Does the ATO Charge Interest on a Payment Plan?

If you've fallen behind on BAS, income tax, or super and set up (or are considering) a payment plan with the ATO, there's one question every Geelong business owner asks first: does the ATO charge interest while I'm paying it off? The answer is almost always yes. Understanding how that interest works — and how to reduce it — can save your business thousands over the life of a plan.

What Is the General Interest Charge (GIC)?

The ATO doesn't call it "interest" in most of its correspondence — it's called the General Interest Charge (GIC), and it's imposed under section 8AAD of the Taxation Administration Act 1953 (Cth). GIC applies automatically to most overdue tax debts, including:

• Unpaid or late-lodged BAS and GST liabilities
• Overdue PAYG withholding
• Late income tax and company tax debts
• Unpaid superannuation guarantee charge (SGC) amounts
• Balances still outstanding while under a payment plan

Entering a payment plan doesn't switch the GIC off. It simply gives you a structured, agreed way to pay down the debt without the ATO taking firmer recovery action (such as garnishee notices or director penalty notices) while you're complying with the arrangement. The interest keeps running on the outstanding balance the entire time.

How ATO Payment Plans Actually Work

An ATO payment plan is a formal agreement to pay an existing debt off over time through scheduled instalments, usually weekly, fortnightly, or monthly. You can set many plans up yourself through the ATO online services portal or your registered BAS or tax agent's practice software, but larger or more complex debts often need a phone negotiation with the ATO's debt team.

Key features of a standard plan:

• GIC continues to accrue daily on the remaining balance
• Missing a scheduled payment can default the arrangement
• New tax debts (like the next BAS) must still be lodged and paid on time, or the plan can be cancelled
• Plans can usually be varied if your circumstances change, provided you contact the ATO before defaulting

For company debts, it's worth knowing that unpaid PAYG withholding and superannuation guarantee charge amounts can trigger a director penalty notice, personally exposing directors, even where a payment plan is in place for the company. This is a key reason to get advice early rather than letting debts build up.

Current GIC Rate and How It's Calculated

The GIC rate is set quarterly by the ATO under a formula tied to the 90-day Bank Accepted Bill rate plus an uplift factor, and it's published on ato.gov.au ahead of each quarter. In recent years the annual rate has generally sat in the range of roughly 10.5% to 11.5% per annum, and it's important to check the current published rate rather than assume last quarter's figure still applies.

The important detail most business owners miss: GIC compounds daily. That means interest is calculated on the outstanding balance (including previously accrued interest) every single day the debt remains unpaid, not just once a year or once a quarter. On a $40,000 debt sitting on a slow 18-month plan, daily compounding at current rates can easily add several thousand dollars to the total cost.

A related charge, the Shortfall Interest Charge (SIC), applies specifically to tax shortfalls identified on amended assessments (for example, after an ATO audit adjustment) and is generally set at a lower rate than GIC — but it converts to the full GIC rate if the shortfall itself isn't paid by the due date on the amended assessment.

Can You Get GIC Reduced or Remitted?

Yes, in some circumstances. The ATO has discretion to remit GIC in full or in part where it's fair and reasonable to do so. Common grounds that support a remission request include:

• The debt arose from circumstances genuinely outside your control (natural disaster, serious illness, or an ATO system delay)
• You have an otherwise strong compliance and lodgement history
• The debt is small and you acted quickly once you became aware of it
• You proactively contacted the ATO before the debt became overdue, rather than waiting to be chased

Remission is not automatic — it's requested in writing (often through your registered BAS agent or tax agent, who can frame the request against the ATO's own remission guidelines) and assessed case by case. A well-documented history of on-time lodgements, even when payment was late, meaningfully strengthens a remission case. This is one reason keeping clean, current books through Xero matters even when cash is tight — it gives you the paper trail to support a fair hearing.

Setting Up an ATO Payment Plan the Right Way

Before you commit to a plan, it pays to get the structure right the first time — a defaulted plan usually costs more in interest and puts you back at square one with the ATO's recovery team. A few practical steps:

• Be realistic about repayment amounts — factor in your ongoing BAS and PAYG obligations on top of the plan, not instead of them
• Front-load payments if you can — paying down principal faster reduces the daily compounding base
• Keep every future lodgement on time — even one late BAS during an active plan can trigger a default
• Ask about remission upfront if the debt arose from a one-off, explainable event
• Get your BAS agent to negotiate on your behalf — the ATO's debt teams generally respond well to structured proposals presented through a registered agent

Staying on Track With Xero and Good Records

Most ATO debts don't appear overnight — they build up over several BAS cycles because cash flow visibility was missing. Running your books through Xero, with GST and PAYG liabilities tracked in real time rather than discovered at BAS time, gives you the early warning to act before a debt becomes unmanageable. Setting aside GST and PAYG in a separate savings account as you invoice, rather than treating it as available cash, is the single most effective habit for Geelong businesses looking to avoid payment plans altogether.

If you're already on a plan, regular management reporting also makes it far easier to demonstrate to the ATO that you're back on solid footing — useful both for negotiating variations and for supporting any future remission request.

The bottom line: an ATO payment plan stops aggressive recovery action, but it does not stop the clock on interest. GIC compounds daily on your outstanding balance under section 8AAD of the Taxation Administration Act 1953, current rates published quarterly at ato.gov.au. If you're facing a growing ATO debt, the best move is to get your lodgements current, get a registered BAS agent involved early, and negotiate a plan you can actually sustain — rather than one that looks manageable on paper but defaults within a few months.