Buying out a business partner when the company owes the ATO

Yes, you can buy out a co-director while your company has an ATO debt, but the debt needs to be dealt with as part of the deal, not around it. A director who resigns can stay personally exposed to penalties for some company tax debts from before they left, so your departing partner will almost always want the debt paid out or tightly managed at settlement. That changes both the negotiation and the amount you need to borrow.

Plenty of business partnerships end at exactly the moment cash is tight, and tax debt is often part of the reason. This guide explains why the debt matters to both of you, what the ATO’s rules say, and how buyouts in this situation tend to get funded.

Why does the departing director care about the ATO debt?

Because walking away from the company doesn’t automatically walk them away from the debt.

The ATO’s director penalty regime can make directors personally liable for a company’s unpaid PAYG withholding, GST and super guarantee charge. The ATO is clear that resigning doesn’t remove liability for debts due before the resignation. It also notes that liability can continue even after the company is deregistered.

So picture it from your partner’s side. They’re selling their shares, resigning as a director and moving on. If the company later fails to pay the tax that built up while they were on the board, the ATO could pursue them personally. No sensible departing director will accept that risk without protection, which usually means one of three things:

1. The debt is paid in full at settlement.
2. The price is reduced to reflect the debt, and the debt is cleared from the proceeds.
3. The continuing owner gives an indemnity, and the departing director decides whether they trust it.

The first option is the cleanest, and it’s the one lenders find easiest to fund.

What should you check about the debt before negotiating?

Get the full picture from the ATO portal and your accountant before anyone agrees a number. The details matter.

Question	Why it matters
Which tax types make up the debt?	PAYG withholding, GST and super guarantee charge can follow directors; other debts generally don’t
Were the amounts reported on time?	The ATO says if PAYG withholding or GST was reported more than three months late, or never, a director penalty can only be remitted by paying the debt in full
Is there a payment plan, and is it on track?	A defaulted plan makes the full balance payable immediately
Are all lodgements up to date?	Lenders and the ATO both expect current lodgements
Has a director penalty notice been issued?	It shortens the timeline and changes the options

For a new director joining the board as part of a restructure, the ATO gives 30 days from appointment to deal with pre-existing debts in one of the ways it lists before they become exposed. That’s worth knowing if you’re bringing in a replacement director as your partner leaves.

Can the payment plan just stay in place?

Sometimes, but it’s often the sticking point.

The ATO’s guidance on payment plans notes that debts on a plan keep accruing general interest charge, which compounds daily. To stay on track, the business must lodge on time, pay new debts in full or on a separate plan, and keep up the instalments. If it doesn’t, the plan can default, making the full overdue amount payable immediately.

From the departing director’s point of view, that’s a risk they can’t control once they’ve left. From the continuing owner’s point of view, it’s also expensive: the ATO says general interest charge incurred on or after 1 July 2025 isn’t tax deductible.

That’s why many buyouts in this situation roll the ATO debt into the same funding as the payout. If you want to see whether that’s realistic for your company, send us a quick outline of the buyout and the tax position. There’s no credit check when you first enquire.

How do lenders view a buyout with ATO debt attached?

Tax debt makes some lenders walk away. Others look at it case by case, and that’s the group that matters here. They’ll usually want:

• The full ATO statement for every account, not just the headline figure.
• Up-to-date lodgements, including BAS.
• The signed buyout agreement, with the price and how the ATO debt is being handled.
• Trading figures: tax returns, recent bank statements and management accounts, adjusted for the departing partner’s drawings and any replacement cost.
• A clear reason the debt built up, and why it won’t happen again. A one-off bad year, a lost contract or a growth spurt that stretched cash are all things lenders understand.
• Security, very often property.

Our ATO tax debt loans page explains how lenders look at tax debt in general, and partner buyout loans covers the buyout side in detail.

How is this kind of buyout usually funded?

Add up the payout, the tax debt and any facilities your partner has guaranteed, and the total is often bigger than either director expected. Unsecured options, which typically run from $5k to $500k and are sized on turnover and bank statements, can handle a smaller combined figure when trading is strong and the tax debt is modest.

When the number is larger, property usually carries the deal. We arrange property-secured business loans between $20k and $5m, written as a first mortgage, a second mortgage or a caveat loan over residential or commercial property. A continuing owner with a home loan already in place can often leave it untouched and borrow against the remaining home equity instead. Equipment and vehicle loans carrying the departing partner’s guarantee can be paid out in the same transaction; the business debt refinance page shows how that consolidation usually works.

One more point on sequencing. Settlement should pay the ATO directly, or through the solicitors’ trust accounts, on the same day the departing director is paid and resigns. That way nobody is relying on a promise, the ATO account shows a nil balance, and the lender can see exactly where its money went. Ask your accountant to request a current payout figure from the ATO a few days before settlement, because general interest charge keeps accruing daily until the debt is cleared.

Illustrative example

Illustrative only. Two directors own a civil earthmoving company. One wants out after a falling-out. The company owes the ATO $140k, mostly GST and PAYG withholding, on a payment plan that’s on track, and has a $180k machinery facility both directors guarantee. An independent valuation puts the departing director’s shares at $320k.

The departing director won’t resign while the ATO debt and the machinery guarantee remain. The parties agree the price, and the continuing director borrows $640k with a second mortgage over his home. At settlement, the departing director is paid, the ATO debt is cleared in full and the machinery facility is refinanced in the continuing director’s name. The lender’s comfort comes from the trading record, the property security, and a clear explanation that the debt built up during a large project with slow payment terms.

Ready to untangle the buyout and the tax debt together?

Tax debt makes a partner exit feel more complicated than it needs to be. Once you see it as one more item to fund at settlement, the path gets much clearer, and we’re comfortable working with businesses that carry ATO debt.

The enquiry takes about a minute, and there’s no credit check when you first enquire. Your details aren’t farmed out to a list of lenders who’ll all ring you. A real person looks at the buyout, the ATO position and your security, then calls you to talk it through. Please give accurate figures for the tax debt and the agreed price, so we can match the right option first time.

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