No longer deductible – What you need to know about ATO interest charges
Five things you need to know
- From 1 July 2025, deductions are no longer available for ATO interest charge amounts incurred on or after this date.
- This applies to all individuals and entity types, and to assessments for income years starting on or after 1 July 2025.
- Interest incurred before this date remains deductible but ongoing interest incurred on or after 1 July 2025 will be subject to the new non-deductible provisions.
- The General Interest Charge (GIC) rate for the July-September 2025 quarter is 6.78% per annum, while the Shortfall Interest Charge (SIC) rate is 6.78% per annum.
- These changes will impact those who use ATO payment plans to manage ATO debt.
One thing you should do
Prioritise timely lodgement and payment to the ATO to avoid these non-deductible interest charges.
How Herron can help
- Estimate the daily interest accruing on your ATO debt and model the difference between paying it off and refinancing.
- Advise whether interest on a proposed loan will be deductible and how to document the purpose of funds.
- Assist with tax planning and cash flow management.
The details
From 1 July 2025 taxpayers can no longer claim an income‑tax deduction for ATO interest amounts incurred on or after this date.
The change applies to assessments for income years starting on or after that date:
- Interest incurred before 1 July 2025 remains deductible, so the “cut‑off” point is midnight on 30 June 2025.
- Interest that accrues on historical debt after 30 June 2025 is non‑deductible.
The change removes a long‑standing deduction that softened the blow of ATO debt and is designed to encourage taxpayers to pay on time and not carry tax debt.
For businesses managing cash flow, the 1 July 2025 change can hurt. ATO interest rates are already relatively high and after this date that interest will be paid from after‑tax profits.
General Interest Charge (GIC)
The GIC applies when:
- a tax liability remains unpaid after the due date; or
- a return is lodged late; or
- an instalment of tax is underestimated.
The ATO imposes the GIC to encourage timely payment and ensure late payers do not have an unfair advantage.
The GIC rate for the July to September 2025 quarter is 10.78% per annum. You can find the GIC on ATO notices or your account summary in ATO online services.
Shortfall Interest Charge (SIC)
SIC arises when there is a shortfall in tax paid because of an amendment or correction to your tax assessment.
It compensates the ATO for the time between when the tax should have been paid and when the correct assessment is made. The SIC rate for the July to September 2025 quarter rate is 6.78% per annum.
How the changes can impact you
- Cash flow and timing
Businesses on ATO payment plans may have seen their after‑tax cost of interest increase overnight. If a business is in a dispute with the ATO, it is important to take into account that GIC on contested debts will continue to run, and interest accruing from 1 July 2025 will not be deductible.
- Higher interest rates
Removing the deduction raises the effective interest rate. If your marginal tax rate is 30%, a 10.78% GIC effectively cost you around 7.55% after tax under the old rules.
Now the deduction is removed, you bear the full 10.78%. For taxpayers on the top marginal rate, the difference is even larger. That makes it even more important to avoid or reduce GIC and SIC.
- ATO interest vs business loans
Unlike ATO interest, interest on genuine business borrowings used to produce assessable income remains deductible after 1 July 2025. Generally, business loans will offer lower interest rates than ATO payment plans over a longer period, and the interest remains deductible if the funds are used for income‑producing purposes creating an incentive for businesses to refinance tax debts through a bank loan where appropriate.
- Is interest on a bank loan to pay tax deductible?
If a bank loan is taken out to pay an ATO debt, interest on that loan can be deductible but only in specific circumstances.
The ATO’s ruling on interest for business tax debts
In Taxation Ruling IT 2582, the Commissioner stated that where a taxpayer carries on a business for the purpose of producing assessable income and borrows money to pay income tax, the interest incurred on those borrowings is a normal incident of conducting that business and is deductible. The ruling recognises that paying tax is an unavoidable cost of doing business and borrowing to meet that cost preserves working capital for income‑producing activities.
For this ruling to apply the entity must carry on a business so it will not apply where there is no business carried on, such as an entity with only passive investment income.
When considering a loan to pay business tax
The following factors can determine if the deduction is available for interest on a loan used to pay business tax:
- Purpose and tracing: the loan must be connected to your business and used to pay income tax on business profits. Funds should be segregated so you can trace that the borrowed money was applied to the tax debt. If you mix business and personal taxes, interest must be apportioned.
- Continued business use: the deduction may cease if the loan is no longer used in the business – the interest cost must remain incidental and relevant to the business.
- Rates and security: lenders may require security (e.g., property or equipment). Second‑tier lenders that specialise in tax debt loans charge higher rates and may require personal guarantees. A traditional bank loan or a line of credit secured against business assets or property generally offers lower rates but may involve longer terms and fees.
Taking out a loan solely to pay tax is not an automatic solution and should be discussed with Herron as part of your tax planning strategy.
What you can do:
- Prioritise timely lodgement and payment
Set aside funds regularly for GST, PAYG withholding, super and income tax obligations.
- Know the after‑tax cost of ATO debt
Calculate the higher effective cost of ATO interest and incorporate this into cashflow forecasts. Herron can help you estimate the interest that could be accruing on an ATO debt, and then decide whether refinancing to pay the ATO debt will mean lower interest rates over a longer period, as well as maintaining the interest payments as a tax deduction after 1 July 2025.
Herron – here to help
Every business is different and the rules on deductibility of interest are complex. To better understand how changes to the deductibility rules may impact your business and your cash flow, talk to us about:
- Your current interest on debts owed to the ATO and what is deductible;
- Whether interest on a proposed loan to repay the ATO will be deductible;
- The documentation that is needed to trace the purpose of funds to be deductible; and
- Ensuring you are compliant with ATO guidance.
Most importantly, planning ahead and making tax payments part of your cash flow management are the best way to avoid ATO interest charges.
Contact us today to talk about the cost of carrying ATO debt and how to minimise the impact of the new rules on your business.
Joshua Challenor
Accountant
Mark Herron
Principal