Selling a business with ATO debt: clear it before the sale, or at settlement?

Plenty of owners decide to sell at exactly the moment the ATO balance is at its worst. Sometimes the debt is the reason: you’re tired, the numbers have slipped, and a clean exit looks better than another year of catching up. Sometimes it’s just bad timing, with a buyer appearing after a rough quarter.

Either way, the question is the same. What happens to the tax debt when the business changes hands, and should you clear it before you sell or out of the proceeds? Here’s how it works, written by a funder rather than a broker or an insolvency firm.

Does the ATO debt go with the business when you sell?

It depends on what you’re actually selling. Most small business sales in Australia take one of two forms.

	Asset sale	Share sale
What the buyer gets	The business assets: equipment, stock, goodwill, the lease, the name	The company itself, by buying its shares
Where the ATO debt sits after settlement	With you or your company, the seller	Inside the company, now owned by the buyer
What the buyer usually wants	Clear title to the assets, and no garnishee or security interests over them	The ATO balance at nil, or the price reduced to cover it, plus warranties and indemnities
What happens to the proceeds	Paid to the selling entity, which still owes the ATO	Paid to the shareholders

Sole traders and partnerships can only sell assets, since there are no shares. Companies can do either, though most small business sales are asset sales precisely because buyers don’t want to inherit unknown liabilities.

The thing to take from the table: in neither case does the debt simply vanish. It either stays behind with you or becomes the buyer’s problem, and buyers know that.

Why selling doesn’t switch off director liability

If you run a company, this is the part most owners underestimate. The ATO can recover unpaid PAYG withholding, GST and super guarantee charge from directors personally under the director penalty regime. The ATO’s guidance on closing a business also notes that penalties can attach to liabilities incurred even if they aren’t yet due when the business stops trading.

So consider an asset sale where the company keeps the debt, collects the sale money, and then pays everyone except the ATO. The directors are still exposed. The same goes for resigning before or after the sale: stepping down doesn’t wipe amounts that arose while you were a director. Our page on new and resigning directors covers the timing rules.

And if any of those amounts went unreported for more than three months after they were due, they may already be “locked down”, meaning payment is the only way to make the personal penalty go away. That is a strong argument for clearing the debt rather than parking it.

Can the ATO grab the sale money?

It can try. A garnishee notice goes to anyone who holds money for you or owes you money, and requires them to pay the ATO instead. Once contracts are exchanged, a buyer owing you the balance of the price, or an agent holding the deposit, fits that description.

That rarely kills a sale on its own. What it does is create a nasty surprise at settlement, when the figures in your settlement statement no longer match what you expected to walk away with. If a lender or landlord also needs paying out on the day, the numbers can stop working altogether.

The fix is boring and effective: tell the ATO you’re selling, show them the contract, and agree in writing how and when the debt will be paid.

Short on time before the contract deadline? See if you qualify for funding to clear the ATO before settlement. It takes about a minute.

What buyers will ask about your tax position

Any buyer with a decent accountant will check the tax position during due diligence. business.gov.au’s guide to selling your business lists finalising tax obligations as one of the core steps, and buyers approach it from the other side. Expect them to ask for:

• ATO statements of account for the activity statement and income tax accounts, not just a verbal “it’s under control”;
• Lodgement history, because missing BAS or tax returns suggest numbers that may not be reliable;
• Evidence that super is paid up, especially with Payday Super now in force;
• A credit report, which may show the debt if the ATO has disclosed it to credit reporting bureaus. That can happen once a business owes $100,000 or more, more than 90 days overdue, and isn’t engaging.

An unresolved debt does two things in a negotiation. It gives the buyer a reason to push the price down by more than the debt itself, as a risk premium. And it adds a condition the sale has to satisfy before it can settle, which is one more thing that can slip.

What about GST on the sale itself?

Many business sales are GST-free as a sale of a going concern. The ATO’s going concern rules require, among other things, that buyer and seller agree in writing before the sale that it’s a going concern, that the buyer is registered or required to be registered for GST, and that you keep the business running until the day it’s sold.

This matters for tax-debt owners in two ways. First, if the deal doesn’t qualify, GST is payable on the sale price, which can add a fresh, large BAS liability on top of the old one. Second, “you keep the business running until settlement” means you still have to trade, lodge and pay through the sale period. Falling further behind in those months is common, and it makes the final reckoning bigger.

If the sale includes the business premises, you’ll also need a foreign resident clearance certificate for settlement. Since 1 January 2025 that applies to property sales of any value, so apply early.

The shortcut to avoid: selling cheap to yourself

Sometimes the “sale” a struggling owner is pitched isn’t to an outside buyer at all. The idea is to move the assets into a fresh company for a nominal price, leave the debt in the old one, and let it fold.

Since 18 February 2020, a liquidator, or ASIC, can unwind a transfer of company property made for less than market value that leaves creditors worse off, known as a creditor-defeating disposition. ASIC is clear that in a legitimate restructure an independent valuer sets the price and the new owner pays it. Anything else risks being treated as illegal phoenix activity, with directors personally in the frame. If someone suggests this, walk away.

Three clean ways to deal with the debt

Assuming the business is genuinely being sold at a fair price, these are the realistic options, from simplest to most flexible.

1. Pay it from the proceeds at settlement, by agreement. If the sale price comfortably exceeds everything owed and settlement is soon, the ATO may accept being paid out of the proceeds. Get the arrangement in writing and make sure your conveyancer or lawyer builds it into the settlement statement. The risk is that the debt grows, or collection action arrives, if the sale falls over or settlement is pushed back.

2. Put an ATO payment plan in place until the sale settles. For smaller debts, an ATO payment plan stops escalation while you sell and can be paid out at settlement. It doesn’t remove the debt from due diligence, though. Buyers will still see it, and general interest charge keeps accruing.

3. Clear the debt now with short-term funding, repaid from the sale. For a lot of sellers this is the cleanest option. A property-secured loan, often a caveat loan or second mortgage over a home or commercial property, pays the ATO out in full. The business then goes to market with a nil balance, director exposure on those amounts is gone, and the sale proceeds become the loan’s exit. Where it’s arranged, funds can be paid straight to the ATO at settlement of the loan.

Property-secured funding runs from $20,000 to $5,000,000, and funding is possible in as little as 24 hours once a lender has what it needs. For trading businesses without property, unsecured options typically run from $5,000 to $500,000, sized on turnover and bank statements.

The trade-off is honest enough: you pay for the loan, and you need a realistic plan B if the sale is delayed. A good lender will ask about both.

An example: the retiring owner with a buyer lined up

This is an illustrative scenario, not a real client.

A married couple have run a landscape supplies yard in regional Victoria for 22 years through their company. They’ve found a buyer through a broker: an asset sale, with settlement in about four months to allow for the lease assignment.

The catch is about $180k owed to the ATO, mostly GST and PAYG withholding from a bad wet season. The ATO has started making calls, and the buyer’s accountant has asked for a statement of account.

They weigh it up:

• Paying from proceeds would work on paper, but four months is a long time with no arrangement in place, and a garnishee on the deposit would spook the buyer.
• A payment plan would quieten the ATO but leave the debt visible in due diligence, and the buyer is already hinting at a lower offer.
• A second mortgage over their home pays the ATO in full within weeks. The buyer’s accountant gets a nil statement, the price holds, and the loan is repaid from the sale proceeds at settlement. Their plan B, if the sale falls through, is to refinance into a longer-term facility.

They go with the third option, with their accountant reviewing the numbers first. Nothing about it is unusual. It’s simply the option that kept the sale on track.

Selling soon and the ATO is still in the picture?

We work with business owners who owe the ATO every week, and selling with a tax debt is one of the situations we understand best. You aren’t the first owner to try to exit with a messy ATO account, and a good sale doesn’t have to be derailed by it.

If you’d like to know whether funding could clear the debt before your buyer’s due diligence, the enquiry takes about 60 seconds and there’s no credit check when you first enquire. We don’t push your details out to a pile of lenders, so your phone won’t light up with strangers. A real person who understands ATO debt reads your situation and calls you back.

One request: fill the form in accurately, with the rough ATO balance, whether you’ve received any notices, and roughly when the sale should settle. Those three details let us tell you on the first call whether funding, an ATO plan or simply waiting for settlement is the smarter move. If you want to sort through your options first, our ATO debt options checker gives you a ranked plan in a few clicks.

See if you qualify →