picture of exactly what is owed and allows you to consider the appropriate next step.
Ignoring both the lodgement and the debt usually creates a larger compliance problem.
Can You Set Up an ATO Payment Plan Online?
For many taxpayers, yes.
The ATO states that eligible taxpayers owing $200,000 or less may be able to establish a payment plan through online services or its automated phone service.
If your debt exceeds $200,000, or you cannot arrange an appropriate plan through the standard online process, you generally need to contact the ATO to discuss your circumstances.
Eligibility and the terms available can depend on your individual situation.
Does Interest Continue on an ATO Payment Plan?
This is important:
A payment plan does not necessarily stop interest from accumulating.
General interest charge, commonly called GIC, can continue to apply to unpaid ATO debts while they are being repaid.
The ATO states that GIC compounds daily, which is one reason paying the debt over the shortest affordable period can reduce the total cost.
That means a payment arrangement should not be treated as an interest-free loan.
If you can responsibly reduce the outstanding balance sooner, doing so may reduce the interest ultimately charged.
ATO Interest Is No Longer Tax Deductible
There is another major rule that taxpayers with ATO debt should now understand.
For ATO general interest charge and shortfall interest charge incurred on or after 1 July 2025, an income tax deduction is no longer available.
The change is now law.
Previously, certain ATO interest charges could potentially be deductible.
For the 2025–26 income year onwards, carrying an ATO debt can therefore be more expensive because interest incurred from 1 July 2025 is generally no longer deductible.
This makes early action on tax debt even more important.
Why Might You End Up With a Tax Bill?
A tax bill doesn’t automatically mean something has gone wrong.
There are many legitimate reasons you might owe additional tax.
Multiple Jobs
If you earned income from more than one employer, the amount withheld during the year may not have been sufficient for your total taxable income.
Sole Trader or Contractor Income
Sole traders generally don’t have an employer automatically withholding income tax from business profits.
Unless sufficient money has been put aside or PAYG instalments have been paid, a tax liability can arise when the return is lodged.
Investment Income
Interest, dividends, distributions and rental income can increase taxable income.
Capital Gains
Selling assets such as:
- shares
- investment properties
- cryptocurrency
- other investments
may result in a capital gain that increases the tax payable.
PAYG Instalments Were Too Low
Business owners and investors in the PAYG instalment system may still have additional tax to pay if instalments during the year did not cover their final liability.
Study and Training Loan Repayments
Income levels can also affect compulsory repayments of eligible study and training loans.
The important point is to understand why the tax bill occurred rather than simply arranging repayments and forgetting about the underlying cause.
What Should You Consider Before Setting Up a Payment Plan?
Before committing to an arrangement, review your actual cash flow.
Consider:
- how much you can pay upfront
- how much you can realistically afford each instalment
- your rent or mortgage
- payroll obligations
- supplier payments
- upcoming BAS liabilities
- super obligations
- future tax instalments
- other essential expenses
An unrealistic payment plan that fails after two months doesn’t solve the problem.
For businesses, it is particularly important to avoid using money reserved for upcoming GST, PAYG withholding or employee obligations to temporarily cover an older tax debt without considering the consequences.
Can You Pay Extra Towards an ATO Payment Plan?
Generally, paying additional amounts toward an outstanding balance can reduce the balance on which future GIC is calculated.
However, making an additional payment does not necessarily replace your scheduled payment obligations under the arrangement.
Keep following the agreed payment schedule unless the arrangement itself has been changed.
What If You Already Have Other ATO Debts?
Do not look at a new tax bill in isolation.
Check your overall ATO account position.
You may have outstanding amounts relating to:
- previous income tax assessments
- BAS
- GST
- PAYG instalments
- PAYG withholding
- super-related liabilities
- penalties
- interest charges
Understanding the total position is essential before deciding what repayment arrangement is realistic.
Can an Accountant Help With an ATO Payment Plan?
An accountant or registered tax professional can help you understand:
- how the tax debt arose
- whether your returns and activity statements are current
- your existing ATO account balances
- upcoming tax obligations
- your business cash flow
- what payment arrangement may be manageable
- whether underlying bookkeeping or tax-planning problems need attention.
The most valuable question is often not simply:
“How do I pay this debt?”
It is:
“Why did this debt arise, and how do I prevent the same problem next year?”
For example, a sole trader repeatedly receiving large annual tax bills may need better tax provisioning or PAYG instalment planning.
A business repeatedly struggling with BAS payments may have a cash-flow or bookkeeping problem that needs to be addressed before the next quarter.
Don’t Ignore ATO Correspondence
Putting an ATO letter aside does not make the liability disappear.
If you receive correspondence about an overdue amount, read it carefully and act promptly.
Likewise, if you know you cannot meet a payment date, dealing with the issue early gives you more options than waiting until the debt has been outstanding for months.
Five Practical Steps If You Can’t Pay Your Tax Bill
1. Confirm the Amount Owing
Check your Notice of Assessment and ATO account to understand the actual liability.
2. Make Sure Your Lodgements Are Current
Outstanding returns or activity statements can make it difficult to understand your real position.
3. Review Your Cash Flow
Work out how much you can realistically pay without creating another immediate financial problem.
4. Consider an Appropriate Payment Arrangement
If eligible, investigate an ATO payment plan rather than ignoring the debt.
5. Fix the Cause
If the debt resulted from insufficient tax being set aside, inaccurate bookkeeping, poor cash-flow planning or inadequate PAYG instalments, address that problem now.
Otherwise, you may finish paying one tax debt just as the next one arrives.
Need Help With an ATO Tax Debt?
Accountant Helpdesk assists individuals, sole traders and businesses with tax returns, ATO matters, accounting and tax-payment planning.
If you’ve received a tax bill and are unsure what to do next, our team can help you understand the liability, review your tax position and consider the available options.
Accountant Helpdesk is based in Williams Landing and assists clients across Melbourne. Contact us to arrange an appointment.
