ATO interest charges no longer tax-deductible for businesses

Effective 1 July 2025, businesses can no longer claim income tax deductions for interest charges imposed by the ATO on unpaid or underpaid tax liabilities. This change, enacted 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.

Previously, businesses could deduct ATO-imposed interest charges on overdue tax debts, reducing the net cost of these charges. From 1 July 2025, this deduction is no longer available, meaning any GIC or SIC incurred from this date cannot be claimed as a tax deduction, regardless of when the underlying tax debt arose.

For example, if a business incurs GIC on an unpaid income tax liability after 1 July 2025, this interest expense is not deductible in its tax return for the 2025–2026 income year or subsequent years.

Why this matters

This legislative change is significant for businesses that manage cash flow by deferring tax payments, as the cost of carrying tax debt will effectively increase. Without the tax deduction, the real cost of ATO interest charges rises, making it more expensive to delay tax payments.

The ATO applies GIC on unpaid tax liabilities at a rate that is reviewed quarterly and compounds daily. As of the latest update, the GIC rate is 11.17%. With the loss of deductibility, the after-tax cost of this interest becomes more burdensome for businesses.

What businesses should do

To mitigate the impact of this change, businesses should consider the following actions:

• Review and settle outstanding tax debts: Assess any existing tax liabilities and aim to pay them as soon as possible.
• Implement strong cash flow management: Ensure that funds are allocated to meet tax obligations on time, reducing the likelihood of incurring non-deductible interest charges.
• Consider alternative financing options: If immediate payment of tax debts is challenging, explore financing through third-party lenders. Interest on such loans may still be deductible, potentially offering a more tax-effective solution.
• Engage with tax professionals: Consult with your tax adviser to develop strategies tailored to your business’s financial situation, ensuring compliance and optimal tax outcomes.
• Communicate with the ATO: If you’re facing difficulties in meeting your business’s tax obligations, consider proactively contacting the ATO to discuss payment plans or potential remission of interest charges. 

The removal of tax deductibility for ATO interest charges underscores the importance of timely tax compliance. Businesses should act promptly to adjust their financial strategies, ensuring that they are not adversely affected by increased costs associated with overdue tax payments.

Source: www.ato.gov.au/media-centre/ato-reminder-on-interest-deductibility-changes-from-1-july 
www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/take-control-before-interest-on-ato-debt-costs-you-more