ATO Interest Deductibility Ending: What Business Owners Need to Know

19 June

From 1 July 2025, a key change to the tax rules for businesses will come into effect — one that could quietly cost more than many business owners realise.

Currently, when a business incurs interest charges from the ATO — such as General Interest Charges (GIC) on overdue tax, or Shortfall Interest Charges (SIC) on underpaid tax — those interest payments are tax-deductible. This means businesses can currently claim those interest costs as deductions, helping to reduce their overall taxable income.

However, under the new rules taking effect, this deductibility will be removed. Businesses will no longer be able to claim ATO-imposed interest as a tax deduction. In practice, this means that any GIC or SIC charged by the ATO will become more expensive, as it will need to be paid out of after-tax income.

What Does This Mean in Dollars?

Imagine your business owes $100,000 in tax debt. The ATO charges an interest rate of approximately 11.17% (as of mid-2025), which compounds daily. That’s roughly $11,170 in interest each year.

Before 1 July 2025 (Current Rules):

That $11,170 is tax-deductible
If your company tax rate is 25%, you get back $2,792.50 at tax time
So your real cost is: $8,377.50

After 1 July 2025 (New Rules):

The $11,170 is no longer deductible
You lose the tax offset
Your real cost is now the full $11,170

That’s an extra $2,792.50 out of your pocket.

What Are Your Alternatives?

Instead of simply leaving the debt with the ATO and paying high, non-deductible interest, here are some options to consider:

Option 1: Business Loan

Interest rate: ~7%
Annual interest: $7,000
Interest is tax-deductible
Tax saving at 25%: $1,750
Real after-tax cost: $5,250
Annual saving vs 11.17%: $5,920

Option 2: Cash-Out Refinance on Property

Interest rate: ~6%
Annual interest: $6,000
Tax-deductible if used for business (eligibility to be confirmed by your accountant)
Tax saving at 25%: $1,500
Real after-tax cost: $4,500
Annual saving vs 11.17%: $6,670

These are just two options that offer lower after-tax interest costs compared to paying the ATO directly, and they also give you more control and flexibility over repayments.

What Should Business Owners Do?

Here’s what you can do:

Check your ATO balance: Know exactly what you owe and how much interest you’re paying
Calculate the cost difference: Understand how much more expensive your tax debt will be from July 205
Explore funding options: Consider business loans, overdrafts, or refinancing to reduce your costs
Consult your accountant: Get advice on structuring debt to keep interest tax-deductible and manage cashflow effectively

The Bottom Line

ATO payment plans and interest charges have always been a lifeline for businesses behind on tax. But from 1 July 2025, they’ll become a far less tax-effective option.

The numbers speak for themselves. By refinancing ATO debt with a tax-deductible loan or other finance options, many businesses can reduce their interest cost by thousands of dollars each year — without changing the repayment amount, only the structure.

However, please keep in mind that each situation is different, and the ability to leverage debt is a case-by-case scenario.

Disclaimer: This blog provides general information only and is not financial or tax advice. Please speak with your accountant or tax advisor to assess your individual circumstances.

Lee Natoli