If you’re worried about mounting tax debt, you’re probably wondering if ATO debt forgiveness is an option.
The short answer is yes, the tax office can forgive debt — but only under some circumstances. For companies, this only happens through formal insolvency processes.
Here’s how debt forgiveness by the ATO works, including the rules and how to protect your business.
What Is ATO Debt Forgiveness?
ATO debt forgiveness means the tax office agrees not to pursue all or part of your tax bill. For companies:
- Penalties and interest can be waived
- Primary tax debt can’t be forgiven, unless through a formal insolvency process
That means there are two main ways forgiveness may apply:
- Ask for a reduction of penalties and interest through the ATO or your accountant
Enter a formal restructure (like Voluntary Administration or Small Business Restructuring), where part payment might be accepted in lieu of full settlement
ATO Debt Forgiveness Rules
Individuals such as sole traders, employees, or deceased estates may be formally released from tax debt by the ATO in cases of serious hardship, meaning payment would prevent them from meeting basic expenses such as food or rent.
Companies and trusts can’t apply to have tax debts wiped in the same way, but may be fully or partially forgiven through the insolvency processes outlined below.
ATO Debt Forgiveness and Insolvency
For business owners, the only way to achieve ATO debt forgiveness for your primary tax bill is through a formal insolvency process.
The main options include:
Voluntary Administration (VA)
What is voluntary administration? VA involves an independent administrator reviewing your business and deciding the best deal for creditors.
During this period:
- Legal actions and ATO recovery are paused
- Directors hand over control temporarily
- A Deed of Company Arrangement (DOCA) may be put forward, offering creditors (including the ATO) a partial repayment
The ATO participates by voting in VA and usually supports reasonable offers that pay more than company liquidation. In some agreements, tax debt can be reduced by as much as 90%.
Small Business Restructuring (SBR)
SBR is a quicker, cheaper alternative to VA. Directors stay in control of the company and work with a small business restructuring specialist to propose a plan to creditors.
To be eligible for SBR, a company must:
- Owe less than $1 million in total liabilities
- Be up to date with tax lodgements
- Have paid all employee entitlements
- Have not used the small business restructuring process or simplified liquidation in the last 7 years
The ATO is often the largest creditor and frequently supports small business restructuring plans. ASIC reported that 87% of SBR proposals were approved in 2023–24, highlighting the opportunity for companies to manage tax debt this way.
Why Does the ATO Accept Reduced Offers?
Formal restructuring is backed by law, and an insolvency practitioner reviews the numbers and reports to all creditors. This offers confidence that:
- The business is genuinely unable to pay in full
- The offer is fair and based on what the company can realistically afford
- Creditors will receive more through the proposal than through liquidation
The ATO is not obliged to accept the proposal, but often does when the numbers stack up.
When to Seek Expert Help
When seeking debt forgiveness, direct negotiation won’t clear your primary tax liabilities.
The solution is to use the right legal structure — whether it’s Small Business Restructuring, Voluntary Administration, or a DOCA — and to act early with expert advice.
At SALEA Advisory, we help directors and advisers with debt management strategies that solve tax problems and keep viable businesses running.
If debt is holding you back, or you’re helping a client in trouble contact SALEA Advisory for confidential guidance on your next steps.
