Sole trader ATO debt: when the tax bill is personally yours

It usually starts innocently. A good year, a tax return that comes back bigger than expected, a few quarters of BAS where the GST money got spent on wages or stock. Before long there’s a balance on the ATO portal that keeps growing. For a sole trader, that number isn’t the business’s problem sitting at arm’s length. It’s yours.

This page explains why, what it means when you want to borrow, and some calm ways to deal with it.

Why is a sole trader’s ATO debt a personal debt?

Because a sole trader and the business are one legal person. business.gov.au says a sole trader is “personally liable to pay tax on all the income derived”. There’s no company to hold the debt and no director penalty regime to worry about — just you and the ATO.

That has two practical effects:

• The debt follows you, not the business name. Closing the ABN doesn’t make it go away.
• It sits in any lender’s picture of you, because your personal position is the business’s position.

How does the ATO debt keep growing?

The ATO’s payment plans page is clear that tax debts on a plan “continue to accrue GIC, which compounds daily”. And since 1 July 2025, the ATO confirms taxpayers “can no longer claim an income tax deduction for ATO interest charges incurred on or after 1 July 2025”. That change made carrying an ATO balance noticeably less attractive than it used to be — which is part of why more owners now look at clearing it with other finance.

Can I borrow while I owe the ATO?

Yes, often. Lenders consider ATO debt case by case, and many see it every week. What they weigh:

Factor	What helps
Size of the balance	Relative to turnover and what you’re borrowing
Payment plan	Being on one — and keeping to it
Lodgements	BAS and returns up to date, even if payment is behind
Cause	A one-off big year reads better than a long pattern
The plan	How the loan fixes the problem rather than delaying it

Honesty matters most. An ATO debt that turns up on a statement after you said there wasn’t one is far more damaging than one you mentioned upfront.

Should I use a business loan to pay out the ATO?

Paying the ATO is a business purpose, and using a business loan to clear the balance is common. Whether it’s right for you depends on:

1. Total cost. Compare the full cost of the loan with what the ATO balance will cost on a plan, including GIC that’s no longer deductible.
2. Cash flow. A loan repayment needs to fit your quietest months, not your best.
3. What caused the debt. If the business is spending its GST, a loan clears the balance but doesn’t fix the habit. Our guide to paying yourself properly helps here.
4. Security. For larger balances, property-secured options can offer more room. That puts the property at risk, so read protecting the family home first.

Your accountant should be part of this decision. When you’ve got the numbers, tell us what you owe and what you need and we’ll show you what’s realistic.

What about my credit file?

The ATO’s disclosure rules apply to businesses with an ABN that have a tax debt of at least “$100,000 is overdue by more than 90 days” and aren’t actively engaging with the ATO. If you’re on a payment plan and complying with it, the debt won’t be reported under those rules. Beyond that, any past defaults on your personal file matter too — see sole trader loans with bad credit.

How do I stop it happening again?

Some simple habits help sole traders stay on top of tax:

• Set aside tax as money comes in. A separate savings account for GST and income tax, topped up weekly.
• Pay yourself a set amount rather than drawing whatever’s in the account.
• Lodge on time, even when you can’t pay in full — then call the ATO.
• Talk to your accountant mid-year, not just after 30 June, so there are no surprises.

Illustrative example: A sole trader builder has an ATO balance that grew after two strong years. He’s on a payment plan and keeping to it, and his accountant has shown him the plan will cost more now GIC isn’t deductible. He owns his home with plenty of equity. He compares a small secured business loan to clear the ATO in full against staying on the plan, then decides with his accountant.

What if the balance is too big to refinance?

Sometimes a loan isn’t the answer. If the ATO debt is large compared with what the business earns, or the business is still losing money each month, borrowing more can simply move the problem. In that case the honest conversation is about a realistic payment plan, cutting costs, or getting advice from your accountant or the Small Business Debt Helpline on 1800 413 828, which business.gov.au lists as a free service. We’d rather tell you that on the first call than put you into a loan that doesn’t fix anything.

Tax debt, handled without judgement

We talk to owners about ATO debt every day, and we don’t flinch at it. Your enquiry takes about 60 seconds and involves no credit check. It goes to one specialist — never broadcast across a list of lenders — who will call you to understand the balance and your plans. Please give us the real figure you owe and whether you’re on a payment plan; accurate answers are how we find the right option on the first go.

Get a straight answer on your ATO debt →