ATO Debt Just Got More Expensive: What The New Changes Mean For You

From 1 July 2025, interest on Australian Taxation Office (ATO) debt will no longer be tax deductible. This is a major shift that will affect thousands of Australian businesses, sole traders, and investors, particularly those using payment plans or carrying outstanding tax liabilities. 

If you’re relying on the current deduction to soften the blow of General Interest Charges (GIC) or Shortfall Interest Charges (SIC), it’s time to review your position and consider alternatives before the rules change. 

Let’s break it down. 

What are the interest charges?

There are two main types of interest that are charged by the ATO. These are:

General Interest Charge (GIC):

This applies when you pay your tax liability late. The ATO applies GIC to encourage tax liabilities to be paid on time and ensure taxpayers who pay late don’t have an unfair advantage over taxpayers who pay on time.

GIC is calculated on a daily compounding basis on the overdue amount.

The GIC annual rate for the July – September 2025 quarter is 10.78%.

Shortfall Interest Charge (SIC):

This is applied when there is a shortfall in tax paid because of an amendment or correction to your tax assessment. SIC is also calculated on a daily compounding basis.

The SIC annual rate for the July – September 2025 quarter is 6.78%.

The ATO applies SIC to the tax shortfall amount for the period between when it would have been due and when the assessment is corrected.

What’s changing? 

Currently, many taxpayers can claim a tax deduction for interest incurred on overdue ATO debt, most commonly GIC and SIC. This deduction offsets part of the cost, making the effective interest rate less painful. 

From 1 July 2025, this will no longer be allowed. The Federal Government has confirmed that all ATO-imposed interest charges will become non-deductible, regardless of when the debt arose or what type of entity holds it. 

That means even if your tax debt dates back several years, any interest charged from 1 July 2025 onward is not deductible. 

Why does this matter? 

• ATO interest rates are already steep (currently over 11%). So, removing the deduction means you’ll be hit with the full brunt of those rates. 
• Cash flow pressure: For businesses already managing tight margins, losing the deduction reduces after-tax profit and puts pressure on liquidity. 
• This change affects companies, trusts, sole traders and superannuation funds. It also applies to any taxpayer under a payment arrangement with the ATO. 

Here’s an example…

Let’s say you’re a company in the 25% tax bracket and you’ve got an overdue ATO debt incurring GIC at 11.15% p.a. 

That’s a 33% increase in the real cost of ATO debt interest, purely because the tax deduction is no longer available. 

What can you do about it? 

There are proactive steps you can take to avoid being caught out, including: 

1. Clearing existing ATO debts as soon as possible.

Where possible, pay down your ATO debt before the new rules kick in. Interest paid before 1 July 2025 may still be deductible, and getting rid of the balance altogether avoids any post-July exposure. 

This is the simplest and most effective approach if your cash flow allows for it. 

2. Refinancing ATO debt with private or commercial finance.

If paying the ATO directly isn’t feasible, consider refinancing your tax debt using a business loan, private finance, or working capital facility. You can explore this option with your trusted advisor.

In many cases: 

• The interest on a commercial loan used to pay ATO debt can still be deductible, provided the funds are used for income-producing purposes. 
• This can reduce your effective cost of funds and improve cash flow. 

3. Exploring ATO payment plan options (with caution).

If you do need to continue with an ATO payment arrangement beyond 1 July 2025, make sure it’s a deliberate and well-managed decision. Know that interest incurred from that date will not be tax deductible. So you will need to adjust your forecasts and margins accordingly. 

4. Applying for interest remission (if appropriate).

While rare, the ATO can still remit GIC or SIC where there are special circumstances or where delays were outside your control. This is a case-by-case situation, but one worth exploring if you’re hit with interest due to administrative errors or genuine hardship. 

Planning ahead: This is not a set-and-forget situation. 

This change is a timely reminder that ATO debt cannot be ignored or put on the backburner. The cost of getting it wrong is simply too high. 

This isn’t just about reacting to an interest rate hike, it’s about strategically planning your cash flow and tax obligations well in advance.  

Keeping in regular contact with your Aintree Group accountant or adviser is key. They can help you: 

• Forecast likely tax liabilities and interest exposure 
• Run scenario modelling for payment options or refinancing 
• Ensure any finance options remain tax-effective 
• Build repayment strategies that align with your business goals 

Having a plan, and updating it regularly, is critical. Leaving things until the last minute, or assuming it’ll be fine without doing the numbers, could result in thousands of dollars lost in non-deductible interest. 

Who needs to act? 

This change affects all entities carrying or expecting to carry ATO debt, including: 

• Small to medium businesses 
• Company directors 
• Trusts and trading entities 
• Self-managed superannuation funds (SMSFs) 
• Professionals operating under ABNs or as sole traders 

If you’re in a payment plan, have overdue debts, or regularly incur GIC/SIC, now is the time to reassess. 

The removal of deductibility on ATO interest charges is more than a technical tax change, it’s a shift in how we manage debt and risk. 

If you’re carrying ATO debt, the most strategic thing you can do is: 

• Either clear it before 30 June 2025, or
• Refinance it in a way that preserves tax effectiveness and reduces cost. 

Don’t wait for a notice in your inbox to remind you. Get on the front foot, talk to your adviser, and make the decisions now that will protect your business later. 

If you’re experiencing financial hardship, click here for more information.

Need help reviewing your options or structuring a finance solution that works for you? 

We’re here to help you navigate it. Contact our team today!

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.