ATO Interest Charges No Longer Tax-Deductible: What Businesses Need to Know
Effective 1 July 2025, businesses will no longer be able to claim income tax deductions for interest charges imposed by the ATO on unpaid or underpaid tax liabilities.
This change, introduced under the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, applies to General Interest Charge (GIC) and Shortfall Interest Charge (SIC) amounts incurred in income years starting on or after 1 July 2025.
What’s Changing?
Previously, businesses could deduct ATO-imposed interest charges on overdue tax debts, helping to reduce the net cost of these charges.
From 1 July 2025, this deduction will no longer be available. Any GIC or SIC incurred on or after this date cannot be claimed as a tax deduction—regardless of when the underlying tax debt arose.
Example: If a business incurs GIC on an unpaid income tax liability after 1 July 2025, this interest will not be deductible in its 2025–26 tax return or in any future income year.
Why This Matters
This legislative change has significant cash flow implications for businesses that manage tax obligations by deferring payments. With the removal of deductibility, the real cost of carrying tax debt will increase.
The ATO applies GIC on unpaid tax liabilities at a rate reviewed quarterly and compounded daily. As of the latest update, the GIC rate is 11.17%. Without deductibility, the after-tax cost of this interest becomes more burdensome.
What Businesses Should Do
To manage the impact of this change, businesses should take proactive steps:
- ✅ Review and settle outstanding tax debts: Pay off existing tax liabilities promptly to avoid accruing non-deductible interest.
- ✅ Strengthen cash flow management: Ensure adequate planning and budgeting to meet future tax obligations on time.
- ✅ Explore alternative financing options: Consider third-party loans to pay tax debts. Interest on these may still be deductible, offering a more tax-effective solution.
- ✅ Engage with tax professionals: Work with advisers to assess your position and adjust your tax strategy accordingly.
- ✅ Communicate with the ATO: If you’re struggling to meet obligations, proactively contact the ATO to discuss payment arrangements or potential interest remissions.
Looking Ahead
The removal of tax deductibility for ATO interest charges highlights the importance of timely tax compliance. Businesses should act now to review their financial strategies and avoid unexpected costs associated with overdue tax payments.