ATO Axes Deduction for Tax Debt Interest

From 1 July 2025, the ATO will deny tax deductions for interest charged on unpaid tax debts, including:

• General Interest Charge (GIC) - currently 11.17% 

• Shortfall Interest Charge (SIC) - currently 7.17%  

This applies regardless of when the debt was incurred, thereby ending the long-standing practice of treating these interest costs as deductible only when related to income-generating activities.

What does this mean?

Previously, businesses could claim ATO interest as a tax deduction, effectively reducing the real cost of carrying ATO tax debt. With the new changes, the full interest cost will now be non-deductible, thereby increasing the financial burden, particularly for SMEs that are already managing tight cash flows.

Key Impacts:

• Higher after-tax cost of unpaid tax debts

• Reduced cash flow for businesses relying on ATO payment plans

• Increased risk of unexpected tax bills and interest charges

What you should do:

• Pay off ATO debts as soon as possible to avoid accumulating non-deductible interest

• Avoid using the ATO as a line of credit; it’s no longer cost-effective

• Consider refinancing tax debts through commercial loans, where interest may remain deductible

• Review your cash flow to ensure timely BAS and tax payments

• Update your tax planning strategies to reflect this change

Need guidance?

If you’re unsure how this change affects your current or future liabilities, the GrowthMD team is here to help. We’ll help you assess the impact, explore refinancing options, and restructure your tax management approach for maximum efficiency.