What Happens If a Business Defaults on an ATO Payment Plan?

An ATO payment plan default is more serious than a single late instalment left unresolved.

The ATO describes a default as the point where the payment plan is no longer active because its conditions have not been met. When that happens, the full overdue balance can become immediately payable and the ATO may take firmer recovery action.

For a business already under cash-flow pressure, the correct response is to establish the real position quickly rather than wait for the next notice.

What can cause an ATO payment plan to default?

A plan can default when its conditions are not met. The ATO's guidance includes failures such as not dealing with arrears on the plan and not meeting required payments or future obligations.

For a business, the common pattern is straightforward: the old tax debt is being paid by instalments, but a new BAS or another current obligation falls due at the same time. The business funds one and misses the other. Cash-flow pressure compounds.

What happens after default?

According to the ATO, when a payment plan defaults the whole overdue balance becomes immediately payable and firmer action may follow.

Firmer recovery action can vary with the circumstances. The important point is that the business should no longer assume the old instalment schedule remains in force.

The first steps are practical:

1. confirm the payment-plan status directly with the ATO or through the tax agent
2. obtain a current ATO account statement
3. bring outstanding lodgements up to date so the real liability is known
4. identify what caused the default
5. build a realistic short-term cash-flow forecast
6. decide whether a revised ATO arrangement, commercial finance or a broader restructuring discussion is appropriate

Where legal notices, director penalty issues or insolvency concerns are involved, obtain tax and legal advice promptly. A finance broker should not be the only adviser in that situation.

Can you simply set up another payment plan?

Sometimes a further arrangement may be available, but it should not be treated as automatic.

The ATO assesses payment arrangements based on the circumstances and expects taxpayers to engage with their obligations. A repeated cycle of plan, default, new plan and new arrears is a warning that the business's cash generation may not support the debt burden.

Before agreeing to another schedule, calculate what the business must pay in a normal month:

• operating costs
• payroll and super
• existing loans and leases
• current BAS and tax obligations
• proposed ATO instalment

If the forecast only works when every customer pays exactly on time, there is very little room for normal business volatility.

When commercial finance may be worth comparing

A business loan is not a cure for a defaulted payment plan. It can be useful where the underlying business is viable and a suitable facility can clear the ATO balance into a repayment structure that fits cash flow.

That comparison should include the lender rate, fees, term, security and total cost. A five-year facility may reduce the monthly repayment materially while keeping the debt in the business much longer.

Use the ATO payment plan vs business loan calculator to model the direct cost and repayment difference.

Then read Can You Refinance ATO Debt With a Business Loan? for the lender-assessment side.

Default and credit reporting are different issues

A payment-plan default does not mean the ATO automatically reports the business tax debt to a credit reporting bureau that day.

The ATO has separate disclosure criteria. Broadly, the business must meet the statutory conditions, including at least $100,000 overdue by more than 90 days and not effectively engaging with the ATO to manage the debt.

A default can matter because the business may no longer be complying with an arrangement that previously demonstrated effective engagement. But the disclosure test is separate and should be checked against the current ATO criteria.

See ATO Debt and Credit Reporting: When Business Tax Debt Can Be Disclosed.

The finance question after a default

A lender looking at a recently defaulted ATO plan will want a credible explanation of what changed.

If the default was caused by one unexpected event and the business has otherwise strong cash flow, that is different from a business that has missed multiple tax obligations because normal trading does not generate enough cash.

The submission should explain:

• what caused the default
• whether lodgements are current
• the current ATO balance
• whether new tax obligations are now being met
• what has changed operationally or financially
• how the proposed facility will be repaid

For finance options aimed specifically at tax arrears, see Business Loan With ATO Debt.

Frequently Asked Questions

What is an ATO payment plan default?

The ATO describes a default as the payment plan no longer being active because its conditions have not been met.

What happens to the balance after a payment plan defaults?

The full overdue balance can become immediately payable and the ATO may take firmer action.

Can a business get another ATO payment plan after default?

A new arrangement may be possible depending on the circumstances, but it is not automatic. Contact the ATO or a registered tax adviser promptly.

Should a business take a loan after an ATO plan defaults?

Only if the business is viable and the new repayment is sustainable. Finance should not be used simply to postpone an underlying trading deficit.

Official sources

• ATO: Managing your payment plan
• ATO: Payment plans
• ATO: Firmer action we may take

Further Reading

• Can an ATO Payment Plan Affect a Business Loan Application?
• ATO Debt and Credit Reporting
• ATO Payment Plan vs Business Loan Calculator

GPS Finance Group (CRN 000575797) is an Authorised Credit Representative of AFAS Group Pty Ltd (ACL 414426). AFCA Member ID 119860. General advice only. Consider whether this information is appropriate for your circumstances. Tax and legal questions should be discussed with a registered tax adviser or lawyer.