Published on 14 Jan 2026
ATO payment plans are often the most practical way for a business to clear tax debt with the Australian Taxation Office while protecting cash flow and avoiding escalation. When a tax bill is larger than expected, a payment plan ATO option can help you spread instalments over time instead of paying a large lump sum on the due date. Understanding how ATO payment plans work, how to negotiate them, and how to record them in your accounts can make a big difference to your financial position.
Tax and BAS deadlines can feel overwhelming when income is uneven or you are already juggling other debts. If you ignore overdue accounts and payments, the ATO can add General Interest Charge (GIC), which compounds daily and increases the total amount you owe. A clear payment arrangement, supported by good bookkeeping and planning, gives you a structured way to pay what you owe while keeping your business running.
What Are ATO Payment Plans And When Should You Use Them?
An ATO payment plan is a payment arrangement with the Australian Taxation Office that lets you pay an outstanding tax debt in instalments instead of as a single lump sum. You can usually include income tax, activity statement (BAS) amounts, PAYG, and some other tax obligations in one plan. For many small businesses and sole traders, this is the simplest way to manage a tax bill that cannot be paid in full by the due date.
You should consider an ATO payment plan when you are experiencing financial difficulties but can still commit to regular instalments without putting essential expenses at risk. The ATO will look at your financial position, including your income, assets, liabilities, and current account balances, to decide if you are eligible. In most cases you will need all tax returns and activity statements lodged so the ATO can see the full details of what you owe.
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Are You Eligible for an Interest-Free Payment Plan?
If your business has an annual turnover under two million dollars and owes fifty thousand dollars or less in recent activity statement amounts that are overdue by up to twelve months, you may be eligible for an interest-free payment plan. To qualify, you need a good payment and lodgment history with no more than one payment plan default in the past twelve months, and you must agree to a twelve-month direct debit arrangement.
This option can significantly reduce the cost of clearing your debt compared with paying GIC on a standard payment plan. Not all businesses will be eligible, but if you meet the criteria, it is worth requesting this arrangement when you contact the ATO or set up your plan through online services.
Why Have ATO Payment Plans Become More Expensive and Risky?
ATO payment plans can be convenient, but they now come with a relatively high interest charged through the General Interest Charge (GIC). As of January 2026, the GIC annual rate is 10.65 per cent, which compounds daily on the account balance you owe. This is often a high interest rate compared with many business loans or overdrafts. In addition, any GIC incurred on or after 1 July 2025 is no longer tax deductible, so the interest is now a direct cost to your business.
Because the interest compounds daily, an outstanding tax debt can grow faster than many owners expect if the instalment schedule stretches over a long period. Using the longest term might reduce each payment, but it can significantly increase the total money paid in interest. This is why it is important to aim for the shortest period you can comfortably manage without risking payment plan defaults.
Key reasons ATO payment plans can be costly include:
General Interest Charge (GIC) is a relatively high interest rate that is reviewed and updated quarterly by the ATO.
Interest compounds daily on the unpaid balance.
All interest incurred from 1 July 2025 onwards is not tax deductible.
Long terms can lead to much more interest over time.
How Can You Negotiate a Better ATO Payment Plan for Your Business?
When you set up a payment plan with the ATO, the goal is to agree on instalments that are realistic for your circumstances and acceptable to the ATO. It helps to prepare a simple cash flow showing income, regular expenses, and what you can safely pay each week or month. The ATO may ask for more detail about your assets, liabilities, and personal circumstances if the debt is high or you have had payment issues before.
A strong proposal usually includes an upfront payment that shows commitment to reducing the debt quickly. Offering an up front payment or upfront payment also helps reduce GIC because interest is then charged on a lower balance. From there, you can propose a regular payment method, such as monthly direct debit via your bank, that fits with your normal cash inflows.
How Do You Set Up a Payment Plan Using Online Services?
Most businesses can set up a payment plan online using ATO online services rather than waiting on the phone. Through Online Services for Business, you can see the full details of your accounts and payments, including current account balances, refunds and tax credits. You can then choose a new plan, select a payment method, and confirm your bank details or card details.
To set up a payment, you can usually choose to pay by direct debit, credit or debit card, or manual bank transfer. Direct debit via your bank is often safer because it reduces the chance of missed instalments. If you are a small business or sole trader with lower annual turnover, the ATO system may even suggest a plan option for you based on what you owe and your past payment history.
What Should You Do If You Are Experiencing Financial Difficulties Or Defaults?
If you are experiencing financial difficulties and cannot pay a scheduled instalment, contact the ATO before the payment due date. Early contact shows that you want the payment plan to continue and gives you a chance to adjust the instalment schedule. Waiting until a payment plan defaults can lead to the plan being cancelled and the full balance being demanded.
A default does not always mean the ATO will refuse any future plan, but repeated defaults will make negotiation harder. If the ATO cancels a plan after defaults, General Interest Charge (GIC) continues to accrue, and enforcement options can become more serious. It is better to ask for temporary assistance or a revised plan than to miss payments without any explanation.
How Should You Record ATO Payment Plans in Your Bookkeeping Software?
Correctly recording an ATO payment plan in your accounting software helps you track how much you still owe and how much interest you are paying. Many businesses create a separate account called “ATO Payment Plan” or similar to keep this balance clearly visible. Each payment is then split between the reduction of the tax debt and the interest charged.
It is also important to show interest separately from normal business expenses when it is not tax deductible. One simple method is to use an expense account such as “ATO Interest – Non-Deductible” so that your tax agent can easily adjust this when preparing your tax returns. Keeping clear records also helps if the ATO asks for more detail about how you are managing your tax obligations.
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How Do ATO Payment Plans Affect Cash Flow and Future Tax?
An ATO payment plan changes your cash flow because you are paying off past debt while also meeting future tax obligations. This means that future BAS and income tax amounts still need to be paid in full by their due dates, on top of the plan instalments. If you only budget for the plan and forget about new tax, you can quickly fall behind again.
Good planning starts with a simple month-by-month view of your expected income, expenses, and tax. This should include instalments for the plan, expected new BAS or income tax amounts, and any other large payments such as loans or insurance. Building a small buffer for unexpected costs reduces the risk of new debt forming while you are still paying off the old one.
To keep cash flow under control, consider:
Setting aside a percentage of income for future tax as tax credits in a separate bank account.
Making additional voluntary payments to the ATO when you have extra cash.
Reviewing pricing and cost control so that your margins support both current and past tax.
Planning for future refunds or credits that may reduce your overall ATO balance.
When Should You Consider Alternatives to An ATO Payment Plan?
Because GIC can be a high interest rate and may not be tax deductible, it is wise to compare an ATO payment plan with other options. For some businesses with strong credit, a bank overdraft or short-term loan may have a lower rate than GIC on a tax debt. However, other finance options can come with their own risks, such as security over personal assets.
Before replacing an ATO payment plan with another loan, you should look carefully at the full cost and your capacity to pay. This includes fees, total interest, the shortest period you can manage, and what happens if your income changes. Your accountant or registered tax adviser can help you work through an example or two to see which option is more suitable.
How Can ACT Bookkeeping Support You with ATO Payment Plans?
Handling an ATO payment plan on your own can feel stressful, especially when you are trying to run the business at the same time. A bookkeeping team familiar with how ATO payment plans work can help you understand your position, set up a plan, and keep your records accurate. This support can remove confusion around dates, amounts, and what to do if your situation changes.
ACT Bookkeeping can help you review your ATO accounts, explain your current account balance, and prepare a clear picture of your financial position. We can assist you to set up a payment plan through online services, choose a suitable payment method, and organise direct debit so payments run smoothly. Our team can also help you track instalments and interest in your software so you always know how much you owe and how long the plan is expected to run.
We also understand that each business has different personal circumstances and goals. Whether you are a sole trader, a growing small business, or managing multiple entities, we can help you balance tax, cash flow, and long-term plans. If you would like more detail or tailored assistance, you can request a review of your ATO position, and we will walk you through your options step by step.
