ATO Debt Forgiveness: Penalty and Interest Remission, Settlements and Litigation in 2026
Including the new Model Litigant Rules under the Legal Services Directions 2025
ATO debt can escalate quickly.
For directors and business owners, the issue is rarely limited to the primary tax debt. General interest charge, shortfall interest charge, failure to lodge penalties, director penalty notices, garnishee action, statutory demands and winding up proceedings can all follow if the position is not addressed early.
It's no surprise that "ATO debt forgiveness" is one of the most searched phrases by business owners under pressure — though, as we explain below, that's not quite how the system works.
In practice, the relevant pathway may involve remission of penalties or interest, negotiation of a payment arrangement, settlement of a tax dispute, objection or review proceedings, or formal insolvency advice.
In 2026, this area is particularly important. The ATO has introduced more structured processes for requesting remission of interest and failure to lodge penalties. The Legal Services Directions 2025 have also commenced, updating the framework that applies to Commonwealth litigation, including the model litigant obligation. Recent tax litigation has also reinforced the need for careful drafting and strategy when resolving disputes with the Commissioner.
For directors, the stakes can be personal. Unpaid PAYG withholding, GST and superannuation guarantee charge may trigger an ATO director penalty notice. Once that occurs, a company tax debt can become a personal liability issue.
Understanding how the ATO approaches remission, settlement and litigation can make a significant difference. It can help directors and business owners preserve options, reduce exposure and avoid steps that may later be scrutinised by the ATO, creditors, a liquidator or a court.
ATO Debt Forgiveness: What Does It Actually Mean?
“ATO debt forgiveness” is a useful search term, but it can be misleading.
The ATO may reduce, remit or compromise certain amounts in particular circumstances. However, this does not mean all ATO debt can simply be forgiven. The starting point is that primary tax, GST, PAYG withholding and superannuation-related liabilities are amounts the ATO will generally seek to recover.
What may be open to negotiation or reduction depends on the nature of the debt.
For example, a taxpayer may seek:
Remission of general interest charge
Remission of shortfall interest charge
Remission of failure to lodge penalties
Review of an ATO tax penalty
Settlement of a disputed tax or superannuation liability
A payment arrangement
Deferral or restructuring of payment obligations
Objection, review or litigation where the underlying liability is disputed
The right pathway depends on whether the amount is accepted, disputed, accruing interest, subject to recovery action, or connected to broader insolvency risk.
This distinction matters. A director asking for “ATO debt forgiveness” may actually need urgent advice on director penalty notices, solvency, restructuring, tax objections or liquidation risk. Treating all ATO debts as the same can cause delay, and delay often narrows the available options.
How and When the ATO Remits Penalties and Interest
The ATO has discretion to remit certain interest and penalties. The most common issues for businesses and directors are general interest charge (GIC), shortfall interest charge (SIC) and failure to lodge (FTL) penalties.
General interest charge, or GIC, commonly applies where tax debts remain unpaid. Shortfall interest charge, or SIC, may apply where an amended assessment results in an increased tax liability. Failure to lodge penalties may apply where returns, activity statements or other required documents are not lodged on time.
Since 1 July 2025, GIC and SIC incurred on or after that date are no longer deductible for income tax purposes. This means an unremitted interest charge now carries a greater after-tax cost, making a well-prepared remission request more important.
Remission is not automatic. The taxpayer generally needs to explain why remission should be granted and support that position with evidence. For many businesses, remission of general interest charge is the most valuable form of relief, particularly where unpaid ATO debt has accumulated over time.
Relevant factors may include:
The reason the debt, shortfall or late lodgement occurred
Whether the circumstances were within the taxpayer’s control
The taxpayer’s compliance history
Whether there was illness, natural disaster, serious disruption or other external cause
Whether the ATO contributed to delay
Whether the taxpayer engaged early and acted promptly
Whether the taxpayer has taken steps to prevent recurrence
Whether the taxpayer is now compliant or has a realistic plan to become compliant
In January 2026, the ATO announced new interest and failure to lodge penalty remission request forms. These forms are intended to help taxpayers and advisers provide the right information when requesting remission of interest charges or failure to lodge penalties.
The practical point is simple: a general request saying the debt is unfair or unaffordable is unlikely to be enough.
A stronger remission request should identify the legal and factual basis for remission, explain the chronology, address the taxpayer’s conduct and include supporting documents. Depending on the circumstances, this may include medical evidence, ATO correspondence, evidence of business disruption, cash flow records, lodgement history, payment history, tax agent correspondence and records showing what has changed.
ATO Approach to Settlements
Settlement is different from remission.
A remission request usually concerns whether interest or penalties should be reduced, where a settlement usually involves the compromise of a dispute about a tax, superannuation or debt position. This may occur before, during or after objection, review or litigation.
Under the ATO’s Code of Settlement, a settlement is generally considered where it produces a sensible outcome given the strength of each side’s case, the cost of continuing the dispute, and the taxpayer’s future compliance. A settlement is not simply a request for the ATO to discount a debt because the taxpayer cannot pay. The terms matter.
Beyond the ATO's internal Code of Settlement guidelines, Commonwealth litigation rules under the Legal Services Directions 2025 add an additional layer of legal oversight for significant monetary compromises. Where the Commonwealth is settling a claim above $100,000, the Legal Services Directions 2025 also require written advice and formal sign-off, a reminder that ATO settlements carry their own governance layer.
Recent litigation is a useful caution here. In Ziegler v Commissioner of Taxation [2025] FCAFC 168, the Full Federal Court confirmed the Commissioner can increase an administrative penalty at the objection stage, and that a taxpayer cannot show an assessment is excessive merely by alleging a breach of the settlement deed. Settlement terms need to be drafted carefully, with downstream tax consequences considered upfront and not after the deed is signed.
How the ATO Conducts Litigation: New Model Litigant Rules in 2026
Tax disputes can progress from objection to tribunal review or court proceedings.
Where that occurs, the ATO is subject to model litigant obligations under the Legal Services Directions 2025, which commenced on 2 March 2026.
In broad terms, those rules require Commonwealth entities to conduct litigation fairly. This includes:
avoiding unnecessary delay
narrowing issues where possible
dealing with claims consistently
considering alternative dispute resolution where appropriate
not taking advantage of a person who lacks resources
This does not mean the ATO cannot take firm positions. It can. The model litigant rules do not require the Commissioner to compromise a dispute simply because litigation is difficult, expensive or commercially inconvenient for the taxpayer.
However, the rules may be relevant where the ATO’s conduct creates unnecessary cost, delay or procedural unfairness.
For taxpayers, the stronger approach is not to make broad allegations that the ATO is being unfair. It is to identify the specific conduct, connect it to the relevant obligation and raise it in a disciplined way.
Insolvency and Director Risks When Dealing with ATO Debts
ATO debt often becomes an insolvency issue.
Unpaid tax may sit alongside creditor pressure, overdue BAS lodgements, unpaid superannuation, declining cash flow, contractor debts or supplier pressure. If the company cannot pay its debts as and when they fall due, directors need to assess solvency carefully.
An ATO director penalty notice can also make directors personally liable for certain unpaid company tax liabilities, including PAYG withholding, GST and superannuation guarantee charge.
The timing and type of notice matter. In some cases, directors may still have options if they act within the required timeframe. In other cases, particularly where liabilities were not reported on time, options may be limited.
Directors should also be careful about entering payment arrangements the company cannot realistically meet. A failed arrangement can make later negotiations harder, increase ATO pressure and point to deeper solvency issues.
Where a company is under financial pressure, directors should consider whether all lodgements are up to date, whether tax liabilities have been reported, whether a DPN has been issued, whether the company is solvent, and whether restructuring, voluntary administration or liquidation should be considered.
ATO debt should not be treated as an accounting issue only. It can quickly become a personal liability, insolvency or litigation issue.
Practical Strategies and Case Insights
A well-handled ATO debt usually comes down to acting early, using the right pathway (remission, settlement, payment arrangement or objection) and supporting any request with specific, dated evidence rather than a general hardship claim. Directors should also confirm lodgements are current and assess solvency before proposing any arrangement, since a DPN can turn a company debt into a personal one quickly.
Recent litigation reinforces why care matters even after a resolution is reached.
In Ziegler v Commissioner of Taxation [2025] FCAFC 168, the Full Federal Court confirmed the Commissioner can increase an administrative penalty at the objection stage, and that a taxpayer cannot show an assessment is excessive merely by alleging a breach of a settlement deed. The case is a reminder that engaging with the ATO, objecting, or restructuring around a settlement can carry consequences that aren’t always intuitive, and each step should be modelled before it’s taken, not reacted to afterwards.
Need Further Guidance on ATO Penalty & Interest Remission?
ATO debt is more than a tax issue. It can become a director risk, insolvency issue and litigation matter if it is not addressed early.
For directors and business owners, understanding the difference between remission, settlement, payment arrangements, objections and litigation can help preserve options, reduce exposure and avoid steps that may later come under scrutiny.
At Gear & Co Lawyers, our lawyers advise directors, business owners, creditors and insolvency practitioners across Queensland on complex insolvency, restructuring, ATO disputes and commercial litigation matters. If you are facing ATO debt, an ATO tax penalty, a director penalty notice, recovery action or financial distress, contact our commercial and insolvency lawyers today on (07) 3709 2547 or info@gearandco.com.au for urgent advice, or fill in our contact form.
For further guidance, you may wish to read our articles on Director Penalty Notices, Insolvent Trading FAQs and What Are the Director’s Duties When Facing Insolvency.
While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed. This publication is intended to provide only general information on matters of interest. It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice. You should seek legal or other professional advice specific to your circumstances.
