The end of lenient tax debt deals and what it means for your practice risk

The firm works with distressed businesses from initial financial assessment through to formal restructuring, tailoring its strategy to each client's specific creditor profile, asset position and trading history rather than applying a standardised approach.

"The pandemic created expectations around ATO flexibility that were never going to last. The Tax Office has said clearly it is moving to enforce, and a payment plan that felt like protection two years ago is now a much weaker position. Accountants need to be having a different risk conversation with those clients," says Domenic Calabretta, Mackay Goodwin’s Chief Executive Officer.

The cost of carrying ATO debt has changed

From 1 July 2025, the General Interest Charge and the Shortfall Interest Charge are no longer deductible. Depending on entity structure, that change adds between 15 and 45% to the effective cost of an outstanding tax liability. Clients who once treated unpaid tax as a manageable float are now paying materially more for that decision.

The expectation of routine remission was already being unwound before the legislative change arrived. At the Tax Institute's Tax Summit in September 2023, ATO Deputy Commissioner Vivek Chaudhary said directly: "As a consequence of our more lenient approach during the pandemic, we have seen an increased expectation that interest and penalties will be remitted. That expectation is not well-founded."

The July 2025 deductibility change locked that position in permanently.

A payment plan does not remove personal liability

Small businesses now hold $35.9 billion of the ATO's total collectable debt, according to RSM Australia's analysis of the ATO's 2024-25 Annual Report. Construction carries the highest concentration of disengaged debt at $4.3 billion, with professional services, hospitality and support services also identified as high-risk sectors.

In 2024-25, the ATO issued 84,529 Director Penalty Notices covering $5.5 billion in debts. A DPN triggers personal liability for unpaid PAYG withholding, GST and superannuation guarantee charges regardless of whether a payment arrangement exists.

"A DPN does not care whether a payment arrangement exists. It cares about whether the liability sits on the books. We take calls from accountants who were confident their client was protected because a plan was in place, and by the time we're talking, the window to act has already narrowed," says Calabretta.

What a formal framework changes

When ATO negotiations fail to produce terms a business can sustain, two legal mechanisms alter the position in ways an informal discussion cannot. Safe Harbour provisions under section 588GA of the Corporations Act 2001 protect a director from personal insolvent trading liability when they appoint an appropriate adviser and commit to a defined restructuring process.

A small business restructure under Part 5.3B of the Corporations Act creates a statutory mechanism to restructure debts, binding creditors, including the ATO, to an accepted plan. That is a different legal outcome from a phone-based arrangement the ATO can walk away from.

"A phone call with the ATO is persuasion. A formal framework is law. When we implement Safe Harbour or a restructuring plan, we're not relying on the Tax Office being cooperative. We're working within a process that binds them. That distinction matters a great deal to the director sitting across the table," says Calabretta.

Where practitioners can act first

The clients most at risk are those with growing balances across PAYG, GST and superannuation in sectors the ATO has flagged as priority enforcement targets. Identifying them before the ATO escalates, rather than after a DPN arrives, is where practitioners make the most material difference.

Mackay Goodwin offers a complimentary Business Health Check that maps a distressed business's position and produces an actionable recovery roadmap before any formal engagement begins. It is designed as a practical entry point for accountants who have clients in difficulty but have not yet determined what the right path forward looks like.

With GIC non-deductibility embedded in the tax system and the ATO issuing more than 84,000 DPNs in a single financial year, the practice question is no longer whether clients with accumulated debt will face harder terms. It is whether the right framework is in place before the Tax Office decides to move.