Getting a business loan when the ATO has a judgment against you

An ATO judgment is a court confirming the debt is owed, and on its own it does not stop a secured business loan — a lender looking at equity in real property and a business purpose can still fund a payout. What it changes is the clock: a judgment is the step before a bankruptcy notice or a wind-up application.

What a judgment is, and what it is not

A judgment does not create a new debt and it is not a finding about your business. It is a court recording that an amount is owed, which converts an administrative balance into something enforceable through the court's own machinery. The ATO describes the step plainly: where a taxpayer does not work with it on the debt, it may file a claim or summons with the relevant court of the state or territory, and once the court recognises the debt owed it may execute on the judgment debt in several ways.

Worth knowing how you got here, because it is almost never defiance. The ATO's own framing of legal action is about disengagement — it starts with the taxpayer who has not paid and has not engaged, and continues where somebody remains disengaged and takes no steps to manage payment. In practice that describes a year of envelopes nobody opened during a bad trading stretch far more often than it describes a decision. The route out is the same either way, and it begins with somebody in the business engaging.

One detail that catches people later: where a court imposes interest on the judgment debt, the ATO notes that this amount is not tax deductible. The balance has not just become enforceable. It has become more expensive to leave alone.

You are not the first one this week

Most owners in this position ring their bank first, and most are told no. The reasons rarely have anything to do with whether the loan would be repaid: the last financials look wrong, a lodgement is late, there is a mark on the credit file, or the word judgment appears somewhere in the file and the application quietly stops being read. Those are the things a bank exists to care about. None of them says a word about whether there is equity in the building.

That gap is where HomeSec has been since 2004. We are not here to judge how the balance got there, and we have seen it often enough that it does not surprise us. What we look at is whether there is enough unused equity in real property and whether the purpose is a genuine business one — not financials, not a credit score, not whether everything is up to date, and no interrogation about the last two years. From a clean, complete scenario funds can be available in as little as 24 hours, and interest can be capitalised for up to six months so there is nothing payable while the business gets its feet back under it.

Back to the judgment, because what the ATO can do next depends on who the debtor is.

What the ATO can do with a judgment — and what it says it will not do

The route depends on whether the debt sits with a company or with a person, and the ATO's guidance treats the two separately.

1. 1
   An individual or sole trader, including a director reached personally.The ATO's own example of executing on a judgment debt is filing and serving a bankruptcy notice. That notice gives 21 days to pay the debt or make a payment plan with the ATO; if neither happens, the ATO may file a creditor's petition — an application to the Federal Court for a sequestration order. A petition requires an act of bankruptcy, such as failing to comply with a bankruptcy notice, within the preceding 6 months. A director usually only arrives here after the company's debt was moved onto them, which is what a director penalty notice does.
2. 2
   A company.The ATO may issue a statutory demand requiring the whole debt to be paid or a payment plan entered within 21 days, and may then use non-payment as evidence of insolvency in an application to wind the company up. Both of those have their own page here: what a statutory demand actually requires and what a filed winding-up application triggers.
3. 3
   The property, if the judgment creditor goes further.A judgment that has been turned into a writ and recorded against land reaches the title itself, which is a different problem from a credit event and has to be dealt with at settlement. What a lender reads on a title, and what stops a file there covers that ground, and the short version is to raise it at the start rather than at documents.

Now the two sentences in the ATO's guidance that matter most to somebody reading this at midnight, because they are the Tax Office's words and not ours. On bankruptcy action, it says that if you believe you can pay your debts you should provide clear evidence of your ability to pay, and that it will not seek to bankrupt you where it is clear you are able to pay the debt in a reasonable time. On a creditor's petition, it says the court will not issue the order if you can demonstrate you are able to immediately pay all your debts.

Read those twice. At this stage of the road the question has stopped being whether the ATO believes your story and become whether you can show where the money is. That is a narrower question, and it is one that equity in a property can answer.

Does an ATO judgment belong on a credit file?

Less automatically than almost everybody assumes, and the distinction is worth understanding because it is the thing most likely to be wrong on your file.

Start with who the rules are about. Every credit reporting definition in Part IIIA of the Privacy Act is framed around an individual: court proceedings information about an individual means information about a judgment of an Australian court made against that individual. A company is not an individual, which is why what a commercial bureau records about the company sits outside this framework entirely. A judgment against the company and a judgment against the director are two different records, governed differently, and conflating them is how people end up arguing with the wrong organisation.

Then the test itself. A credit reporting body may hold a judgment against an individual only as court proceedings information, and the OAIC's guidance is explicit that this is restricted to a judgment relating to credit provided to, or applied for by, that individual. It cannot be collected as publicly available information instead: the CR Code says publicly available information does not include judgments unrelated to credit, and the OAIC's own note is that judgments can only be collected on the court proceedings information basis.

Credit, in the Privacy Act, is a contract, arrangement or understanding under which payment of a debt is deferred — and the OAIC adds that this needs to involve a positive, voluntary act signifying the parties' willingness and intention to be bound. A tax liability is imposed by statute. Nobody agreed to it. The OAIC's guidance does not address tax judgments by name, so this page will not tell you what your listing is: it will tell you that the test exists, that it is applied case by case, and that it is a fair question to put to the credit reporting body with your actual report in front of you. Where the body finds it is holding something that does not meet the definition of credit information, the OAIC's position is that it should look to delete it.

Two honest caveats, because the point of saying any of this is to be useful rather than encouraging. The first is that an ATO payment plan may change the analysis — the OAIC's worked example of a council debt is that a payment plan relating to an overdue amount may itself involve the provision of credit, which is exactly the shape of an arrangement a lot of readers will have entered before things went wrong. The second is that a judgment which does belong on a credit report stays there for five years, and a disclosed tax debt is an entirely separate mechanism with its own page — what an intent to disclose notice means — that has nothing to do with a court. Either way, a lender that assesses property equity rather than a credit file is reading a different document from the one you are worried about.

What a judgment actually changes for the borrowing

Three things, and none of them is the one people expect.

1. 1
   The payout figure replaces the balance.A judgment debt usually carries costs and may carry court-imposed interest, so the number to clear is not the number on the last ATO statement. Get the current figure in writing before anybody works out how much is needed; a loan sized to a stale balance settles and leaves a residue.
2. 2
   Where the funds go stops being optional.Money raised to clear an enforced tax debt goes to the Tax Office at settlement, not into the business account to be applied later. That is better for everybody: it is the evidence of ability to pay that the ATO's guidance says it is looking for, and it removes the possibility of the funds being needed somewhere else on the way.
3. 3
   The timetable is now somebody else's.A bankruptcy notice runs 21 days; a statutory demand runs 21 days. Those are the deadlines a funding application has to fit inside, which is why a complete scenario at the start is worth more than a fast lender at the end. What actually takes the time in a secured loan is the part a borrower can control.

The arithmetic underneath it is less obvious. Interest a court imposes on the judgment debt is not deductible, on the ATO's own statement. Interest on money borrowed to pay a tax related liability is treated differently, and the ATO's published position is that a taxpayer carrying on a business may be able to deduct it where it is necessarily incurred in carrying on the business. That asymmetry is set out properly on the page about which kind of loan this actually is, and it is a conversation for your registered tax agent rather than for us — but it is the reason leaving an enforced balance in place is rarely the cheap option it looks like.

The first 48 hours

1. 1
   Find out exactly what has been entered, and against whom.The company, you personally, or both. The court, the file number and the date. Everything downstream depends on which of those it is, and a surprising number of people are unsure.
2. 2
   Get a current payout figure from the ATO in writing.Including costs and any interest the court imposed. This is the number a funder works from.
3. 3
   Engage, even now.The ATO's escalation is built around disengagement, and its guidance says to contact it or your registered tax professional immediately. Showing a credible payment route is what the next two steps in its own process turn on.
4. 4
   Speak to a registered liquidator or an insolvency lawyer.Not because the answer is insolvency, but because they will tell you plainly whether the business is viable, and because the options that end a company have to be taken by somebody registered to take them.
5. 5
   Work out what the property could release.If paying is the route that keeps the business alive, the question is simply whether there is equity and how fast it can be reached. That part we can answer the same day — and a business loan to pay the ATO is the product it points at.

When borrowing is not the answer

Clearing an enforced tax debt with secured finance makes sense when the business behind it works, when the debt is the residue of a bad year rather than the shape of every month, and when there is a real exit — a sale, a refinance that completes once the tax position is clean, a contract that settles. Where there is time to refinance at bank pricing instead, that is the cheaper road and we will say so.

It is the wrong answer in four situations, and they are worth naming. If the business loses money every month and the judgment is simply the most visible part of that, no loan fixes it — more debt secured on the family's property keeps a loss running and puts the house alongside the company, and the call to make is to a registered liquidator about small business restructuring. If you do not accept the amount, borrowing to pay a figure you dispute is the wrong instrument: that is a conversation with your tax agent and, if it comes to it, with the court, not with a lender. If there is no equity in real property, this is not our answer either, and the Small Business Debt Helpline on 1800 413 828 is free, independent and confidential. And if the balance is below $20,000 we do not lend to it at all — registering security over a property to clear a small amount is the wrong tool, and an ATO payment plan or the help the ATO itself offers is where to start.

This page explains what the ATO's published guidance and the OAIC's credit reporting guidance say, and what a judgment changes for borrowing. It is general information, not legal, tax or insolvency advice: what to do in your circumstances is a question for a registered liquidator, an insolvency lawyer or your registered tax agent, and the ATO's own guidance on legal action and the OAIC's guidance on credit reporting are the primary sources.

Reviewed by Paul Stone, Joint Chief Executive