If you've received a letter or myGov message from the ATO about a tax debt you thought was long gone, you're not alone. Over the past couple of years the ATO has shifted decisively away from the more lenient collection approach it took during the COVID years, and two changes in particular are catching taxpayers off guard: the reactivation of debts that were previously placed "on hold", and the removal of the deduction for ATO interest charges.
Both changes hit small businesses and sole traders hardest — and we're seeing them regularly across Werribee, Hoppers Crossing, Tarneit and the wider western suburbs.
What is a "debt on hold"?
The ATO has long had the ability to pause active collection of a debt it considers uneconomical to pursue. The debt isn't waived or forgiven — it's simply parked. Legally it still exists, it just stops appearing in the ATO's active collection cycle.
For years, many taxpayers with a debt on hold heard nothing about it. Some assumed it had been written off entirely. Then the ATO began writing to individuals and businesses to remind them the debt was still on the books, and to advise that it would once again be offset against future refunds or actively pursued.
The most common way people discover an old debt on hold is unpleasant: they lodge a return expecting a refund, and the refund never arrives — or arrives much smaller than expected — because it has been used to reduce the parked debt.
Why this matters more than it sounds
- Offsetting is automatic. If you have a debt on hold and you become entitled to a refund or credit, the ATO can apply that credit against the debt without needing your agreement.
- It can affect cash flow planning. If you were counting on a refund to cover a BAS payment or a supplier invoice, an unexpected offset can create a genuine squeeze.
- Old debts can be hard to verify. Some of these amounts date back many years. Reconstructing what the debt relates to — and whether it's correct — takes work.
The bigger change: ATO interest is no longer deductible
Historically, if you carried a tax debt and the ATO applied general interest charge (GIC) or shortfall interest charge (SIC), you could generally claim a deduction for those interest amounts. That effectively softened the blow — the after-tax cost of an ATO debt was lower than the headline rate suggested.
That deduction has been removed. GIC and SIC incurred on or after 1 July 2025 are no longer deductible. Interest incurred before that date generally remains deductible under the old rules, but from the 2025–26 income year onwards, every dollar of ATO interest is a real, after-tax dollar out of your pocket.
Combine that with the fact that GIC is calculated on a compounding daily basis and sits well above typical commercial lending rates, and the maths becomes uncomfortable quickly. An ATO debt is now one of the most expensive forms of finance a small business can carry.
A practical comparison
Consider a business carrying a $40,000 activity statement debt. Under the old rules, the GIC accruing on that debt reduced taxable income, so the effective cost was materially lower. Now, there's no offset at all. Meanwhile, a business overdraft or equipment facility at a lower rate — where the interest is still deductible because it's incurred in producing assessable income — may be dramatically cheaper.
For many clients, the sensible answer is now: refinance the ATO out. Borrow commercially, pay the ATO, and claim the deduction on the commercial interest. That won't suit everyone, and it depends on your capacity to service the loan, but it's a conversation worth having rather than defaulting to a long ATO payment plan.
Remission of interest is no longer easy
The ATO has also tightened its approach to remitting (reducing or cancelling) interest charges. Remission is discretionary, and the ATO is applying that discretion more narrowly than it did during the pandemic period. Broadly, you're in a better position to ask for remission where:
- The delay was caused by circumstances genuinely beyond your control — serious illness, natural disaster, or a documented ATO processing error;
- You have an otherwise strong lodgment and payment history;
- You acted promptly once you became aware of the problem; and
- You have engaged with the ATO rather than ignoring correspondence.
Simply not having the money is rarely enough on its own. Requests supported by documentation — medical certificates, bank statements, insurance correspondence — carry far more weight than a general statement of hardship.
Director penalty notices and the risk of ignoring it
For company directors, unpaid PAYG withholding, GST and super guarantee amounts carry personal risk. The ATO can issue a director penalty notice (DPN) making a director personally liable for those amounts.
The critical distinction is timing. If the relevant activity statements and super obligations were lodged on time — even if not paid — a director generally has options to deal with a DPN, including appointing an administrator or liquidator within the notice period. If lodgments are late beyond the statutory window, the penalty can become locked down and the only realistic way out is to pay it.
This is the single strongest argument for the advice we give constantly: lodge on time, even when you can't pay. Lodging preserves your options. Not lodging destroys them.
Disclosure of business tax debts to credit reporting bureaus
The ATO also has the power to report certain business tax debts to credit reporting bureaus, which can affect your ability to obtain finance, secure trade credit, or win contracts. This generally applies where a business has a significant debt that is overdue by an extended period and the business isn't effectively engaging with the ATO to resolve it.
The key protection here is engagement. A business with a compliant payment plan in place is in a very different position to one that has gone quiet. If you've received an intent-to-disclose notice, treat it as urgent — there is typically a short window to respond before disclosure occurs.
What to do if you've received an ATO debt letter
1. Don't ignore it
The worst outcome in every one of these scenarios comes from non-engagement. Firmer recovery action, locked-down DPNs, credit reporting and garnishee notices all become more likely when the ATO gets no response.
2. Verify the debt before you pay it
Log in to the ATO portal (or ask us to review your integrated client account and income tax account) and check what the amount actually relates to. Occasionally we find debts arising from unlodged returns that would have produced a refund, misapplied payments, or amounts that have already been dealt with.
3. Bring lodgments up to date
Outstanding returns and activity statements are the foundation of most ATO debt problems. Until they're lodged, no one — including the ATO — knows the real number. Getting current also unlocks access to payment plans and remission requests.
4. Consider a payment plan — with eyes open
The ATO offers payment plans, and smaller debts can often be arranged online. But remember that GIC continues to accrue on the outstanding balance for the life of the plan, and it's no longer deductible. Model the total cost before committing.
5. Compare the cost of commercial finance
Given the non-deductibility of GIC, borrowing to clear an ATO debt is now a genuinely competitive option for many businesses. It also removes the compliance risk that comes with carrying an ATO balance.
6. Build the tax into your cash flow, not around it
Most ATO debt problems start with GST and PAYG withholding being treated as available working capital. A separate bank account for tax collected on behalf of the ATO is unglamorous, but it's the most effective fix we know.
How ProPartners can help
We regularly help clients across Werribee, Altona, Williamstown, Sunshine, Hoppers Crossing and Tarneit deal with ATO debt — from reconciling an old debt on hold, to bringing years of lodgments up to date, to negotiating payment arrangements and preparing properly supported remission requests. As registered tax agents we can also access your ATO accounts directly and give you a complete picture of where you stand.
If you've had a letter from the ATO, or a refund that didn't arrive, the earlier we look at it the more options you'll have. Get in touch with ProPartners Accountants & Advisers to arrange a review.
This article is general information only and does not take into account your personal circumstances. Please speak with us before acting on anything discussed here.