The short answer
A business income tax debt is income tax the ATO has assessed, on a company tax return or a sole trader's or partner's business income, that wasn't paid by the due date. It often follows a profitable year where PAYG instalments were too low, or where cash went into growth before the return was lodged. Income tax debts sit in a separate account from GST and PAYG withholding, so they need their own payment plan. Company income tax isn't one of the amounts covered by the director penalty regime, unlike GST, PAYG withholding and the super guarantee charge, but the ATO can still charge interest, issue garnishee notices and report large overdue business debts to credit bureaus. The general interest charge is 11.51% a year for October to December 2026, compounding daily, and it hasn't been tax-deductible since 1 July 2025 (ATO). Options include a payment plan, a business loan or a property-backed loan.
How do income tax debts arise?
- A profitable year where PAYG instalments, based on an earlier and smaller year, didn't keep up.
- Profit reinvested in stock, equipment or staff before the tax was set aside.
- Late lodgement of several years' returns at once.
- Amended assessments after an ATO review or a correction.
A sole trader pays tax on business income through their individual return, while a company pays on its own return. Either way, the result is a debt on the income tax account.
How is it different from a GST or PAYG debt?
| Feature | Company income tax | GST and PAYG withholding |
|---|---|---|
| Covered by the director penalty regime | No | Yes |
| Which ATO account | Income tax account | Activity statement account |
| Payment plan | Needs its own plan | A separate plan for the activity statement account |
| Interest-free small business plan | Not available | Available for some activity statement debts |
| Garnishee and credit reporting | Can apply | Can apply |
Directors aren't automatically shielded, though. Personal guarantees, trading while insolvent and other liabilities can still create personal risk if the company can't pay its debts.
What does carrying the debt cost?
The general interest charge for October to December 2026 is 11.51% a year, compounding daily, which is about 12.2% over a full year. On a $100,000 income tax debt, that's roughly $12,200 in a year, and none of it is deductible. Interest on a loan used to pay a business tax debt is generally deductible, which narrows the gap between a loan and a payment plan. Read our GIC deductibility guide for the break-even comparison.
What are the options?
- ATO payment plan. Debts of $200,000 or less can usually be set up online or by phone. Plans longer than two years need a conversation with the ATO.
- Unsecured business loan. Suits smaller debts where trading supports repayments.
- Property-backed loan. Suits larger debts, or where the ATO has moved to garnishee notices.
- A mix. Pay part with a loan and put a shorter plan in place for the rest.
Watch the double hit from PAYG instalments
After a strong year, the ATO usually lifts PAYG instalments for the following year. A business can find itself paying last year's tax and higher instalments for this year at the same time. Instalments can be varied if this year's income will be lower, but varying them too low can attract a general interest charge on the shortfall. Talk to your accountant before varying, and build both payments into any plan or loan.
What do lenders look at?
Lenders want returns lodged, the debt amount confirmed, and evidence the business can meet new tax obligations as well as loan repayments. A recent profitable year often helps the application, because it shows the business can earn. Unpaid debts of $100,000 or more overdue for more than 90 days may already appear on business credit reports if the ATO has disclosed them.
