Offer in Compromise: Settle ATO Tax Debt for Less in 2025

Tax debt can feel like a mountain you’ll never climb. But what if the Australian Taxation Office (ATO) allowed you to settle your debt for less than the full amount owed? Enter the Offer in Compromise—a rarely discussed but powerful debt relief tool that’s gaining fresh attention in 2025 as economic pressures mount and the ATO updates its hardship policies.

What is an Offer in Compromise?

An Offer in Compromise (OIC) is a formal agreement where the ATO accepts less than the full amount of tax debt owed, considering it full and final settlement. While the ATO doesn’t use the term “Offer in Compromise” as frequently as its US counterpart, the concept exists under the ATO’s ‘Debt Compromise’ or ‘Settlement’ provisions. It’s a strategic option for individuals and small businesses experiencing serious financial hardship, where full payment would be impossible or inequitable.

• Eligibility: The ATO generally considers OICs for taxpayers who can demonstrate severe and ongoing financial difficulty.
• Scope: Can apply to income tax, GST, superannuation guarantee charges, and penalties.
• Outcome: If approved, the taxpayer pays a negotiated reduced sum, and the remaining debt is waived.

2025 Policy Updates and Economic Backdrop

The economic landscape in 2025 is challenging: inflation remains above target, household budgets are stretched, and business insolvencies are rising. In response, the ATO has refreshed its Debt Relief and Compromise Guidelines to provide greater clarity and flexibility for struggling taxpayers.

Key 2025 updates include:

• Streamlined assessment: Faster review timelines for compromise applications, with a 60-day response target.
• Expanded criteria: Broader consideration for small businesses and sole traders affected by natural disasters or industry downturns.
• Digital lodgement: New online forms and submission channels for compromise offers, reducing paperwork and wait times.

These changes reflect a more pragmatic approach from the ATO, acknowledging that chasing uncollectable debts can be a lose-lose for both sides.

How to Apply: Steps and Pitfalls

Securing an Offer in Compromise is not as simple as asking for a discount on your tax bill. The ATO requires:

1. A detailed statement of financial position, including assets, liabilities, income, and expenses
2. Evidence of hardship, such as medical reports, job loss documentation, or business insolvency records
3. A written offer stating the lump-sum or payment terms you propose
4. Disclosure of any potential windfalls (e.g. inheritance or insurance payouts)

The ATO weighs your proposal against the likelihood of recovering more through continued enforcement. If they believe your offer represents the most they could realistically recover, they may accept. But beware:

• Undisclosed assets can void your agreement if found later
• Lowball offers with no supporting evidence are routinely rejected
• Ongoing compliance is required—future non-lodgment or non-payment may revoke the compromise

Example: In early 2025, a Brisbane café owner facing $110,000 in GST and income tax debt after COVID-related shutdowns submitted an OIC with supporting financials showing negative cash flow and no recoverable assets. The ATO accepted a $22,000 lump sum, funded by a family loan, and wrote off the remaining balance—providing a lifeline that allowed the business to keep trading.

Alternatives and When to Consider an OIC

OICs are a last resort. The ATO typically expects taxpayers to consider:

• Payment plans (including interest-free arrangements for eligible hardship cases)
• Partial remission of penalties and interest
• Bankruptcy or insolvency (for companies)

If you have no realistic path to repay your tax debt in full, have explored all other options, and can document your hardship, an Offer in Compromise could be your best shot at a fresh start in 2025.