Borrowing to Pay your PAYG Instalments? Why You Should Think Twice
It’s no secret that many doctors feel frustrated by the amount of tax they pay. With limited business deductions available and most expenses being personal, such as mortgages, school fees, or living costs, the amount withheld through PAYG Instalments (PAYGI) can feel disproportionately high.
So, when someone suggests that you can borrow to pay your PAYGI and then claim the interest as a tax deduction, it’s easy to see the appeal. On paper, it sounds like a clever way to manage cash flow and reduce taxable income.
Unfortunately, this idea is both misleading and risky. The reality is that borrowing to pay your personal tax does not create a deductible expense and can expose you to compliance issues down the track.
Instead, suppose you are looking to make your money work harder. In that case, it’s far better to consider legitimate borrowings for wealth-building purposes — such as an investment property, managed funds, or superannuation strategies. Partnering with a licensed financial planner can help you structure these investments correctly so your borrowings genuinely fund assets that grow your wealth and support your retirement, rather than simply covering short-term tax payments.
The reality: PAYGI is a personal tax obligation
Your PAYG Instalments represent prepaid tax on your personal income, not your practice or business expenses. Whether you operate as a sole trader, in a trust, or through a service entity, these instalments are fundamentally personal.
That means any interest on money borrowed to pay them is not deductible. This is not a grey area. The tax legislation (specifically section 25-5(2)(c) of the ITAA 1997) explicitly prohibits claiming interest or other borrowing costs where the borrowed funds are used to pay a tax liability.
So, even though your practice may be generating income, the purpose of the borrowing — to meet your personal tax obligations — makes the interest private and non-deductible.
Why this strategy can backfire
1. breaches a clear statutory rule
The law is unambiguous: interest on loans used to pay tax cannot be claimed as a deduction. Any adviser promoting this approach is ignoring a direct prohibition, which exposes you to audits, increase in tax liabilities and application of penalties.
2. PAYGI isn’t part of producing your income
Expenses are only deductible if they’re incurred in earning assessable income. Paying the ATO doesn’t produce income; it settles an existing liability. The moment you borrow to fund a tax payment, that interest becomes private in character.
3. doesn’t fix the root issue — cash flow management
Borrowing to pay PAYGI may create short-term relief but leads to compounding costs and interest. You’re effectively turning a timing issue into an expensive debt problem.
4. PSI rules don’t change this
If your income is considered Personal Services Income (PSI), the ATO already views it as primarily derived from your own professional efforts. That reinforces, rather than negates, the personal nature of your PAYG obligations. In other words, PSI doesn’t make your PAYGI a business expense.
Why some marketing claims sound persuasive — but aren’t
Some advisers cite older tax rulings, Private Binding Ruling (PBR) or “industry practice” to justify deducting interest on PAYGI borrowings. These arguments typically rely on selective readings of tax determinations that apply to companies or partnerships with genuine operational debt — not sole practitioners or contractors paying personal tax.
The crucial point is simple: the purpose of the borrowing determines its deductibility. If it’s used to pay tax, it fails the test immediately.
A safer, smarter approach for doctors
At ASTUTEMED, our position is straightforward: we do not recommend borrowing to pay PAYG Instalments. Instead, we focus on proactive cash-flow and forecasting strategies that keep you in control:
Quarterly tax projections — anticipating your tax position early to avoid surprises.
24-month rolling forecasts — integrating your practice income, personal spending, and super contributions.
Strategic PAYGI variations — lawfully adjusting instalments if your earnings fluctuate.
Targeted use of borrowing — reserving finance for legitimate income-producing or investment purposes such as equipment, fit-outs, property, or wealth-building strategies with a qualified financial planner.
These measures preserve your financial flexibility without exposing you to ATO scrutiny or disallowed deductions.
Final thoughts
If you are being encouraged to borrow for tax payments under the promise of a “deductible interest strategy,” treat it as a warning sign. The ATO has consistently ruled against such claims, and the long-term cost of getting it wrong far outweighs any perceived short-term benefit. The key is clarity and planning not complexity or shortcuts. Managing PAYG Instalments effectively is about understanding your financial flow, not trying to reclassify a personal tax obligation as a business expense.
Need help forecasting your PAYGI or managing tax cash flow?
ASTUTEMED specialises in helping doctors and medical professionals align their financial structure, cash flow, and tax strategy with clarity and compliance. If you’d like a review of your upcoming PAYGI obligations or want to discuss a proactive tax strategy tailored to your situation, please contact us.