Key Takeaways
- ATO interest charges like General Interest Charge (GIC) and Shortfall Interest Charge (SIC) from 1 July 2025, are no longer deductible for individuals or businesses.
- The change aims to discourage delayed tax payments and level the playing field for those who pay their taxes correctly and on time.
- Taxpayers and businesses with unpaid debts after 1 July 2025 will face higher after-tax costs due to the loss of deductibility.
- Small businesses may be disproportionately affected, especially those struggling with cash flow.
- ATO interest rates can be higher than some tax debt loan rates, making it more costly to use payment plans to deal with tax debts.
- Interest accrued before 1 July 2025 remains deductible, even if paid after that date.
- Business owners can explore lower-interest finance options like tax debt loans to deal with obligations to the ATO before the deadline.
- The ATO can remit interest charges in limited circumstances, such as financial hardship or events beyond the taxpayer’s control.
- Now is the time for proactive tax planning to reduce exposure to non-deductible interest in future financial years.
As of 1 July 2025, the Australian Government announced significant changes regarding the deductibility of tax debt interest in Australia. This change, introduced in the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO), will impact both individuals and businesses. Understanding these changes is important for effective tax planning and financial management.
Understanding Tax Debt Interest in Australia
The Australian Taxation Office (ATO) imposes interest charges on outstanding tax debts to encourage timely payment and to compensate for the government’s delayed receipt of revenue. These ATO penalties include:
- General Interest Charge (GIC): ATO GIC is applied to overdue tax debts, calculated daily based on the 90-day bank bill rate plus a 7% uplift factor.
- Shortfall Interest Charge (SIC): Imposed when a taxpayer’s self-assessment results in a tax shortfall, calculated daily from the due date of the tax to the time the corrected assessment is issued.
Is ATO Interest Still Tax-Deductible Before July 2025?
As of writing, taxpayers can claim a deduction for these interest charges in the year they are incurred, provided the debt relates to income-producing activities. This deduction effectively reduces the cost of borrowing from the ATO. However, time is running out. By July 2025, ATO penalties will no longer be deductible, thus increasing the cost of having tax debts.
Upcoming Changes: Denial of Deductions for ATO Interest Charges
When does ATO interest stop being deductible? From 1 July 2025, taxpayers will no longer be able to claim deductions for GIC and SIC incurred on or after this date. This change aims to:
- Encourage Timely Tax Payments: By removing the tax benefit of deferring payments, the government seeks to promote prompt tax compliance.
- Align with Community Expectations: The change addresses concerns that taxpayers should not benefit from deductions for interest on unpaid taxes.
- Level the Playing Field: This change aims to establish fairness in the tax system, rewarding those who pay their taxes correctly and on time.
- Increase Government Revenue: The policy is projected to boost government receipts by approximately $500 million, helping reduce the $50 billion in tax debts the ATO is currently chasing.
Implications for Taxpayers
1. Increased After-Tax Cost of ATO Debts
Without the ability to deduct GIC and SIC, the after-tax cost of holding ATO debts will increase. For example, if a business used to be able to claim GIC as an expense, they will no longer be able to post in July. This is a significant expense that can greatly impact the cost of tax debt.
2. Impact on Existing Payment Plans
Businesses and individuals with existing payment arrangements should be aware that any GIC or SIC accrued after 1 July 2025 will not be deductible.
3. Disproportionate Effect on Small Businesses
Small businesses may find it more challenging to manage the increased costs associated with non-deductible ATO interest charges
Strategies to Mitigate the Impact
1. Pay Off ATO Debts Before 1 July 2025
Paying off outstanding ATO debts before the changes take effect can allow taxpayers to claim deductions for GIC and SIC incurred up to that date. This strategy can reduce the overall tax liability associated with these interest charges.
2. Explore Alternative Financing Options
Given the high interest rates associated with ATO debts, businesses and individuals should consider alternative business loan options, such as tax debt loans, which may offer lower interest rates and the potential for tax-deductible interest expenses.
3. Negotiate Remission of Interest Charges
The ATO has the discretion to remit GIC and SIC in certain circumstances, including:
- Delays due to unforeseen events (e.g., natural disasters, industrial action).
- Serious financial hardship.
Taxpayers should proactively engage with the ATO to explore remission options if they believe they qualify.
How Tax Debt Loans Can Help Before July 2025
With the upcoming changes to the deductibility of ATO interest charges, many businesses and individuals are reassessing how they manage their tax debt. One increasingly popular strategy is using tax debt loans, which are specialist financing options designed to pay off or consolidate ATO debt. These loans can be a practical solution to help taxpayers maintain cash flow and take advantage of the current rules before they change.
Why Consider a Tax Debt Loan Now?
- Maximise Tax Deductibility While It Lasts
If ATO debt has been settled using a tax debt loan before 1 July 2025, any General Interest Charges (GIC) or Shortfall Interest Charges (SIC) incurred up to that point remain tax-deductible.
- Replace High ATO Interest Rates with Lower Loan Rates
ATO interest charges can exceed 11% annually and are calculated daily. In contrast, tax debt loans can come with more competitive rates, sometimes significantly lower depending on your credit and business profile. Replacing ATO debt with a structured loan can reduce your borrowing costs and provide a clearer repayment timeline.
- Protect Your Business’s Credit and Reputation
Outstanding tax debts can result in default against your business and lead to other ATO enforcement action, including garnishee notices or director penalty notices. By refinancing tax debt through a loan, you can avoid and reduce the risk of disruptive legal consequences.
- Improve Cash Flow Flexibility
Many tax debt loan products offer flexible repayment terms tailored to your business’s cash flow. This flexibility allows you to meet ATO obligations in full while continuing to invest in operations, staffing, or expansion without straining working capital.
More Questions
1. Can you claim ATO interest as a tax deduction in 2024–2025?
Before July 2025, taxpayers can still claim deductions for General Interest Charges (GIC) and Shortfall Interest Charges (SIC) imposed by the Australian Taxation Office (ATO). These deductions are available provided the interest charges relate to income-producing activities, such as business operations or investment income.
2. Are General Interest Charges tax-deductible before July 2025?
Yes, General Interest Charges (GIC) and Shortfall Interest Charges (SIC) are tax-deductible before 1 July 2025. These deductions apply if the interest charges are related to income-producing activities. However, starting from 1 July 2025, deductions for GIC and SIC will no longer be available, even if the underlying debt arose before this date.
3. What are the rules for claiming interest on tax debt as a deduction?
To claim a deduction for interest on tax debt, the following conditions must be met:
- Income-Related Debt: The interest must be on a tax debt arising from income-producing activities, such as business operations or investments.
- Accrual Basis: The interest expense must be incurred during the income year for which the deduction is claimed.
- Proper Documentation: Maintain accurate records of the interest charges, including statements from the ATO and any payment receipts.
- Apportionment: If the debt relates to both private and income-producing purposes, only the portion attributable to income-producing activities is deductible.
It’s important to note that from 1 July 2025, deductions for General Interest Charges (GIC) and Shortfall Interest Charges (SIC) will no longer be available, regardless of when the underlying debt arose.
In Summary
The impending changes to the deductibility of ATO interest charges represent a significant shift in tax policy. Taxpayers should take proactive steps to understand these changes and adjust their financial strategies accordingly. By paying off debts before the changes take effect, exploring alternative financing options, and negotiating remission of interest charges where appropriate, taxpayers can mitigate the impact of these changes on their financial position. For personalised advice and assistance in managing ATO debts and understanding the implications of these changes, consider consulting with a qualified tax professional.
Pay off Tax Debts Before July 2025
With tax debt loans, you can deal with any obligations to the ATO before the policy changes take effect. This allows you to maintain good standing with the ATO and avoid the costs of non-deductible GIC and SIC. We at Dark Horse Financial specialise in tax debt loans, ensuring you get the best rates and terms. Contact us today to learn more.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute tax, legal, or financial advice. It is not intended to replace professional consultation with a qualified tax agent, accountant, or legal advisor. Each individual’s or business’s circumstances are unique, and specific advice should be sought to address your particular situation.
