For years, falling behind on BAS was the quiet, standard way Australian small businesses managed a tight quarter. It was informal, nobody asked questions, and the interest felt survivable.
That changed on 1 July 2025, and most owners have not recalculated.
What the ATO now charges
The general interest charge (GIC) for the April–June 2026 quarter ran at approximately 10.96% per annum. It compounds daily from the original due date.
And since 1 July 2025, GIC and the shortfall interest charge are no longer tax-deductible.
That second change is the one that matters, and it is widely under-appreciated.
For a company paying 25% tax, a non-deductible 10.96% is equivalent to roughly a 14.6% deductible interest rate in pre-tax terms. At the 30% company rate it is closer to 15.7%.
Set that against your alternatives:
| Source | Typical rate | Deductible? | Effective pre-tax cost |
|---|---|---|---|
| ATO general interest charge | ~10.96% | No | ~14.6% |
| Secured business loan | 7–9% | Yes | 7–9% |
| Unsecured business loan | 10–18% | Yes | 10–18% |
| Invoice / debtor finance | 8–15% | Yes | 8–15% |
| Business credit card | 15–22% | Yes | 15–22% |
The ATO now sits alongside a credit card, not alongside a bank loan. Yet it remains the facility most businesses reach for first, because it requires no application and nobody says no.
The scale of it
Collectable tax debt owed by Australian small business reached $35.9 billion in 2024-25 — up $19.4 billion since 2018-19, and roughly two-thirds of the $54.2 billion total collectable debt across all taxpayers.
As at 30 June 2025, approximately $34.7 billion of that was unpaid activity statement debt — predominantly GST, PAYG withholding and superannuation guarantee charge.
That composition matters. Most of it is money the business collected or withheld on someone else’s behalf. GST is the customer’s. PAYG withholding is the employee’s. It never belonged to the business, which is why the ATO’s tolerance for it is limited and why directors can be made personally liable.
Enforcement has resumed
The ATO reduced collection activity during the pandemic. That period is over.
In 2024-25 the ATO issued close to 85,000 director penalty notices, covering $5.5 billion in liabilities. Firmer actions now in regular use include garnishee notices, directions to pay, director penalty notices, and disclosure of business tax debt to credit reporting bureaus — which affects your ability to obtain finance elsewhere.
The ANAO has recommended the ATO set explicit targets to reduce the small business debt shortfall, so the direction of travel is toward more enforcement, not less.
What to do if you are behind
1. Lodge, even when you cannot pay
This is the single most important thing in this article.
Lodgement and payment are separate obligations. Lodging on time while paying late keeps you in the system as a business with a cash flow problem. Failing to lodge changes the category entirely — it removes the ATO’s visibility, escalates enforcement options, and in the case of a lockdown director penalty notice can make a director personally liable with no way to remit the penalty.
If you take one thing from this page: lodge on time regardless of whether you can pay.
2. Get a payment plan in place
Over 655,000 payment plans were on foot as at the end of June 2025, covering roughly $11.7 billion. This is an entirely ordinary arrangement, not an admission of failure.
Small businesses may qualify for an interest-free payment plan on overdue activity statement debt in some circumstances — which, given the numbers above, is worth considerably more than most owners assume.
Arrange it before the ATO contacts you. Terms offered to a business that comes forward are consistently better than terms offered to one that has been chased.
3. Compare it honestly against commercial finance
Most owners have never done this calculation, because ATO debt does not feel like borrowing. It has no application form and no relationship manager.
But at an effective ~14.6% pre-tax, refinancing ATO debt into a cheaper commercial facility is frequently a straightforwardly profitable transaction. 34% of Australian SMEs sourced non-bank lending in the past twelve months for working capital, and 92% have used or would consider one. It is mainstream.
Do the comparison properly, including fees and term. Sometimes the ATO plan wins — particularly if it is interest-free. Often it does not.
4. Fix what caused it
Tax debt is almost always a symptom. The two usual causes:
A cash timing problem. Australian small businesses are paid in an average of 24.1 days, with invoices settled 6.9 days late. Add Payday Super compressing the cycle from 1 July 2026, and GST collected in one quarter is routinely spent before it is remitted. The fix is a separate tax account and a transfer on every deposit — unglamorous, and it works.
A profitability problem wearing a cash flow costume. If you have been behind for more than a year and the balance keeps growing, the business is not generating enough margin. No payment plan fixes that. Repricing might.
The uncomfortable part
Deferring tax feels like the cheapest option available because nothing happens immediately.
At an effective pre-tax cost of around 14.6%, compounding daily, with personal director liability attached and credit reporting consequences, it is close to the most expensive money in your business.
If you would not take a 15% loan to fund this quarter, you should not be funding it with the ATO either.
Where to go next
- Director Penalty Notices: What Triggers One
- Business Cash Flow in Australia
- Payday Super: The $124,000 Working Capital Hole
- The Profit Lever Hierarchy — if this is a margin problem, not a timing one
- Australian Business Compliance Calendar 2026-27
Sources: Australian Taxation Office; ANAO performance audit — ATO management of small business collectable debt; ATO Deputy Commissioner address to The Tax Institute Tax Summit; ASBFEO Small Business Data Portal, March quarter 2026; ScotPac SME Growth Index. GIC rate quoted is for the April–June 2026 quarter and is reset quarterly — check the current rate. This is general information, not tax or financial advice. Speak to your accountant about your specific position.