ATO Interest Charges Lose Their Shine: No Longer Tax-Deductible for Businesses
From 1 July 2025, a key tax rule will change for Australian businesses. The Australian Taxation Office (ATO) interest charges, once deductible, will no longer be claimable in your tax return. This may feel like gold losing its shine, as the true cost of overdue tax debts is about to increase.
What’s Changing?
Under the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, deductions for ATO interest charges will be denied. This applies to:
- General Interest Charge (GIC)
- Shortfall Interest Charge (SIC)
For income years starting on or after 1 July 2025, these costs can no longer reduce your taxable income. Importantly, this rule applies regardless of when the underlying debt began. If you incur ATO interest after this date, it is non-deductible (ATO – Deny deductions for ATO interest charges).
Businesses with substituted accounting periods (SAPs) will be impacted from the start of their next income year after 1 July 2025.
“It’s important businesses plan ahead and set aside money to meet tax obligations, including GST, PAYG withholding, and super,” says ATO Assistant Commissioner, Anita Challen.
Why It Matters
Until now, deductibility reduced the net cost of ATO interest charges. From July 2025, that buffer disappears.
The ATO currently applies GIC at a rate of 11.17%, compounding daily (ATO – Take control before interest costs you more). Without deductibility, the after-tax cost of carrying tax debt rises sharply.
CPA Australia warns the effective cost could rise to around 14.37% for small businesses, and up to 20.33% for high-income individuals (The Australian).
For businesses that manage cash flow by delaying payments, this shift is significant. What once felt like a discounted cost now becomes a full-price penalty.
The Numbers in Perspective
Here’s how the change might play out:
- A $50,000 overdue tax debt at 11.17% accrues more than $5,500 interest in a year.
- Previously, deductibility could trim that cost by up to 30%.
- From 1 July 2025, every dollar of that interest is a direct business expense.
With the ATO actively pursuing $45 billion in unpaid taxes, and reporting some debts to credit agencies, the stakes are rising for business owners.
What Businesses Should Do
The removal of deductibility isn’t just technical tax reform—it’s a clear signal for businesses to strengthen financial management.
1. Clear Existing Debts Early
Pay off outstanding liabilities before 1 July 2025 to avoid incurring non-deductible interest.
2. Strengthen Cash Flow Planning
Prioritise tax alongside payroll and rent. Treat it as a must-pay to avoid unnecessary penalties.
3. Explore Alternative Finance
Third-party finance may still allow deductible interest, potentially making it cheaper than leaving debt with the ATO.
4. Talk to Your Tax Adviser
Tailored advice is vital. Every business’s circumstances differ, and a professional can help reduce exposure.
5. Engage with the ATO Proactively
Payment plans and interest remissions remain available, though under stricter assessment. Contacting the ATO early can reduce long-term costs.
Think of this as financial housekeeping. Just like gold shines when polished, your tax strategy works best when managed proactively.
The Golden Takeaway
This change affects around 2.6 million small businesses across Australia. The removal of deductions for ATO interest charges underscores a simple truth: timely tax compliance is more valuable than ever.
By acting early, reviewing debt, and planning cash flow, you can protect your business from the rising cost of overdue taxes.
At DJ Grigg Financial, we help businesses across the Latrobe Valley and beyond refine their tax strategies and stay compliant with confidence.
Ready to shield your business from rising ATO costs?
Contact our team today to develop strategies tailored to your business.