Can you get a home loan with ATO debt?

A smaller monthly payment may help your budget, but check how long the debt will last and the total interest and fees.

If the plan has broken down, or you are not sure what you owe, start with your accountant and the ATO. Get the figures up to date and respond to any notices while you look at the loan options.

An up-to-date plan and enough equity can help. The lender still needs to see that your income covers the new loan, household costs and ongoing tax payments. Permission to pay the ATO through the loan is only one part of that assessment.

Accepting an ATO payment plan and lending you money to pay it out are different policies. A bank can say yes to one and no to the other. For a business owner, I also check whether the debt came from a one-off setback or a business that is still falling behind on tax.

Brighten, Macquarie and Resimac treat an ATO payout differently.

For self-employed borrowers, Full Doc generally uses tax returns and financial statements to verify income. Alt Doc uses alternative evidence, such as business bank statements or an accountant’s declaration. Each lender sets its own document requirements.

The number of debts is only one part of the assessment. You still need enough equity and income, the right documents and a property the lender accepts. You can also read our Pepper Money review; we would need to confirm the product and ATO-payout rules for your application.

Some lenders will let a formal ATO plan keep running. I match the agreement to your current ATO balance and recent payments. The monthly payment still counts when the lender works out how much you can borrow.

Before applying, ask whether the lender will let the plan continue or requires it to be paid out, and whether it will lend for that payout. Our self-employed home-loan guide or low-doc guide explains which income documents to have ready.

The ATO can report some business tax debts to credit reporting bureaus. Its criteria include an entity with an ABN that is not excluded, at least $100,000 overdue for more than 90 days, and no effective engagement with the ATO to manage it. An active complaint about the proposed disclosure can also affect whether it proceeds.

Before disclosing, the ATO sends a notice and gives you 28 days from receiving it to take the required action. Keeping to an agreed payment plan can count as effective engagement. If a notice arrives, contact the ATO; starting a refinance does not put the notice on hold.

A smaller tax debt still needs to be declared. The lender may see it in ATO statements, tax assessments, business accounts or bank transactions even when it is not on your credit report.

Ask your accountant to separate the amounts and accounts. A company's tax bill, BAS debt and a director's personal tax bill should not arrive at the lender as one unexplained total.

For a sole trader, you and the business are not separate legal entities. Check who holds the ABN and who owes the amount on the notice. Do not assume personal income tax is always outside the business-debt reporting rules.

The lender also needs to understand why the debt arose. A one-off bill is different from overdue BAS that keeps growing. Clearing the old balance only helps if the business can keep up with the next tax bill.

1. Start with the current figures. Get the ATO account balance and payment-plan schedule. Interest and recent payments can change what needs to be paid.
2. Work out the total loan needed. Add the mortgage payout, current ATO payout and itemised refinance costs. Check that the equity and income cover the whole amount.
3. Agree how the ATO will be paid. Ask the lender what evidence it needs and whether the settlement agent must pay the ATO directly. The lender needs to accept both the debt and the reason for the borrowing.
4. Check the money has arrived. Keep the settlement record and updated ATO statement. If the ATO had begun disclosure action, confirm the position after payment.

Do not add a rounded cash buffer just because there is equity. Every dollar needs a purpose and adds to what you repay. Keep the tax-debt portion visible in the repayment plan so it does not become a permanent part of the mortgage.

Some lenders want the debt cleared before they will proceed; others may allow it to be paid at settlement. Confirm that first, before arranging another loan to bridge the gap.

Moving a tax debt into a home loan can cut the monthly repayment sharply. But stretch it over 30 years and you could still be paying for it decades later. A refinance may also change the interest rate on the mortgage you already have.

This hypothetical example covers the $40,000 tax-debt portion alone, at an assumed 8% p.a. Compare paying it off over 5 years with leaving it in the loan for 30 years. This is an illustration, not a lender quote or a comparison with an ATO plan.

The example uses monthly repayments and an unchanged rate. Figures are calculated before rounding to whole dollars. Fees, tax effects and changes to the existing mortgage are excluded. If refinancing changes the rate on the rest of your mortgage, add that cost to the comparison too.

Then put all 3 options side by side over the same period:

• The cost of keeping the existing mortgage and agreed ATO plan.
• The cost of clearing the tax debt separately, including fees, repayments and any loss of cash reserves.
• The replacement mortgage's rate and fees across the full balance, plus the time needed to clear the added tax debt.

Check that the budget after settlement also covers ongoing tax instalments and other business commitments.

If you clear the ATO with a personal or business loan, tell the mortgage lender about that new debt and its repayments. It still affects how much you can borrow. Paying the tax bill does not make the replacement debt disappear.

Remember that you are using your home as security. If you cannot keep up with the new repayments, the home is at risk. Our debt-consolidation guide takes you through the repayment and interest comparison. The bad-credit refinance guide covers moving now versus waiting.

• Current statements for each relevant ATO account and the formal payment plan.
• Evidence of plan payments, including any missed payments or revised arrangement.
• Tax returns, financials, BAS and income evidence relevant to your business and personal position.
• The current mortgage statement, property estimate and other loan or card commitments.
• A breakdown of the debts and costs the proposed loan would pay.
• A short explanation of why the tax debt arose and what has changed to prevent it growing again.

I pause the loan work if returns or BAS are overdue, the payment plan has broken down or the business keeps adding new tax debt. Bring the accountant and ATO position up to date before using your home to borrow more.

Your accountant works through the tax position; I compare the ways the loan could be set up. If the debts are unaffordable, the National Debt Helpline provides free financial counselling on 1800 007 007.

Client examples are based on real situations. Names and identifying details have been changed.