How much does tax debt reduce my borrowing power?

How the reduction actually works

Lenders size a home loan on surplus income: what is left after living expenses and existing commitments, tested at an assessment rate above the actual rate. An ATO plan instalment is a commitment, so it comes straight off that surplus. Because a home loan repayment is spread over 25 to 30 years, a relatively small monthly commitment blocks a large loan amount. A $1,500 a month plan instalment can take well into six figures off what you could otherwise borrow, depending on the lender's assessment rate and term.

Three variations change the size of the hit:

• Debt paid out at settlement. If the new loan clears the ATO, most lenders remove the instalment from the calculation and count only the bigger loan.
• Short remaining term. Some lenders will disregard a commitment that ends within a few months; others count it regardless.
• Total balance rather than instalment. A few lenders treat the whole ATO balance as needing to be cleared, which is a decline rather than a reduction.

What reduces it beyond the instalment

For the self-employed, the debt itself is often less damaging than what it implies. A lender reading two years of financials and an ATO statement asks whether the business is generating the income claimed if it cannot meet its tax. Unlodged returns are worse still, because the lender cannot verify income at all and the debt looks open ended.

Credit reporting is the other lever. A business debt of $100,000 or more, overdue more than 90 days and not being managed, can be listed by the ATO after a 28 day notice. That listing is read by every lender and typically ends the conversation at major banks. Individuals not in business are not reported, and a kept plan stops reporting for those who are. Does a payment plan affect my credit score covers this.

Getting capacity back

• Clear the debt before applying if you can, or structure the loan so the ATO is paid at settlement. Refinancing to pay ATO debt explains how that usually works.
• If you cannot, keep the payment plan current and paid by direct debit so the record is clean, and ask about GIC remission to shrink the balance.
• Lodge everything outstanding. A lender can work with a known debt; it cannot work with an unknown one.
• Ask a licensed broker how specific lenders treat plan instalments before you apply. Policies differ more than most people expect.

This site does not arrange finance or recommend lenders; it explains what they typically look at so the debt does not ambush the application.

What to do next

1. Work out your monthly ATO commitment and total balance, and get the ATO statement that shows both.
2. Decide whether the ATO can realistically be paid out at settlement or must be carried as an ongoing instalment.
3. Ask a licensed broker to run your borrowing capacity both ways before you choose a lender.

More questions: 10 Paying, loans and home loans questions answered · Full guide: Tax debt & home loans