Key Takeaways
- From 1 July 2025, ATO interest charges (GIC and SIC) will no longer be tax-deductible. This change significantly increases the real cost of carrying tax debt for businesses.
- The removal of deductibility will increase pressure on cash flow and profitability for some businesses.
- Good tax planning and compliance processes are now more important than ever. Timely lodgment and payment can prevent unnecessary interest charges altogether.
- If businesses prioritise repaying ATO debts before the changes take effect any existing interest remains deductible and avoids higher future costs.
- To avoid paying interest that is not deductible businesses currently on payment plans with the ATO could seek to find ways to potentially exit the plans to avoid GIC.
- Seek expert advice that can help businesses reassess debt strategies, improve cash flow, and explore funding options.
- Tax debt loans are a practical solution to refinance or consolidate ATO liabilities. These loans may offer lower interest rates and retain deductibility, unlike GIC/SIC post-2025.
- Refinancing an existing loan to help pay off ATO debt can also preserve cash and reduce costs.
The Australian Taxation Office (ATO) is implementing significant changes to the tax treatment of General Interest Charges (GIC) and Shortfall Interest Charges (SIC) from 1 July 2025. Under the new rules, these interest charges will no longer be tax-deductible, which could have substantial financial implications for businesses with outstanding tax debts.
With these ATO interest changes looming, businesses with outstanding tax debt will need to take action to minimise their exposure. This article explores the impact of non-deductible interest and provides actionable steps to manage tax debt before the deadline.
Understanding GIC and SIC
- General Interest Charge (GIC): The GIC applies to unpaid tax, including those arising from late or missed lodgments. It is calculated daily, based on the 90-day Bank Accepted Bill rate plus a 7% uplift factor. It is currently at 11.17%, but the rate can change in the next quarter.
- Shortfall Interest Charge (SIC): The SIC is imposed when a taxpayer underestimates their tax liability. It applies from the original due date until an amended assessment is issued. The SIC rate is calculated daily, based on the 90-day Bank Accepted Bill rate plus a 3% uplift factor. It is currently at 7.17%, subject to change in the next quarter.
What Are the Financial Risks of GIC and SIC No Longer Being Deductible?
The removal of tax deductibility for GIC and SIC poses several financial risks to Australian businesses, particularly those already managing ATO debts or struggling with cash flow.
The most immediate risk is the increase in the real cost of ATO interest. Under the current system, GIC and SIC charges are deductible, reducing their effective cost. From 1 July 2025, these costs will need to be paid from after-tax income, potentially increasing the effective interest rate by 30% or more, depending on the entity’s tax bracket. This change transforms the ATO from a “cheaper-than-bank” creditor into an expensive debt.
ATO Interest No Longer Deductible: Business Implications
1. Strained Cash Flow
Businesses that are already cash-strapped may find it more difficult to manage ATO debt once it becomes more expensive. This could result in financial strain, particularly for SMEs that operate on tight margins.
2. Payment Plans No Longer an Attractive Option
Many businesses rely on ATO payment arrangements as a short-term cash flow solution to tax debt. GIC is still applied even with a payment plan. With GIC no longer deductible, this strategy becomes less attractive.
3. External Financing Can Be a Better Option
Businesses may turn to tax debt loans or may refinance their existing loans (mortgages or business loans) to settle ATO debts and avoid non-deductible interest.
4. Impact on Tax Planning Strategies
Businesses may rush to pay down tax debts early while GIC and SIC are still deductible. Additionally, businesses must adjust tax planning approaches, forecasting models, and cash flow budgets to account for the full cost of ATO interest moving forward.
5. ATO Becomes a ‘Costlier’ Creditor
With no deductibility, the ATO becomes a high-cost creditor, potentially charging more than other commercial lenders. Businesses will need to reassess how they rank the ATO in their list of creditor priorities.
6. Shift in Business Borrowing Behaviour
Business loans for tax debts may rise (since interest remains deductible). Alternative lenders specialising in tax debt finance may see increased demand.
7. Administrative Burden & Compliance Costs
Accounting and finance teams will need to distinguish between deductible and non-deductible interest expenses, especially during the transition period across FY2025–2026. This may add to administrative overhead and increase reliance on tax professionals or outsourced support.
8. Heightened Compliance Pressure
The ATO will likely place a stronger emphasis on timely lodgments and payments. Businesses will need to ensure internal compliance processes to avoid GIC and SIC altogether.
How to Manage ATO Debts Before 1 July 2025
Here’s what to do before ATO interest becomes non-deductible in July 2025:
1. Paying Down ATO Debt Before Tax Deductibility Changes
Should businesses repay tax debt before 1 July 2025? Ideally, yes. Paying off existing tax debts before the deductibility removal takes effect can help you avoid the impact of the policy change. You can use your savings or turn to financing to pay off your tax debts in full.
2. Review Payment Plans
For businesses with existing payment arrangements, it’s important to review your plan and determine how the policy change will impact them. Interest charges incurred after 1 July 2025 will be non-deductible, potentially increasing the overall cost of the debt. It may be a good idea to plan for exiting the payment plan to avoid the cost.
3. Enhance Tax Compliance Practices
Implementing robust tax compliance measures ensures timely and accurate tax payments, reducing the likelihood of incurring GIC and SIC. Regularly reviewing tax obligations and maintaining up-to-date records can ensure prompt lodgment and payment.
4. Explore Alternative Financing Options
With the increased cost of ATO debts, businesses may find it more economical to seek external financing. Tax debt loans may offer more favourable terms, and the interest may be tax-deductible depending on your circumstances.
5. Consult with Tax Professionals
Engaging with accountants and tax advisors can provide tailored advice and strategies to navigate the changes. They can assist in assessing the impact on your business and developing a comprehensive plan to manage tax obligations effectively.
Long-Term Tax Planning Strategies
What tax planning strategies reduce ATO interest impact? Beyond immediate actions, businesses should integrate the following long-term strategies into their tax planning:
1. Prioritise Timely Tax Payments
Establishing a culture of timely tax payments can prevent the accumulation of GIC and SIC. Allocating funds for tax obligations in advance and setting reminders for due dates can aid in maintaining compliance.
2. Implement Cash Flow Management Techniques
Effective cash flow management ensures that businesses have sufficient liquidity to meet tax obligations without resorting to debt. Techniques such as cash flow forecasting, expense monitoring, and maintaining cash reserves can enhance financial stability.
3. Stay Informed About Tax Legislation
Being updated with changes in tax laws and regulations allows businesses to adapt quickly. Subscribing to updates from the ATO and consulting with your tax professional can provide timely information on legislative changes.
How Tax Debt Loans Can Help Businesses Before the ATO Interest Changes
As the deductibility of ATO interest charges is set to be removed from 1 July 2025, businesses with outstanding tax debts are facing a shrinking window to act. One increasingly strategic solution is the use of tax debt loans—specialised financing options designed to help businesses manage, refinance, or consolidate their tax liabilities.
What Are Tax Debt Loans?
Tax debt loans are loans specifically tailored to pay off tax debts owed to the ATO. These loans are typically provided by non-bank lenders who understand the urgency and complexity of dealing with tax obligations.
Unlike the ATO’s General Interest Charge (GIC), which is currently set at 11.17% annually (and will become even more expensive once interest is no longer deductible), tax debt loans can come with lower effective interest rates, depending on your circumstances. Terms can also be more favourable and flexible than ones provided by the ATO through payment plans.
Benefits of Using Tax Debt Loans
- Lower Effective Interest Costs
By paying out ATO liabilities using external financing, businesses can replace high and soon-to-be non-deductible ATO interest charges with potentially lower-cost, deductible loan interest.
- Preserve Working Capital
Instead of draining operating cash to pay off tax debts in full before 1 July 2025, businesses can preserve working capital by using tax debt loans to spread the repayments over time.
- Avoid Penalties and Escalation
Prolonged unpaid tax debt can trigger enforcement action by the ATO, such as garnishee notices, director penalty notices, or wind-up actions. Tax debt loans help businesses resolve debts promptly, minimising these risks.
- Protect Business Credit Profile
Tax debt loans can assist that ATO obligations are paid on time, preventing the ATO from disclosing tax debts to credit reporting agencies.
- Fast Turnaround and Flexible Terms
Many tax debt loan products are approved quickly and can offer tailored repayment terms to suit your business’s cash flow. This flexibility can be crucial when time is limited ahead of the 1 July 2025 deadline.
When Should a Business Consider a Tax Debt Loan?
Now is the ideal time for businesses with ATO debt to explore their options. If your business is:
- Carrying significant GIC or SIC liabilities,
- Currently on a payment plan with the ATO,
- At risk of defaulting on tax obligations,
- Struggling with cash flow but has capacity to service manageable loan repayments,
…then a tax debt loan could be a highly effective solution.
Engaging a financial broker like Dark Horse Financial can help you secure tax debt loans quickly before the deadline. We can help assess the loan’s cost-effectiveness, ensure it remains tax-deductible, and guide you through the application process quickly.
If you want to learn more about tax debt loans, you can check out our tax debt loans guide.
Can Refinancing Help Avoid ATO Interest Charges After July 2025?
Refinancing can be a great tool to pay off tax debts before the deductibility changes happen this coming July. If you currently have a home loan (with equity built up) or a business loan, you can refinance to a loan with a higher amount and unlock equity to pay off tax obligations.
In Summary
The removal of GIC and SIC deductibility presents significant challenges for Australian businesses. However, with proactive planning and strategic financial management, businesses can mitigate the impact of these changes. By settling outstanding debts, enhancing compliance practices, exploring alternative financing options, and seeking professional advice, businesses can navigate this transition effectively and maintain financial health even during tax policy changes.
Deal With Tax Debt Today
If you want to avoid the impact of the upcoming changes in tax interest deductibility, now is the time to apply for a tax debt loan. We’re experts in tax debt lending, helping businesses across Australia deal with ATO obligations through financing. Reach out today to learn more about how we can help.
Disclaimer: The information provided on this page is general in nature and does not constitute financial, taxation, or legal advice. It does not take into account your personal circumstances, objectives, or needs and should not be relied upon for any reason. Before making any decisions, you should seek independent professional advice tailored to your specific situation.
