Introduction
Effective 1 July 2025, a new law in Australia will deny income tax deductions for interest charged by the ATO on overdue tax debts. This means any General Interest Charge (GIC) on late tax payments or Shortfall Interest Charge (SIC) on underpaid tax will be 100% payable by the taxpayer, with no tax relief. Whether you’re a small business owner with a running ATO payment plan, or an individual with an outstanding tax assessment, this change affects all taxpayers incurring ATO interest. The cost of carrying a tax debt is about to rise, as the interest on ATO debts becomes a true net cost rather than an expense that could be written off at tax time.
In this article, we explain what this change means in simple terms and why it’s being implemented. More importantly, we delve into how you can respond strategically. Just because ATO interest will no longer be deductible doesn’t mean you’re out of options – in fact, it’s now even more crucial to manage or eliminate tax debts smartly. We’ll cover approaches like prioritising tax debt in your budget, using ATO payment plans to possibly get interest relief, and looking at refinancing options (with flexible lenders) to replace expensive ATO interest with a more manageable loan. The goal is to help Australian businesses and individuals understand the impact and make informed decisions, so ATO interest charges don’t drain more cash than necessary.
What Changed: No More Tax Deduction for ATO Interest
On 13 December 2023, as part of the Mid-Year Economic and Fiscal Outlook, the government announced a law change to remove the tax deductibility of ATO interest charges. This has now been enacted under the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025. From 1 July 2025 onward, if you incur GIC or SIC on a tax debt, you cannot deduct that amount in your tax return. Previously, those interest charges could be claimed just like bank interest or other borrowing costs, effectively reducing the cost by your marginal tax rate.
To clarify the types of interest affected:
- General Interest Charge (GIC): ATO’s interest applied daily to overdue tax amounts after the due date. For example, if a business is late paying its BAS or an individual is on a payment plan for an income tax bill, GIC accrues on the outstanding balance.
- Shortfall Interest Charge (SIC): ATO’s interest on a tax shortfall when an assessment is amended. For instance, if your 2023 tax return was amended in 2025 to increase your tax payable, SIC is charged for the period you underpaid.
Interest incurred up to 30 June 2025 will still be deductible (under the old rules) in the tax year it’s incurred. For interest incurred on or after 1 July 2025, no deduction is allowed. There’s no phase-in or exception: the timing of when interest is “incurred” is what matters, not when the tax debt originated. Even if your tax debt is from years ago, the GIC accumulating after the cut-off date is non-deductible.
Why is the government doing this? The official reasoning is to improve tax compliance. By removing what is essentially a perk (the ability to write off penalty interest), the government is sending a message: paying tax late will cost you more, so it’s better to pay on time. It’s arguably a move to prevent businesses from using the ATO as a low-cost lender of last resort. With corporate tax rates at 25-30% and individual top rates at 47%, previously a chunk of ATO interest effectively came back as a tax deduction. That will no longer happen, making every dollar of ATO interest a real dollar out of pocket.
Impact: ATO Interest = Higher Costs, Tighter Cash Flow
The end of deductibility may sound technical, but its impact is very tangible. If you or your business owe money to the ATO and incur interest, you’ll now bear the full cost of that interest. Let’s illustrate: imagine a small business owes $50,000 in tax that it can’t pay immediately. At an annual GIC of ~11%, that’s about $5,500 a year in interest. Under the old rules, a 25% small business tax rate means they could claim $5,500 and get roughly $1,375 back at tax time, making the net cost ~$4,125. Under the new rules, the net cost is the full $5,500, an increase of 33%. For an individual in a high tax bracket, the difference is even greater – losing a 47% deduction effectively nearly doubles the after-tax cost of the interest.
For taxpayers already on tight budgets, this change means less cash flow headroom. You might find that servicing an ATO payment plan or an outstanding amount is eating more into your profits or household budget, since nothing comes back via tax deductions. In other words, ATO interest just got more “expensive” in real terms. Businesses should be mindful that carrying an ATO debt will hurt profitability more directly, and individuals should note that things like a tax shortfall interest can no longer be softened at tax time.
It’s also worth noting a subtle effect: when ATO interest was deductible, if the ATO later forgave that interest (through a remission), that forgiven amount had to be reported as income. Going forward, if the ATO forgives some interest, you won’t have to report the remission as income (since you never deducted it initially). But for most, that’s cold comfort compared to the overall increase in cost.
Bottom line impact: this change increases the effective interest rate you pay on tax debts by whatever your tax rate is. Taxpayers will need to adapt by either avoiding ATO interest or finding smarter ways to deal with tax debts. The next sections cover strategies to consider.
Strategic Options for Taxpayers with ATO Debts
Facing a scenario where ATO interest is non-deductible, taxpayers should re-evaluate how they handle tax debts. Here are some strategic options and considerations:
- Prioritise and Prevent:
- Pay on time if possible: The best way to avoid non-deductible interest is not to incur it. This might mean prioritising tax payments ahead of some other expenses. For businesses, it could involve tightening accounts receivable or using cash reserves to clear tax obligations. For individuals, it might mean adjusting PAYG withholding or making voluntary tax prepayments if you expect a shortfall.
- Use ATO payment plans proactively: If you know you can’t pay by the due date, contact the ATO early to set up a payment plan. This generally stops harsher debt collection actions and demonstrates good faith. While interest (GIC) will still accrue, being in a plan and sticking to it might make the ATO more amenable to waiving some interest later under their remission policies (especially if you experience genuine hardship or can show you’ve done everything right apart from the debt). Essentially, a payment plan buys you time and keeps the door open for interest relief, whereas ignoring the debt could lead to compounding interest and penalties.
- Consider timing: If you have an outstanding large tax debt now, there’s a one-off window before 1 July 2025 to clear it and still get a deduction for the interest incurred to date. This could influence decisions like selling an asset or drawing on savings to pay out a tax debt in June 2025 rather than later. It might also be worth accelerating any negotiations with the ATO about settling debts or interest remissions before the new rules kick in. (However, don’t do anything rash purely for a tax deduction without considering your overall financial picture – see point 3 and 4 below.)
- Explore Refinancing Options:
- Why refinance? Refinancing a tax debt means borrowing funds from a lender to pay off the ATO, then repaying that loan over time. The main benefits are: (a) Stopping the ATO’s GIC from accruing (and avoiding the ATO’s potentially tough collection tactics), (b) potentially securing a lower interest rate than the ATO’s (GIC is ~11%, alternative lenders might offer loans in the single digits or low teens depending on security and risk), and (c) importantly, the interest on a new loan is generally tax-deductible because it’s essentially a normal business borrowing. This restores the tax deductibility that the ATO interest would no longer provide.
- Non-bank and specialist lenders: Traditional banks often won’t lend to cover tax debts (they see it as throwing good money after bad). Non-bank lenders or private lenders are more flexible. They offer products like “tax debt loans” or will extend a business loan even if its purpose is to pay out the ATO. The trade-off is these lenders charge higher interest than banks, reflecting the risk. Rates might range from 8% up to 15% or more, depending on whether the loan is secured (for instance, against property) or unsecured. Even so, for many borrowers, a ~12% fully deductible interest loan is preferable to an 11% non-deductible ATO interest. After tax effects, the cost difference is significant.
- Use of collateral: If you have equity in real estate or other assets, one option is to refinance an existing mortgage or take out a secured loan to cover the tax debt. Secured loans have lower interest rates. Many business owners have taken this route – essentially turning an ATO debt into part of their home loan. Caution is warranted: you’re risking an asset (your property) by doing this. But if the amount is manageable and you’re confident in repayment, it can save a lot on interest costs.
- Unsecured business loans: If no collateral is available, there are lenders that provide unsecured loans for tax debts. The approval might depend on showing that your business is viable or your income is steady enough to service the loan. Short-term unsecured loans might have higher rates and fees, so it’s crucial to crunch the numbers. Often these are meant as a bridge – pay off ATO now, then possibly refinance again into a better loan once the ATO debt is off your record (since some traditional lenders might finance you later if the ATO debt is gone).
- Cash flow facilities: A business line of credit or invoice finance could indirectly help with tax debts too. For example, you might use a line of credit to ensure you can meet BAS payments on time (thus avoiding new GIC) and then pay down that credit line as your cash flow permits. It’s another way to smooth out the cash impact and maintain compliance.
- Don’t Automatically Rush to Pay Without a Plan:
- It might sound counterintuitive, but paying off your tax debt ASAP isn’t always the optimal move. Yes, you avoid interest by paying it, but if paying it off drains your cash to dangerously low levels, you might end up in a worse position (unable to pay suppliers, employees, or other critical expenses). The smart approach is to have a plan – weigh the cost of interest versus the benefit of retaining cash for operations or investments. Sometimes taking a bit longer to pay (and incurring some interest) is better for the health of the business or your finances, especially if that interest might be reduced or if the cash you kept yields a return.
- Interest Remission Possibility: The ATO does, in certain circumstances, remit (waive) GIC or SIC. This usually requires a good compliance history and maybe a demonstration of hardship or a sound reason. If you’re eligible for remission, it could forgive a significant chunk of interest – which is an even better outcome than paying it all and getting a deduction would have been. However, remissions are not guaranteed and usually come after you’ve entered and complied with a payment plan or cleared the debt. It’s something to discuss with a tax advisor: “Do I have a case for interest remission?” If yes, staying on an ATO plan and pursuing remission could save more money than refinancing the debt and paying all the interest to a lender. On the flip side, if you refinance, you’re committing to pay the lender’s interest in full (there’s no concept of the lender later waiving interest because you’re nice – that’s not happening!). So once you go the refinance route, you’ve essentially locked in those interest costs.
- Case-by-case decision: The takeaway here is one size doesn’t fit all. If you can comfortably pay off the debt now, great – that stops interest entirely (just be mindful of your cash needs). If you cannot, consider whether to work with the ATO (and possibly get some interest waived) or work with a lender (and keep the interest tax-deductible and perhaps lower). In many situations, a combination might even work: pay off part, refinance part, etc. The best strategy will depend on factors like interest amount, your cash flow, eligibility for remission, and availability of financing.
- Seek Professional Advice and Support:
- Changes like these are exactly when talking to your accountant or financial advisor pays off. They can help model scenarios: “What if I do nothing and stay on the ATO plan? What if I refinance? What if I pay it off from savings?” Knowing the dollar impact of each choice makes the decision clearer.
- Finance brokers and specialists: Given banks’ reluctance, engaging a finance broker who has experience with tax debt situations can open doors to lenders you might not find on your own. Brokers can negotiate terms or find a lender who understands your story, which increases your chances of approval and maybe better rates.
- Communication is key: If you’re struggling with a tax debt, don’t go silent. Engage with the ATO — they’re more reasonable if you approach them than if you ignore them. Simultaneously, explore your finance options. By lining up a plan (be it an ATO arrangement or alternate funding), you can often prevent crises like statutory demands or director penalty notices which the ATO might issue for seriously overdue debts.
Conclusion: Prepare Now for a Post-2025 Tax Landscape
With ATO interest no longer being tax-deductible from mid-2025, Australian taxpayers need to adjust their mindset and strategies regarding tax debts. The key points to remember: ATO interest (GIC/SIC) is effectively becoming a higher-cost expense, so avoiding or minimising it is more important than ever. If you have existing tax debts, consider taking action before the rules change (to utilise remaining deductions) and have a clear plan for how you’ll manage any debts thereafter.
Take proactive steps: Whether it’s tightening compliance to avoid new debts, refinancing through flexible lenders to manage interest costs, or negotiating with the ATO for a fair payment plan (and potential interest relief), there are avenues to prevent ATO interest from dragging you down. The worst thing to do is ignore the issue – that’s when compounding interest and limited options can really hurt.
At Bartons, we’re helping our clients navigate these changes by offering co-ordinated tax and lending advice. The bottom line is to act early and strategically. By understanding the implications and getting the right support, you can turn this looming challenge into a manageable part of your financial plan. The removal of deductions for ATO interest is a new hurdle, but with prudent management, businesses and individuals can overcome it and maintain control of their finances.
This general advice has been prepared without taking account of your objectives, financial situation or needs. You should consider the appropriateness of this advice before acting on it. If this general advice relates to acquiring a financial product, you should obtain a Product disclosure Statement before deciding to acquire the product.