Key Takeaways
- ATO interest charges like GIC and SIC will no longer be tax-deductible from 1 July 2025. This change increases the effective cost of carrying tax debt.
- Until June 2025, GIC and SIC have been deductible for taxpayers.
- Business loans, in contrast, remain tax-deductible. This makes tax debt loans a potentially more tax-efficient option post-2025.
- There are tax debt loans with lower interest than the ATO interest charge.
- Businesses relying on ATO payment plans could reassess their strategy before the rule change. Transitioning to private finance could yield better tax outcomes.
- Taxpayers should consult with accountants or finance professionals now to plan ahead. Proactive advice can help restructure debt and take advantage of current deductibility rules.
- Comparing ATO interest vs lender interest is more important than ever. The right financing choice can reduce both costs and tax liabilities in the new financial environment.
In Australia, the deductibility of interest expenses plays a key role in reducing taxable income for businesses and individuals. However, not all interest expenses are treated equally. A significant change is set to happen on 1 July 2025, when interest charges from the Australian Taxation Office (ATO) will no longer be tax-deductible. This article discusses the implications of this change, compares the tax treatment of ATO interest with that of lender interest, and provides insights into how businesses and individuals can face these changes.
Understanding Interest Tax-Deductions Australia
What Is Tax-Deductible Interest?
Tax-deductible interest refers to the interest paid on loans that can be claimed as a deduction against taxable income. This deduction reduces the overall tax liability, providing financial relief. To qualify, the loan must be used for income-producing purposes.
Current Treatment of ATO Interest
Currently, interest charges imposed by the ATO, including General Interest Charges (GIC) and Shortfall Interest Charges (SIC), are tax-deductible. These charges apply when taxpayers fail to pay their tax on time or underreport their tax liabilities. The GIC is calculated by adding 7% to the 90-day bank bill rate, while the SIC applies when errors in tax returns lead to underpayment. Both charges are designed to encourage timely tax compliance. However, this current treatment of ATO interest is about to change very soon.
The Impending Change: ATO Interest No Longer Deductible
Is ATO Interest Tax Deductible After July 2025?
Not anymore. As announced in the 2023–24 Mid-Year Economic and Fiscal Outlook, the Australian government plans to amend the tax law to deny deductions for ATO interest charges. This change is set to take effect for income years starting on or after 1 July 2025. If enacted, taxpayers will no longer be able to claim deductions for GIC and SIC, even if they are later remitted.
Why Is This Change Being Introduced?
The government’s decision to remove the deductibility of ATO interest has been communicated as aligning with broader efforts to encourage timely tax compliance. By eliminating the tax advantage associated with ATO interest, the measure aims to promote more proactive financial management and timely payment of tax obligations.
Financial Implications
With the removal of deductibility for ATO interest charges, businesses may find that obtaining a loan from business lenders becomes a more cost-effective option. Interest rates on loans are typically lower than that of payment plans, plus the ability to claim the interest as a deduction could add even more savings. This can make financing an attractive alternative for managing tax debts.
Does Interest From Non-Bank Lenders Qualify as a Deductible Expense?
Can you claim interest from business loans on tax? Yes. Interest paid to private lenders and non-bank lenders is generally tax-deductible if the loan is used for income-producing purposes. This includes loans for purchasing rental properties, business equipment, or funding operations. The key factor is that the borrowed funds must be used to generate assessable income.
How do Tax Deductions Differ Between ATO Interest and Private Loans?
Currently, both ATO interest and private loan interest are tax-deductible if used for income-producing purposes. However, from 1 July 2025, ATO interest will no longer be deductible.
What’s the Tax Benefit of Using a Loan Instead of an ATO Payment Plan?
Using a loan to deal with tax debt may offer lower interest rates and maintain the deductibility of interest expenses, unlike ATO payment plans where interest charges will become non-deductible from 1 July 2025.
Should I Choose a Payment Plan or a Loan?
Generally, here are the differences between ATO payment plans and loans:
| Feature | ATO Payment Plans | Business Loans |
|---|---|---|
| Interest Tax Deductibility | No (from 1 July 2025) | Yes |
| Interest Rates | Higher (11.42% GIC) | Varies (can be lower) |
| Terms | Up to 2 years only | Generally up to 5 years |
| Flexibility | Limited (for payment plans) | Often more flexible (for loans) |
Strategic Considerations for Businesses
1. Timely Tax Payments
The most effective strategy is to ensure timely payment of tax to avoid incurring GIC and SIC. This requires diligent tax planning and cash flow management to meet tax obligations promptly.
2. Assess Current Tax Debts
Businesses should conduct a thorough review of their existing tax debts, including any GIC and SIC accrued. Understanding the total amount owed and the associated interest charges will help in making informed decisions about financing options.
3. Refinancing Tax Debts
If tax debts are unavoidable, consider refinancing options. Securing a loan from a lender to pay off tax liabilities may offer lower interest rates and maintain the deductibility of interest expenses. However, it’s essential to ensure that the loan is used solely for income-producing purposes to retain its deductibility.
4. Review Cash Flow Forecasts
Businesses should review their cash flow forecasts and consider the potential impact of the ATO interest deductibility change. This includes assessing current debt structures, exploring alternative financing options, and consulting with financial advisors to develop effective strategies.
In Summary
The removal of deductibility for ATO interest charges represents a significant shift in Australia’s tax policy. Businesses and individuals must adapt to this change by exploring alternative financing options and implementing effective tax planning strategies. By understanding the differences between ATO-imposed interest and lender interest, and seeking professional advice, taxpayers can prepare for this transition and mitigate the risks involved.
Get a Loan to Deal with Tax Debt
With the upcoming policy changes surrounding interest tax deductibility, now is the time to turn to alternative financing options to deal with tax debt. Avoid the potential cash flow strain from non-deductible GIC and SIC by dealing with ATO obligations promptly. If you want to know more about how a tax debt loan can help, contact our team today.
Disclaimer: Loans and the benefits of loan products are to approved applicants only. Information on this page is general in nature, it does not take into account your personal situation. This information is not intended to replace professional advice and should not be relied upon for any reason. You should always seek professional advice for finance, tax and accounting matters before making a decision or taking any action.
