Picture a Melbourne allied health practice at the end of a slow winter quarter. Payroll is due Friday, two suppliers want payment, and the BAS is due the following week. The owner decides the ATO can wait a month or two. Plenty of people make that call, and it often feels like the lowest-risk option.
In 2026, it’s usually the most expensive one.
Two things have changed. Interest on overdue tax now costs more in real terms than it has for years. And the ATO has a set of collection tools that can turn a company’s tax debt into a credit file entry or a director’s personal liability. Business owners who still think of the Tax Office as a patient, low-cost lender are working from an out-of-date picture.
What overdue tax actually costs in 2026–27
The ATO charges the General Interest Charge (GIC) on unpaid tax. It’s set every quarter at the 90-day bank bill rate plus 7 percentage points. For 1 October to 31 December 2026, the GIC is 11.51% a year, up from 11.43% in the July to September quarter. The daily rate is 0.03153425%.
The headline rate isn’t the whole story, for two reasons.
It compounds daily. Each day’s interest is added to the debt, and the next day’s interest is charged on that larger amount. Over a full year at the current rate, the effective cost is about 12.2%, not 11.51%.
It’s no longer tax deductible. For income years starting on or after 1 July 2025, businesses can’t claim GIC or the Shortfall Interest Charge (SIC) as a deduction. Before this change, a company could deduct the GIC it paid, which cut the real cost a lot. That deduction has now gone.
Here’s a rough example
Say a company owes $80,000 from its BAS and leaves it unpaid for 12 months at roughly today’s rate:
Overdue ATO debt:
- Headline rate: 11.51% (GIC, October to December 2026)
- Effective annual cost: about 12.2%, because of daily compounding
- Approximate interest on $80,000: about $9,760
- Tax deductible: no
- After-tax cost for a 25% base rate entity: about $9,760
Typical business loan (illustrative):
- Headline rate: 9.0%
- Effective annual cost: about 9.4%, with monthly repayments
- Approximate interest on $80,000: about $7,500
- Tax deductible: generally yes, if the loan is used for business purposes
- After-tax cost for a 25% base rate entity: about $5,600
This is an illustration only. GIC changes every quarter, loan pricing depends on the business, and the exact tax result depends on the entity’s circumstances.
To match the after-tax cost of non-deductible GIC, a base rate entity would need a deductible loan charging about 16% a year. Very few secured or unsecured business loans cost that much. On cost alone, carrying ATO debt is now rarely the cheaper choice.
The SIC is lower. It’s 7.51% a year for October to December 2026. It applies when an amended assessment increases a tax liability, for example after a review or a voluntary correction. Once the amended amount becomes due and stays unpaid, GIC takes over.
Interest isn’t the biggest problem
Cost matters, but most of the real damage comes from what happens as a debt gets older and the business stops engaging with the ATO.
Credit reporting
The ATO can report a business’s tax debt to registered credit reporting bureaus. In broad terms, a business is eligible for reporting when it:
- has an ABN and isn’t an excluded entity, such as a deductible gift recipient or a government entity
- owes at least $100,000 that is more than 90 days overdue
- isn’t effectively engaging with the ATO to manage the debt, for example through a payment plan it’s keeping to
- has no active objection or review that the ATO is aware of.
Before it reports anything, the ATO must send written notice. The business then has 28 days to pay or to start engaging. Professional commentators point out that a listing can stay on a commercial credit file for years. Lenders, landlords and trade suppliers check these files as a matter of routine.
The $100,000 threshold is lower than it sounds. A medical or dental practice with several practitioners, or a trades business with a dozen staff, can reach it after two or three missed BAS payments plus GIC.
Director penalties
For company directors, the stakes are personal. Under the Director Penalty Regime, the ATO can make directors personally liable for a company’s unpaid PAYG withholding, GST and superannuation guarantee charge.
How exposed a director is depends largely on lodgement:
- If the company lodges on time but can’t pay, the ATO usually issues a director penalty notice (DPN) that gives the director 21 days to act. The penalty can be remitted if, within those 21 days, the company pays the debt, appoints an administrator or small business restructuring practitioner, or starts winding up.
- If the company hasn’t lodged within three months of the due date (for PAYG withholding and GST) or hasn’t lodged its superannuation guarantee charge statement by its due date, the penalty is “locked down”. Putting the company into administration or liquidation no longer removes the director’s personal liability.
This is the most expensive mistake on the list, and it’s an easy one to make. Owners who are struggling often stop lodging because they don’t want to face a bill they can’t pay. But late lodgement removes the director’s main safety net. The rule is simple: lodge on time, even when you can’t pay on time.
New directors should know that they can become liable for some debts from before their appointment if those debts aren’t dealt with within 30 days of joining the board.
Payday Super changes the timing
Implemented from 1 July 2026, Payday Super requires employers to pay superannuation guarantee within seven days of each payday, instead of quarterly. That’s a big change for cash flow. A business that used to keep three months of super in its working capital no longer has that buffer.
It also means a missed contribution becomes overdue much sooner, and any related charge, along with possible director exposure, builds up faster. Businesses should review their payroll and cash forecasting under the new rules, and confirm the current super guarantee charge and lodgement requirements with their adviser, because the transition details are still bedding in.
Where small businesses and practices can go wrong
A few patterns come up again and again.
Treating GST and PAYG withholding as working capital. GST collected from customers and tax withheld from wages were never the business’s money. When they sit in the operating account, they get spent. Setting them aside in a separate account, each week or each time revenue comes in, is a simple fix that works.
Agreeing to a payment plan the business can’t keep up. Committing to a large monthly instalment to get the ATO to stop calling, and then defaulting, often leaves the business worse off. A defaulted plan can undo the “engaging” status that protects against credit reporting. It’s better to agree a realistic instalment backed by an actual cash flow forecast.
Forgetting about offsets. The ATO can use tax refunds and credits, including GST refunds and income tax refunds, to pay down existing debts. A business that’s relying on a refund to cover a cash shortfall may never receive it.
Waiting for the “firm action” letter. By the time a DPN or a notice of intention to disclose arrives, the options have narrowed and the timeframes are short.
A practical playbook for 2026–27
Forecast tax as a real cost. A rolling 13-week cash flow forecast should include BAS, PAYG instalments, super on every payday and the next income tax payment. Practice owners with service entities, trusts or several companies should forecast each entity separately, because each one has its own tax obligations.
Talk to the ATO early. Businesses can set up payment plans online for debts of up to $100,000, as long as they meet the eligibility rules. Larger or more complicated debts usually need a tailored arrangement. Contacting the ATO before the due date, either directly or through a registered tax agent, gives the business more room than responding after a default.
Ask for GIC remission where it’s justified. The ATO can remit GIC fully or partly, for example where the delay wasn’t the taxpayer’s fault or where the business has a good compliance history. Remission isn’t automatic and should be supported by evidence, but the request is worth making.
Compare refinancing with staying in debt. Now that GIC is non-deductible, refinancing a tax debt with a deductible business loan can work out cheaper. But that moves an ATO obligation onto a lender, often with security over business or personal assets. It only makes sense if the business can afford the repayments. Otherwise it delays the problem.
Be honest about viability. Sometimes recurring tax debt is the symptom, not the cause. The real issue may be pricing, a bad mix of clients, too many staff for the revenue, or a structure that no longer fits. Small business restructuring is available for eligible companies with liabilities under $1 million. It works best when it’s considered early, while the company still has lodgements up to date and choices available.
Help is Available from Melbourne Small Business Tax Specialists
None of this means a business with tax debt is doomed. Plenty of sound Melbourne businesses go through tight quarters and come out fine. The ones that manage it tend to treat the ATO as a creditor they have to manage, not one they can ignore. They lodge on time, keep tax money separate, forecast what’s coming, and raise problems before the ATO does.
Cost is only part of what changed in 2026. Overdue tax used to be the quiet option. Now it costs more than most business loans after tax, it can end up on a credit file, and it can follow a director home. Businesses that recognise this early still have choices. Businesses that recognise it late often don’t.
For small business in every sector and practice owners who want help forecasting tax, negotiating with the ATO or reviewing their structure, we can assist you. We also offer tax and business advisory support in Melbourne, including in Fitzroy, South Yarra, Richmond, and Thornbury.
Rates and thresholds are correct as of October 2026. GIC and SIC rates change every quarter. This article is general information only and isn’t personal tax, legal or financial advice.
FAQs
Does GIC stop once a payment plan is in place?
No. GIC keeps building up every day on the unpaid balance for as long as the plan runs, including on instalments that aren’t due yet. A payment plan protects your business from tougher collection action and shows the ATO you’re engaging, but it doesn’t stop interest. Paying more than the minimum whenever cash allows reduces the total cost. Not sure what instalment is realistic? Our business tax specialists and small business accountants work with practices and businesses in Camberwell, Fitzroy, and more. We can model repayments against your cash flow first.
Is GIC on an older tax debt still deductible?
What matters is when the GIC is incurred, not when the debt arose. GIC incurred in income years starting on or after 1 July 2025 isn’t deductible, even if the original debt is years old. GIC incurred in earlier years is still deductible under the old rules, so debts that run across both periods need to be split carefully. Carrying an older debt into 2026–27? Ask a Melbourne tax specialist to review your interest treatment and repayment strategy. We work with small businesses and practices throughout Camberwell, South Yarra, Richmond and beyond.
What if the business disputes the amount the ATO says it owes?
Lodging an objection or asking for a review doesn’t automatically stop the ATO from collecting. In some cases, the ATO will agree to a 50/50 arrangement: you pay half the disputed amount, and recovery of the rest is put on hold until the dispute is resolved. GIC can still build up on the unpaid part, so losing the dispute means a bigger bill. Think an assessment is wrong? Our Melbourne tax specialists and accountants working in Fitzroy, Balwyn, South Yarra and more can assess the merits and protect your cash flow.
