ATO Interest Charges No Longer Tax Deductible from 1 July 2025

As of 1 July 2025, significant changes to Australian tax law will impact individuals and businesses with unpaid tax debts. The Australian Taxation Office (ATO) has announced that interest charges on overdue tax liabilities—specifically the General Interest Charge (GIC) and Shortfall Interest Charge (SIC)—will no longer be tax deductible. This marks a departure from longstanding practice and has substantial implications for financial planning and tax compliance.

What’s Changing?

Historically, taxpayers could claim deductions for interest accrued on unpaid tax debts. However, under the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, this is set to change. From 1 July 2025, any GIC or SIC incurred will be non-deductible, regardless of when the original debt arose.

Financial Implications

The GIC is currently charged at an annual rate of 11.17%, compounded daily. With the removal of deductibility, the effective cost of carrying tax debt increases, making it more expensive for taxpayers to delay payments.

The removal of deductibility for ATO interest charges means that taxpayers will bear the full brunt of these costs. This change will negatively impact cash flow, as taxpayers will no longer be able to reduce their taxable income and ultimately their tax payable, by claiming deductions for interest charges. For example, a company with a $100,000 overdue tax debt could incur $11,170 in annual interest charges, assuming an interest rate of 11.17%. Historically as the ATO GIC was tax deductible, this would have reduced the company’s tax payable by $2,792.50, assuming a 25% tax rate.

Strategies to Help Mitigate Impact

To help navigate this new landscape, consider the following strategies:

  1. Budgeting: By planning ahead and setting aside funds regularly, you can ensure you meet your tax obligations on time and reduce the risk of penalties or interest.
  2. Payment Plans: If immediate payment isn’t feasible, engage with the ATO to establish a payment plan. While interest will still accrue, structured repayments can help prevent falling further behind.
  3. Alternative Financing: Explore third-party financing options with potentially lower interest rates.

By understanding the implications of these changes and exploring strategic responses, taxpayers can better position themselves to navigate this new environment.

We’re here to help – for assistance in budgeting or help with payment plans, please do not hesitate to contact us.