Tax debt is a reality for many small businesses, especially following the post-COVID period when many clients deferred obligations under the ATO's temporary relief measures. As those arrangements wind down and new debts accumulate, bookkeepers are increasingly involved in helping clients understand their options and navigate the ATO's payment arrangement process.
This guide covers how ATO payment plans work, how to book them correctly, what interest applies, and how to ensure the client maintains their compliance status during the arrangement.
What Is an ATO Payment Plan?
An ATO payment plan (formally called a payment arrangement or instalment arrangement) allows a taxpayer to pay an outstanding tax debt over time rather than in a single lump sum. The ATO offers these arrangements for most tax types including income tax, GST, PAYG withholding, superannuation guarantee charge, and fringe benefits tax.
Payment plans are generally accessible through the ATO's online portal (myGov or Online services for business) for debts under approximately $100,000. Larger debts typically require negotiation with an ATO case officer and may require disclosure of financial information to demonstrate the client's ability to pay.
Getting onto a payment plan does not eliminate interest charges — the general interest charge (GIC) continues to accrue on the outstanding balance throughout the arrangement. The current GIC rate is published quarterly on the ATO website.
How to Set One Up
For debts within the self-service threshold:
- Log into ATO Online Services for Business (or myGov for individuals)
- Navigate to the outstanding debt
- Select "Set up a payment plan"
- Nominate the initial payment amount and the ongoing instalment frequency (weekly, fortnightly, or monthly)
The ATO will calculate the total payments required based on the outstanding balance plus accruing GIC. Clients should try to pay as much as possible upfront and keep instalments as large as cashflow allows — every dollar paid reduces the base on which GIC accrues.
For more complex situations (large debts, multiple obligations, clients with previous arrangement defaults), the accountant or registered tax agent should negotiate directly with the ATO. Having financial statements and cashflow forecasts ready strengthens the negotiation.
GIC vs SIC: What's the Difference?
Two interest charges can apply to tax debts:
General Interest Charge (GIC): The standard interest rate that applies to unpaid tax. It is calculated daily on the outstanding balance. GIC is deductible for income tax purposes for businesses.
Shortfall Interest Charge (SIC): A lower rate that applies when the ATO amends an assessment and the client had an amended (incorrect) tax position. SIC applies only during the period before the amended assessment was issued. SIC is also deductible.
In most payment plan scenarios, it's GIC that applies. Book it as interest expense — it is a deductible business expense and should not be confused with non-deductible personal interest charges.
Bookkeeping Entries for ATO Debt and Payment Plans
When a client enters a payment plan, the debt is already on the balance sheet as a liability (ATO liability account). The accounting treatment:
Ongoing GIC accrual:
- Debit: Interest expense — ATO GIC
- Credit: ATO liability account (increases the debt outstanding)
Each instalment payment:
- Debit: ATO liability account
- Credit: Bank
Net effect: the debt reduces as payments are made, but increases as GIC accrues. Clients should be shown a schedule of their expected payments vs accruing interest so they understand why the outstanding balance doesn't fall at the same rate as their payments.
If the ATO applies a penalty (for example, for late lodgement), penalties are generally not deductible. Code them separately to a non-deductible penalties account, not to interest expense.
Maintaining Compliance During a Payment Plan
The ATO's standard condition for a payment plan is that the client must lodge all future obligations on time and pay new obligations as they fall due — including BAS and income tax. A payment plan does not authorise future non-lodgement.
If a client enters a payment plan for GST debt but then fails to lodge their next BAS, the ATO may cancel the arrangement and issue a demand for the full outstanding amount. This is the scenario that turns a manageable situation into a crisis.
Your role as bookkeeper is to monitor the client's ongoing lodgement and payment obligations and flag any missed deadlines immediately. If a BAS is overdue while a payment plan is active, escalate to the accountant for urgent attention.
When a Payment Plan Isn't the Right Answer
A payment plan makes sense when the client's cash flow issue is temporary and the underlying business is viable. It doesn't make sense when:
- The client has significant assets they could liquidate to pay the debt
- The business is not viable and is accumulating more debt than it can service
- The debt is primarily from director penalties (which create personal liability for the directors regardless of any company payment plan)
In these situations, the client needs qualified tax or insolvency advice — not just a payment plan. Be cautious about assuming a payment plan will resolve all issues if the underlying business fundamentals are poor.
Director Penalty Notices
A critical flag for company clients: if a company fails to meet PAYG withholding, superannuation guarantee, or GST obligations, the ATO can issue a Director Penalty Notice (DPN) making the company's directors personally liable for the debt. Once a DPN is issued, the director may be personally liable even if the company subsequently pays or enters administration.
If you see a company with significant unpaid PAYG or SGC liabilities, alert the directors immediately. The timeframes for avoiding personal liability are short and do not pause while the company is trying to sort out its finances.