Tax Debt & Borrowing: Frequently Asked Questions

Tax debt can significantly impact your ability to borrow money, whether for a home loan, business loan, or personal loan. Lenders closely examine tax obligations when assessing applications. Below are answers to common questions about tax debt and borrowing.

1. Do Lenders Check for Tax Debts?

Yes, lenders review tax debts when assessing loan applications. If you owe money to the Australian Taxation Office (ATO) or another tax authority, lenders may consider you a higher-risk borrower.

What Do Lenders Consider?

  • How much you owe – Larger tax debts raise more concerns.
  • Are you on a payment plan? – Lenders prefer borrowers with structured repayment plans.
  • Credit history impact – If tax debt has been referred to collections, it may affect your credit score.
  • Overall financial health – Lenders assess your income, expenses, and liabilities before approving a loan.

2. How Does Tax Debt Affect Loan Approvals?

Tax debt can reduce your chances of loan approval by affecting your borrowing power and financial risk profile.

Impact on Different Loan Types:

✅ Home Loans: Tax debt reduces borrowing capacity and may prevent approval if a tax lien is placed on assets.

✅ Business Loans: Unpaid BAS or payroll tax debts signal cash flow issues and may limit funding.

✅ Personal Loans: A tax debt in collections may disqualify you from most unsecured loans.

3. What Is the General Interest Charge (GIC)?

The General Interest Charge (GIC) is the interest applied by the ATO on unpaid tax debts. It accrues daily and can significantly increase your total debt over time.

How GIC Affects Borrowing:

  • Increases your total debt, making it harder to qualify for loans.
  • Signals financial mismanagement to lenders.
  • Compounds daily, creating a long-term financial strain.

How to Reduce GIC Impact:

  • Set up a repayment plan with the ATO.
  • Apply for a remission if facing financial hardship.
  • Pay down tax debt quickly to reduce accumulating interest.

4. What Are the Options for Paying Off Tax Debt?

If you need financing to settle tax debts, consider these options:

1. Business or Personal Loans

  • Some lenders offer tax debt loans to consolidate and repay ATO obligations.
  • Non-bank lenders may approve borrowers with tax liabilities.

2. Tax Debt Loans

  • Specialised lenders provide structured repayment loans specifically for ATO tax debts.

3. Refinancing Existing Loans

  • Mortgage refinancing can free up funds to clear tax debt.
  • Business owners can refinance equipment or commercial loans.

4. ATO Payment Plans

  • The ATO offers structured repayment plans, preventing additional interest and penalties.
  • Example: Sarah, a small business owner, set up a 12-month repayment plan to clear her $50,000 tax debt and successfully secured a loan.

5. Line of Credit or Overdraft

  • Businesses may use existing credit lines to cover tax obligations.

6. Debt Negotiation or Settlements

  • Engaging a tax debt negotiation service can reduce the total amount owed or establish manageable payments.

5. Tips for Managing Tax Debts

Keeping tax debts under control is crucial to maintaining financial health and securing loans. Here are some tips to manage tax debt effectively:

1. Stay on Top of Tax Obligations

  • Lodge your BAS and tax returns on time to avoid penalties.
  • Keep track of due dates to prevent debt from accumulating.

2. Set Up a Payment Plan

  • If you can’t pay your tax debt in full, contact the ATO to arrange a payment plan.
  • Ensure you make payments on time to maintain compliance.

3. Prioritise High-Interest Debts

  • The General Interest Charge (GIC) adds to unpaid tax debts over time.
  • Prioritise paying off tax debts before other lower-interest liabilities.

4. Maintain Good Financial Records

  • Keep accurate records of income, expenses, and deductions.
  • Regular financial tracking helps in budgeting and tax planning.

5. Use Professional Help

  • A tax advisor or accountant can help you manage obligations effectively.
  • A finance broker can assist in securing loans if tax debt is a barrier.

6. Avoid Future Tax Debt

  • Set aside money regularly for tax payments.
  • Consider a business savings account for tax obligations.

6. Can You Get a Loan If You Have Tax Debt?

Yes, but lenders prefer borrowers who have structured repayment plans rather than outstanding tax liabilities.

How to Improve Loan Approval Chances:

✅ Set Up a Payment Plan – Lenders are more likely to approve loans if you have an active ATO arrangement.

✅ Show Consistent Repayments – Proving regular payments shows financial responsibility.

✅ Improve Cash Flow – A stable income and financial plan can offset tax debt concerns.

✅ Use Specialist Lenders – Some lenders cater to borrowers with tax debts.

Example:

  • John, a self-employed builder, owed $30,000 in tax debt. After setting up a structured ATO repayment plan and making consistent payments for six months, he secured a home loan with a non-bank lender.

7. Will Tax Debt Affect My Credit Score?

Yes, tax debt can affect credit scores if unpaid or escalated to collections. The ATO does not directly report to credit bureaus, but serious tax debts may result in:

  • Court judgments, which impact credit ratings.
  • ATO disclosure of business debts over $100,000 unpaid for more than 90 days.
  • Debt collection referrals, which lower credit scores.

8. Should I Work With a Finance Broker?

Yes! A finance broker can help navigate tax debt concerns when applying for loans by:

  • Finding lenders that accept applicants with tax debt.
  • Structuring finance solutions to fit your tax situation.
  • Negotiating with lenders for better loan terms.

9. Take Control of Your Tax Debt & Borrowing Power

Tax debt doesn’t have to stop you from securing a loan, but managing it properly is key. If you’re concerned about tax liabilities affecting your ability to borrow, we can help.

🔹 Book a consultation today to discuss loan options.

🔹 Call us now for expert guidance on managing tax debt.

🔹 Let’s create a strategy to improve your financial future!

The Team at The Accountants and The Finance Brokers are here to help you navigate your cash flow requirements in your business. We offer complimentary cash flow reviews and assist you in understanding your finance needs.