How do you actually reduce an ATO debt?

Step one: make sure the number is right

A surprising share of tax debt is overstated. Before negotiating anything, check:

• Default assessments. If you did not lodge, the ATO may have estimated your income, usually on the high side. Lodging the actual return replaces the estimate.
• Missed deductions or amendments. A return lodged in a hurry, or by someone else, can be amended within the time limits.
• Errors and double counting. Old debts that resurfaced from on-hold status sometimes relate to periods you thought were settled. Ask for a transaction history.
• Genuine disputes. If you disagree with an assessment, an objection has time limits, so do not wait. See disputing an ATO debt.

Step two: remove the interest and penalties

This is the workhorse. On an older debt, general interest charge at 11.43% compounding daily, plus failure to lodge and other penalties, can make up a third or more of the balance. The ATO remits these routinely where there is a fair reason: illness, disaster, a customer who failed, a mistake by someone else, or simply that you have engaged and are paying. Interest incurred from 1 July 2025 is no longer deductible, which makes remission worth more than it used to be.

Ask for both GIC remission and penalty remission explicitly. Smaller requests are often decided on the phone; larger ones should go in writing with dates and evidence. Ask again at the end of a payment plan you have kept to, because a completed plan is itself a good reason.

Step three: stop it growing and keep enforcement away

A debt you are not paying grows every day. An ATO payment plan does not reduce the balance by itself, but it stops garnishees, firmer action letters and, for a business, credit reporting. It also builds the engagement history that makes the ATO more willing to remit interest. Offer an amount you can keep to; two defaults inside 12 months makes everything harder.

If cash flow is the underlying problem, a plan alone will not fix it. Deal with the reason the debt built in the first place, whether that is pricing, PAYG instalments set too low, or GST being spent as it comes in.

Step four: when the original tax itself is beyond you

Only at this point does forgiveness of the original tax come in, and the door depends on who owes it:

• Individuals and sole traders in serious hardship can apply for release of income tax, PAYG instalment, FBT and Medicare levy debt. GST and PAYG withholding cannot be released. See how to apply for release.
• Companies with liabilities under $1 million can use small business restructuring, where a plan paying creditors a portion extinguishes the balance. Larger companies look at voluntary administration or liquidation.
• Anyone can propose a formal compromise, but it is rare and the ATO must be satisfied it would recover less through insolvency.
• Bankruptcy releases most personal tax debt for a sole trader, at a real cost, and should be compared carefully against negotiating first.

What to do next

1. Get a transaction history from the ATO and check every assessment on it, lodging anything outstanding to replace default assessments.
2. Write a one page remission request covering GIC and penalties, with dates and a reason, and send it or make the call.
3. Set up a payment plan you can keep to for the balance that remains.
4. If the original tax is still unaffordable, match your structure to the right door: release for individuals, restructuring for companies.

More questions: 11 Forgiveness, hardship and negotiation questions answered · Full guide: ATO debt forgiveness