ATO debt is blocking your refinance — here's how to fix it

An outstanding ATO debt is one of the most common reasons a business owner's refinance application stalls. The business is profitable, the property has equity, the exit makes sense, but the bank will not approve the refinance while the ATO debt is sitting there. It creates a circular problem: you need the refinance to clear the debt, but the debt prevents the refinance. A property-secured business loan, arranged through our panel as either a first or second mortgage, can break that cycle. Here is how it works.

How ATO debt blocks mainstream refinance

When a borrower applies to refinance with a bank, the bank runs a full credit assessment. Part of that assessment involves checking for outstanding liabilities, including tax debts. An ATO debt creates several problems in the bank's assessment:

• —Serviceability impact. The ATO debt is treated as a liability. The repayment (or the ATO's payment plan) reduces the borrower's net position and may cause the application to fail the bank's debt-service coverage ratio.
• —Credit risk signal. An outstanding tax debt signals to the bank that the borrower may have cash-flow issues. Even if the debt arose from a one-off event (a large CGT liability, a BAS shortfall, an unexpected assessment), the bank's credit policy may treat it as a red flag.
• —ATO statutory charge. In some cases, the ATO can register a charge over the taxpayer's property. If a statutory charge is in place, the bank will not refinance until it is removed.
• —Director Penalty Notices. If the ATO has issued Director Penalty Notices (DPNs), the personal liability of the directors becomes a factor in the bank's assessment of the guarantors.

The result is a deadlock. The borrower needs to refinance to consolidate or restructure, but the ATO debt prevents the refinance from being approved.

Using a property-secured business loan to break the cycle

The strategy is straightforward. A short-term, property-secured business loan is arranged to provide funds to clear the ATO debt in full. Once the debt is cleared, the borrower's credit position improves, and a mainstream refinance becomes achievable. The private loan is then repaid from the refinance proceeds.

The sequence looks like this:

• —Step 1: We arrange a short-term loan secured against the borrower's property. The loan amount covers the ATO debt plus any associated costs.
• —Step 2: On settlement, the ATO debt is paid directly from the loan proceeds. If the ATO has a statutory charge, it is discharged on settlement.
• —Step 3: With the ATO debt cleared, the borrower applies to refinance to a bank on longer-term, lower-cost terms.
• —Step 4: The bank refinance settles, the private loan is repaid, and the borrower is back on a conventional facility.

First mortgage vs second mortgage

Whether the loan is structured as a first mortgage or a second mortgage depends on the borrower's existing arrangements.

• —First mortgage: If the property is unencumbered (no existing mortgage) or the existing mortgage will be refinanced as part of the transaction, a first mortgage is the simplest structure. The private funder takes first-ranking security.
• —Second mortgage: If there is an existing first mortgage that the borrower wants to keep in place (for example, a low-rate bank facility that is otherwise performing well), a second mortgage can be arranged behind it. The second mortgage provides the funds to clear the ATO debt without disturbing the first mortgage.

The second mortgage option is particularly useful when the borrower has a competitive bank rate on the first mortgage and does not want to lose it. The private second mortgage is a short-term overlay: it clears the ATO debt, creates a runway for the borrower to get their affairs in order, and is then repaid.

The entity structure requirement

Private Credit Loans only arranges loans to entity borrowers. The borrower must be a Pty Ltd company, corporate trustee, or other body corporate. We do not arrange loans to individuals.

If the ATO debt is owed by the company, the company is the natural borrower. If the ATO debt is owed by a director personally (for example, a personal income tax debt), the loan still needs to be to an entity. In that case, the entity borrows the funds and the director's obligation to the ATO is addressed through the company's application of the loan proceeds. The business purpose must be genuine, and the structure must not be an avoidance device. If the debt is purely personal with no business nexus, we cannot assist.

Exit strategy: clear the ATO, then refinance to a bank

The exit strategy is the most important part of this type of deal. A private loan is a bridging tool, not a long-term facility. The plan must be:

• —Clear the ATO debt on settlement of the private loan.
• —Prepare the refinance application for a bank or longer-term non-bank facility immediately. Do not wait six months.
• —Ensure the business's tax lodgements are up to date. A bank will check not only that the ATO debt is cleared but that all BAS, income tax, and other lodgements are current.
• —Work with your accountant to ensure the business's financials present well for the bank application. If financial statements are overdue, get them done.

A clear, time-bound exit strategy is what makes this type of deal work. The private funder needs to see that the borrower has a realistic plan to move to long-term finance, not just a hope that something will turn up.

Common mistakes to avoid

• —Waiting too long. ATO debts accrue General Interest Charge (GIC) daily. The longer you wait, the larger the debt grows. Early action saves money.
• —Not lodging returns. A funder (and the bank you are refinancing to) will want to see that all ATO lodgements are current. Outstanding lodgements suggest the problem may be larger than the disclosed debt.
• —Ignoring the exit. The private loan is the bridge, not the destination. If you do not have a realistic plan to refinance within the loan term, the deal does not work.

For more on the types of scenarios we handle, or to see how first and second mortgages work in practice, visit our second mortgage and first mortgage pages. If an ATO debt is blocking your refinance and you need to move, submit your scenario and we will assess it within 24 hours.