Short answer
Owe the ATO money you can’t pay by the due date and the tax debt starts earning interest against you immediately. The charge is called the general interest charge (GIC). For the October to December 2026 quarter it runs at 11.51% a year, compounding daily — an effective cost of about 12.2% a year.
Two things make that worse than it looks. First, a payment plan does not stop the interest: GIC keeps compounding on the outstanding balance for the life of the plan. Second, since 1 July 2025, GIC is no longer tax deductible — the 11.51% now comes out of after-tax money. There is exactly one interest-free escape route, and it only fits some small-business BAS debts. This guide shows the real numbers, how to set up a plan, and what happens if you do nothing.
What the general interest charge (GIC) is
The general interest charge is the ATO’s standard interest on unpaid tax. It applies to almost every kind of amount you owe and don’t pay by its due date: income tax from your return, activity statement debts, PAYG instalments, fringe benefits tax, and employer obligations. It is not a penalty — the ATO has separate penalties for that. GIC is pure interest for the time the ATO is kept waiting for its money.
Three features define it:
- Set by formula, reviewed quarterly. GIC equals the 90-day bank acceptance bill rate plus 7 percentage points. That’s why ATO debt always prices well above ordinary bank lending, wherever the rate cycle sits.
- Compounding daily. Interest is calculated every day on the balance including previously accrued interest. The headline rate therefore understates the true cost.
- No longer deductible. GIC and shortfall interest charge (SIC) incurred on or after 1 July 2025 cannot be claimed as a tax deduction, even if the underlying debt is from an earlier year. Before that date, GIC was deductible, which softened the real cost considerably.
Current GIC and SIC rates
| Quarter | GIC annual rate | SIC annual rate |
|---|---|---|
| Jul – Sep 2026 | 11.43% | 7.43% |
| Oct – Dec 2026 (current) | 11.51% | 7.51% |
The daily rate for the current quarter is 11.51% ÷ 365 = 0.03153425% per day. With daily compounding, the effective annual cost is about 12.2%. Rates for the January to March 2027 quarter will be announced by the ATO in December 2026 — always confirm the current quarter’s rate on ato.gov.au before relying on a figure.
The shortfall interest charge (SIC) is GIC’s quieter sibling. It applies when an amended assessment leaves you with extra tax to pay — for example, the ATO audits you or you lodge an amendment and the revised assessment is higher. It runs about 4 percentage points below GIC (7.51% currently) and is also non-deductible since 1 July 2025.
How the interest compounds: the actual maths
The ATO applies GIC like this: each day, multiply the outstanding balance by the daily rate and add the result to the balance. The next day’s interest is charged on that new, slightly larger balance. Over short periods the difference from simple interest is small; over months it is not.
The formula is:
Interest = balance × ((1 + 0.0003153425)days − 1)
Take Maya, who owes $8,000 of income tax from her 2025–26 return and pays six months (183 days) late:
$8,000 × ((1.0003153425)183 − 1) = $8,000 × 0.059397 ≈ $475.16 in interest
That’s roughly $2.60 a day, every day, until the balance is gone — and the daily amount creeps upward as interest capitalises.
A few more reference points at the current 11.51% rate:
- $20,000 unpaid for one month (30 days): ≈ $190
- $10,000 unpaid for a full year: ≈ $1,220 (effective 12.2%)
- $50,000 unpaid for a full year: ≈ $6,098
The deductibility flip: what 1 July 2025 changed
Until 30 June 2025, GIC was tax deductible. That single change rewrote the economics of ATO debt. Compare $1,220 of GIC on a $10,000 debt held a full year:
| Before 1 Jul 2025 (deductible) | From 1 Jul 2025 (not deductible) | |
|---|---|---|
| Gross GIC on $10,000 for a year | $1,220 | $1,220 |
| Tax saved by claiming the deduction (32% bracket) | −$390 | $0 |
| True after-tax cost | ~$830 | ~$1,220 |
| Tax saved (45% + 2% Medicare levy bracket) | −$573 | $0 |
| True after-tax cost (top bracket) | ~$647 | ~$1,220 |
For a top-bracket taxpayer, the real cost of carrying ATO debt has nearly doubled — from about $647 to $1,220 per $10,000 per year. Two side-effects worth knowing:
- If the ATO later remits (waives) GIC incurred on or after 1 July 2025, you don’t count the remitted amount as income — because you never got a deduction for it.
- Interest on a bank loan taken out to pay a tax debt may still be deductible for a business, since that interest isn’t GIC. This is one reason refinancing can beat an ATO payment plan — but get advice first, because it swaps unsecured tax debt for a commercial obligation.
Payment plans: how to set one up
A payment plan is a formal agreement to clear your tax debt in instalments instead of one lump sum. The rules differ for individuals and businesses, but the core deal is the same: you pay an up-front amount, then regular instalments, and you must lodge everything on time and pay new debts in full while the plan runs. The ATO’s guide to payment, interest and penalties sets out the framework agents and taxpayers work within.
Individuals
If you owe $200,000 or less, you can generally set up a plan yourself through ATO online services (linked to your myGov account) or the ATO’s self-help phone line — no need to call a case officer. The ATO offers a payment plan estimator so you can test what instalment amount you can afford before committing. You choose weekly, fortnightly or monthly instalments. If the offered plan is unaffordable, or you owe more than $200,000, phone the ATO to discuss terms — they are negotiable based on your cash flow, debt size and payment history.
Your registered tax agent can also set up or vary a plan for you online if you owe $200,000 or less and don’t already have a plan for that debt.
Businesses and BAS debts
The same $200,000 self-serve threshold applies. Larger debts go through a phone discussion where the ATO may ask for cash-flow evidence. Note that income tax debts and activity statement debts need separate plans — one arrangement doesn’t cover both.
The interest-free option (small business BAS debts)
This is the one genuine interest-free path, and it’s worth checking carefully. The ATO’s alternative payment plans let small businesses that owe activity statement amounts make interest-free payments over 12 months if they:
- have annual turnover under $2 million,
- owe $50,000 or less from recent activity statements, overdue for up to 12 months,
- have a good payment and lodgment history (no more than one plan default in the last 12 months, no outstanding activity statement lodgments),
- can’t obtain finance through normal business channels, and
- can demonstrate ongoing viability.
The mechanics matter: GIC technically still accrues, but as long as you maintain the plan it is automatically remitted once it appears on your account. On a $40,000 BAS debt cleared over 12 months, that’s roughly $4,879 of interest you never pay. Pay by direct debit and keep every other lodgment and payment obligation current. If you already have a standard plan, you can ask to switch by phoning the ATO’s business enquiry line.
What happens if you just ignore it
Doing nothing is the most expensive option, and it gets worse in stages:
- Interest accrues from day one. GIC starts the day after the due date and compounds daily. A payment plan doesn’t pause it (except the interest-free scheme above).
- Your refunds get swallowed. The ATO must apply any credits or refunds — including from later tax returns — against your debt. Lodging next year’s return while a debt sits there usually just reduces the debt. Those offsets don’t replace your plan instalments either.
- Firmer action. If you don’t engage, the ATO can issue garnishee notices (money from your bank account or wages), director penalty notices (making directors personally liable for certain company debts), or statutory demands that can lead to a business being wound up in court.
- Credit reporting — for businesses. The ATO can report a business tax debt to credit bureaus where at least $100,000 has been overdue for more than 90 days and the business isn’t engaging. You get written notice and 28 days to act first.
- Late lodgment penalties stack on top. If the return itself is late, the failure-to-lodge penalty is one penalty unit per 28 days (or part thereof), capped at five units — $364 per unit from 1 July 2026, so up to $1,820 per document. Interest and penalties are separate; you can cop both.
The ATO is generally reasonable with people who make contact early and demonstrably can’t pay — and considerably less reasonable with people who go quiet.
Payment plan vs bank loan vs credit card: the real comparison
Three ways to clear a $20,000 debt over six months:
| Option | Cost over 6 months | Notes |
|---|---|---|
| ATO payment plan (GIC 11.51%) | ≈ $1,160 in interest | No application fee; instalments you negotiate; interest not deductible. Enforcement risk ends once the plan is in place. |
| Business bank loan at 8% (deductible) | ≈ $800 gross, ≈ $544 after tax at 32% | Cheaper after-tax for a business — but it’s a commercial debt with its own security and covenants. Get advice. |
| Credit card (purchases ~20%+, cash advance higher) | ≈ $1,900+ | Almost always the worst option. ATO card payments are fee-free only until 30 June 2027, and the card interest dwarfs GIC. |
The honest decision rule: if you’re an individual, the payment plan usually wins on simplicity and flexibility. If you’re a business that can borrow at a deductible rate well under GIC’s effective 12.2% — especially a property-backed facility — refinancing often wins on pure dollars. If you qualify for the 12-month interest-free scheme, take it; nothing else comes close.
Common mistakes
- Thinking the plan pauses interest. The single most expensive misunderstanding. GIC compounds daily on the outstanding balance for the life of a standard plan. Every extra month on a $20,000 debt costs about $190.
- Claiming GIC as a deduction. Some returns still try it out of habit. GIC incurred on or after 1 July 2025 is not deductible, and claiming it invites an amendment.
- Defaulting on the plan. Miss the terms and the ATO can cancel the arrangement, making the full balance payable immediately — and it’ll be stricter about any replacement. A default in the last 12 months can also disqualify you from the interest-free scheme.
- Not lodging while you owe. Every unlodged return keeps its own penalty clock running ($364 per 28 days, up to $1,820) and blocks the interest-free scheme, which requires no outstanding activity statement lodgments.
- Forgetting new debts. While on a plan you must pay all new tax debts in full and on time. A fresh unpaid BAS can default the whole arrangement.
- Ignoring the mail. The ATO warns before firmer action — including the 28-day warning before credit-bureau reporting. Engagement is what separates a payment plan from a garnishee notice.
Tips to pay less interest
- Pay the principal as fast as possible. Because interest compounds daily, a $5,000 lump sum early in the plan saves far more than the same $5,000 near the end. Use the ATO’s payment plan estimator to find the shortest term your cash flow survives.
- Ask about remission. The ATO can remit (waive) GIC in some circumstances — for example, where its own delay or error contributed, or where payment would cause serious hardship. It costs nothing to ask; put the reasons in writing.
- Check the interest-free scheme first if you run a small business with BAS debt — it erases what would otherwise be thousands in GIC.
- Apply for release on hardship grounds if paying would leave you unable to meet basic living costs. This is a separate process from a payment plan and can apply to eligible debts.
- Lodge on time, always. A $1,820 failure-to-lodge penalty on top of 11.51% interest is a wound you inflict on yourself.
- Estimate next year’s bill early. If you owed this year because of a second job, a side hustle or lumpy income, run the numbers now with an income tax calculator and consider PAYG instalments so you don’t repeat the debt.
FAQ
Does an ATO payment plan stop interest?
No. The general interest charge keeps accruing — and compounding daily — on the outstanding balance for the life of a standard payment plan. The only exception is the 12-month interest-free scheme for eligible small-business BAS debts, where accrued GIC is automatically remitted as long as you maintain the plan.
Can I claim ATO interest as a tax deduction?
Not anymore. GIC and SIC incurred on or after 1 July 2025 are not deductible, regardless of when the underlying debt arose. Interest on a separate bank loan used to pay the tax debt may still be deductible for a business — one reason refinancing can beat a payment plan on after-tax cost.
Will my tax refund be used to pay my ATO debt?
Yes. The ATO is legally required to apply credits and refunds against what you owe, including refunds from other government agencies in some cases. This happens automatically and doesn’t replace your scheduled plan instalments.
Can the ATO affect my credit rating?
For individuals, the ATO doesn’t report to credit bureaus. For businesses, it can disclose a tax debt to credit reporting bureaus if at least $100,000 has been overdue for more than 90 days and the business isn’t engaging with the ATO — with written notice and 28 days to act first.
Can I ask the ATO to waive the interest?
You can request remission of GIC, and the ATO grants it in some circumstances — for example, where its own processing delays contributed to the debt, or where the interest would cause serious hardship. There’s no application fee; put your case in writing with evidence. Under the small-business interest-free scheme, remission of accrued GIC is automatic if you keep the plan.
What if I can’t afford the payment plan the ATO offers?
Don’t accept a plan you can’t meet — defaulting makes things worse. Phone the ATO (or have your tax agent call) to discuss terms based on your actual cash flow; longer terms and smaller instalments are often negotiable, and hardship provisions exist for genuine cases.
Bottom line
ATO debt in 2026-27 is some of the most expensive money in Australia: 11.51% compounding daily, and since 1 July 2025, every cent of it after-tax. The math is unforgiving — $20,000 unpaid for six months costs about $1,160 in interest alone. But the system rewards engagement: self-serve plans up to $200,000, negotiable terms if you can’t afford the standard offer, a 12-month interest-free path for eligible small-business BAS debts, and remission or hardship release in genuine cases. The one strategy that never works is silence — that’s the route from $190 a month in interest to garnishee notices and credit-bureau reporting. If the debt came from a surprise bill, find out why before next year: a 2026–27 income tax estimate takes minutes, and our guides to lodging your return, second-job tax and sole trader tax cover the traps that create most unexpected debts.
