Quick answer
Using a second mortgage to pay an ATO debt can make sense when the debt is too large or urgent for a payment plan to handle comfortably, when clearing it unlocks a refinance, or when director penalty exposure is a concern. General interest charge on ATO debts stopped being tax deductible from 1 July 2025, which changes the comparison. A payment plan may still suit smaller debts the business can clear steadily from cash flow.
Key points
- GIC builds on a daily compounding basis and, for charges from 1 July 2025, can't be claimed as a deduction.
- Debts of up to $200,000 can often go on a payment plan through the ATO's self-service channels.
- Clearing the debt can unlock refinancing with a mainstream lender.
- Director penalties can make company tax debts personal.
- Borrowing still needs a clear exit; it moves the debt, it doesn't erase it.
Tax debts are one of the most common reasons business owners look at their property equity. They’re also one of the situations where the decision has changed recently, so it’s worth weighing carefully rather than reaching for whichever option feels quickest.
What changed on 1 July 2025?
Before mid-2025, the general interest charge (GIC) added to late tax was usually deductible, which took some of the sting out of it. That’s gone. For GIC and shortfall interest charge (SIC) incurred from 1 July 2025 onward, the ATO confirms no deduction is available — and it doesn’t matter which income year the original debt came from.
A June 2025 ATO media release encouraged anyone unable to pay on time to speak with their accountant or finance provider about other ways the debt might be funded, and to go over the tax consequences with a registered tax agent. That’s a fair summary of the decision this page is about.
What does a payment plan offer?
With an ATO payment plan, the debt is cleared in instalments over time. Points the ATO makes:
- Owe $200,000 or less and you may be able to arrange one yourself via online services or the automated phone line.
- Interest doesn’t stop: GIC keeps building on the plan balance, compounding each day.
- New lodgements and payments must be kept up to date in full, or the plan may default.
- A refund you’re due is usually used to reduce the debt rather than paid out.
For a modest debt the business can clear steadily from cash flow, a payment plan is often the simplest path and keeps property out of it entirely.
When might a second mortgage make more sense?
| Situation | Why property equity may help |
|---|---|
| The debt is large relative to monthly cash flow | Instalments would strain the business for too long |
| A mainstream refinance is blocked by the debt | Clearing it can unlock longer-term finance |
| Director penalty exposure is a concern | Paying the company liability reduces the parallel penalty |
| The ATO has escalated action | A single payment can resolve it |
| The plan keeps defaulting | A one-off clearance stops the cycle |
On director penalties: the regime reaches unpaid GST, PAYG withholding and super guarantee charge, according to the ATO. Where those amounts were reported over three months late, paying the company’s liability in full is generally the only way to have the penalty remitted. If that applies to you, get advice quickly.
If one or more of these rows describes your situation, it may be worth asking a specialist what a second mortgage would look like. There’s no credit check when you first enquire.
How do you compare the two fairly?
- Get the real payoff figure from the ATO, including GIC to date.
- Estimate how long the payment plan would take at an instalment the business can genuinely afford.
- Estimate the GIC over that period, remembering it compounds daily and is no longer deductible.
- Get real pricing on a second mortgage, including fees, for the time you’d realistically hold it until the exit.
- Ask your accountant how each option is treated for tax, including whether interest on the second mortgage may be deductible as business borrowing.
- Factor in what clearing the debt unlocks, such as a refinance or removal of enforcement pressure.
Our guide to GIC and tax debt funding choices walks through this comparison in more detail.
What exit works for a tax-debt second mortgage?
Borrowing to pay the ATO moves the debt; it doesn’t remove it. The exit is what makes it sensible:
- Refinance with a mainstream lender once the ATO debt is cleared and returns are up to date. This is the most common exit.
- Sale of an asset, such as an investment property or equipment.
- Cash flow, if the business’s surplus can clear a smaller loan within a reasonable period.
Without an exit, a second mortgage for tax can simply swap one pressure for another. See planning the exit from day one.
A worked example (illustrative)
A company owes $240,000 to the ATO, mostly GST and PAYG withholding from a difficult year. It’s above the online self-service threshold, and the instalment the business could afford would take about three years. The bank has said it will refinance the company’s facilities once the ATO debt is cleared and the latest return is lodged. The directors own a home worth $1,300,000 with $480,000 owed.
A second mortgage of $240,000 would take combined LVR to about 55%, leaving a solid cushion. The exit is the bank refinance, expected within nine months. In this case borrowing may well be sensible. If the bank hadn’t committed, the decision would be much less clear-cut. Illustrative only.
What should you avoid?
- Borrowing to pay tax while new tax keeps going unpaid. Fix the cause, such as setting aside GST and PAYG each week.
- Borrowing more than the payoff figure “for breathing room” without a plan for the extra.
- Ignoring the ATO while you arrange finance. Keep talking to them.
Talk through your tax debt calmly
If an ATO debt is weighing on you, a short enquiry is a reasonable next step. One specialist will look at the debt, the property and your exit and tell you honestly whether a second mortgage, a payment plan or something else is the better fit. There’s no credit check to ask and your enquiry stays with one person. Please include the amount owed and any ATO arrangements accurately. It changes the advice.
Frequently asked questions
Is it better to use a payment plan or a second mortgage for an ATO debt?
It depends on the size of the debt, how quickly the business can repay it, the cost of each option and what else clearing the debt would unlock. A payment plan avoids a mortgage; a second mortgage can clear the debt in one step. Compare both with your accountant.
Is the ATO's interest charge tax deductible?
Not for charges incurred from 1 July 2025. According to the ATO, neither GIC nor shortfall interest charge arising from that date onward can be deducted, whatever income year the original debt belongs to.
Can the ATO set up a payment plan online?
According to the ATO, a debt of $200,000 or under may be able to go on a payment plan via its online services or automated phone line. Bigger debts mean speaking to the ATO directly.
Does paying the ATO debt remove director penalty risk?
Paying the underlying company liability reduces the corresponding director penalty, because they're parallel liabilities. Ask your accountant how it applies to your situation.
Will a lender consider me if I have an ATO debt?
Specialist property-secured lenders consider ATO debt case by case. The property, the equity cushion and a clear exit matter a great deal.