The short answer
A second mortgage is rarely the cheapest way to pay the ATO. An ATO payment plan usually is. A second mortgage makes sense when the ATO won’t accept a plan you can actually meet, when a director penalty notice puts your personal assets at risk, or when the debt is about to be reported to credit bureaus. In those situations, the cost of the loan is usually smaller than the cost of what happens next.
This guide compares the numbers honestly, sets out what to try first, and explains how using a second mortgage to clear an ATO debt works in practice. For an overview of the loan itself, see our second mortgage loans page.
Why an ATO debt costs more to carry than it used to
Three changes have made an unpaid tax debt more expensive and more dangerous to leave sitting.
The interest rate is high and compounds daily. The ATO’s general interest charge (GIC) is 11.51% a year for October to December 2026, and it is worked out daily on a compounding basis. If the rate stayed at that level for a full year, the effective cost would be about 12.2%. The rate is reset every quarter. (ATO GIC rates)
It is no longer tax-deductible. GIC incurred on or after 1 July 2025 can’t be claimed as a deduction, even when the underlying debt is from an earlier year. Every dollar of GIC is now a full after-tax cost. (ATO)
Collection action escalates. Two tools matter most for business owners:
- Credit reporting. The ATO may report your business to credit reporting bureaus if at least $100,000 is overdue by more than 90 days and you are not engaging with it to manage the debt. A default listing can affect supplier terms and future finance. (ATO)
- Director penalty notices. If a company doesn’t pay its PAYG withholding, net GST or superannuation guarantee charge, each director can become personally liable for the same amount. A notice gives 21 days to act. Where those amounts were reported more than three months late, the penalty is “locked down” and can only be cleared by paying the debt in full.
What to try before you borrow
Borrowing against property should come after these steps, not instead of them.
- Get your lodgements up to date. Overdue BAS and returns limit your options with the ATO, and lenders will ask about them too. For director penalties, whether amounts were reported on time decides whether the penalty can be cleared without paying in full.
- Ask for a payment plan. If you owe $200,000 or less, you may be able to set one up yourself through Online services for business or the ATO’s self-help phone line. Above that, or if the online option doesn’t accept your terms, you need to phone the ATO. (ATO payment plans) GIC keeps accruing while the plan runs.
- Talk to your accountant. They can check the debt is correct, whether some interest or penalties could be remitted, and whether the business can afford the plan alongside its ongoing BAS.
A second mortgage becomes the better option when:
- the ATO won’t agree to instalments you can sustain, or you have already defaulted on a plan;
- the instalments would starve the business of the cash it needs to keep trading;
- a director penalty notice has arrived, especially a lockdown notice;
- you have received a notice that your debt may be reported to credit bureaus;
- you want one clear, dated exit instead of an open-ended debt compounding daily.
How the costs compare
| ATO payment plan | Second mortgage | Caveat loan | |
|---|---|---|---|
| Interest rate | GIC, 11.51% p.a. for Oct–Dec 2026, compounding daily | From 15% p.a. through Formation Finance | Generally higher than a second mortgage |
| Tax-deductible? | No, for GIC incurred from 1 July 2025 | May be, depending on what the funds are used for; ask your accountant | As for a second mortgage |
| Upfront costs | None | Establishment, valuation and legal fees | Establishment and legal fees |
| How fast | Can be set up online for debts of $200,000 or less, if the ATO accepts the terms | Typically 7 to 14 business days after valuation and documents | Can be faster when no consent is needed |
| Effect on ATO action | Holds most action off while you keep to the plan | Debt is paid in full | Debt is paid in full |
| Main risk | Missing an instalment restarts enforcement | Property is security; you need an exit within the term | Shorter term and higher cost |
A worked example. A company owes the ATO $250,000 in activity statement debt. Its director owns a property worth $1,200,000 with $550,000 owing on the first mortgage. At a 75% combined LVR, total borrowing can reach $900,000, leaving room for a second mortgage of up to $350,000.
- Leave it with the ATO for 12 months: about $30,500 in GIC if nothing is repaid and the rate stays at 11.51%. None of it is deductible.
- Clear it with a second mortgage for 12 months: $37,500 in interest at 15% p.a. interest-only, plus an establishment fee of about $6,250 (2.5%), before valuation and legal costs.
On interest alone, the ATO is cheaper by roughly $13,000 in this example. The second mortgage earns that cost only when it removes a risk the payment plan can’t, such as personal liability under a lockdown director penalty notice, a credit default listing that would cost you supplier terms, or a plan the ATO has refused. A payment plan does not, on its own, clear a director penalty. Run the property numbers for your own situation in our second mortgage loans calculator.
How it works, step by step
If you have a director penalty notice, the 21-day window is tight, so start the steps below on the day it arrives.
- Get your ATO position in writing. Download the account statement for each account and keep every notice, including any director penalty notice and its date.
- Get an indicative assessment. We look at the property, what is owing on the first mortgage, the combined LVR and how you will repay. We can usually give an indicative answer the same day.
- Valuation and documents. Expect to provide a first mortgage statement, a council rates notice, company or trust documents, ID for directors and guarantors, and your ATO statements.
- First lender consent, if needed. In Victoria your first lender is involved in registering a second mortgage, and in most states its loan contract requires consent. Our guide to second mortgage vs caveat loan explains what happens if consent is slow or refused.
- Settlement. Second mortgages typically settle 7 to 14 business days after the valuation and documents are received. Funds can be directed to the ATO at settlement.
- Exit. Repay within the term, usually 3 to 24 months, through a refinance, a property sale or business cash flow. Agree the exit before you sign, not after.
Keep the ATO informed while the loan is in progress. Telling it that finance is being arranged, and when settlement is expected, is part of engaging with it.
Risks to weigh before you sign
- You are moving a business debt onto property. If the property is your home, a debt the ATO might have negotiated over time is now secured against where you live. Business-purpose loans fall outside most National Credit Code protections, which apply to credit for personal, domestic or household purposes.
- The exit has to be real. A second mortgage buys time, typically 3 to 24 months. If the refinance, sale or cash flow you are counting on doesn’t arrive, extension fees and default interest add up, and the lender can move to sell.
- It doesn’t fix the cause. If the business can’t pay its next BAS on time, a new ATO debt starts building while you are repaying the loan. Check that current obligations are affordable before you clear the old ones.
- It isn’t the answer to insolvency. If the company may not be able to pay its debts as they fall due, speak to a registered insolvency practitioner before borrowing against personal property. A loan won’t fix a business that can’t trade its way out.
Get advice from your accountant, and a lawyer if you are giving security over your home, before you commit.
Frequently asked questions
Can I use a second mortgage to pay an ATO debt?
Yes. Clearing an ATO debt or a tax payment arrangement is one of the common reasons our business clients take a second mortgage. The loan is for business purposes, and the borrower is often the company or trust, with directors giving guarantees.
Is a second mortgage cheaper than the ATO’s interest?
Usually not. GIC is 11.51% p.a. for October to December 2026, and our second mortgages start from 15% p.a. plus fees. The case for borrowing is avoiding escalation, not saving interest.
Can I use my home as security?
Yes, if the funds are used for business purposes and you sign a business purpose declaration. Weigh the risks above carefully, and get independent legal advice first.
How much can I borrow?
Most second-ranking lenders cap combined borrowing on both mortgages at around 75% of the property’s value. Our second mortgage loans calculator shows the room you have.
Will the ATO stop chasing me once I apply for a loan?
No. An application doesn’t pause collection action. Keep engaging with the ATO, tell it finance is in progress, and keep to any plan already in place until settlement.
Talk to us before the ATO’s next deadline
Formation Finance is a Melbourne-based team with access to more than 50 lenders, including private lenders, family offices and specialist non-bank lenders. If you are weighing a second mortgage to clear an ATO debt, we look at your combined LVR, your first mortgage terms and your exit, and give a same-day indicative assessment.
Book an obligation-free consultation or call (03) 9060 7878.
All loans we arrange are for business or investment purposes only. This article is general information, not tax, legal or financial advice. GIC rates are set quarterly by the ATO. Our rates, terms and timeframes are indicative and subject to lender approval.
