ATO interest is no longer tax deductible — what that means for carrying tax debt

What changed?

When a business pays tax late, the ATO applies the general interest charge (GIC). If an amendment increases a tax liability, it may apply the shortfall interest charge (SIC). For years, businesses could claim both as tax deductions. That made carrying ATO debt less painful: part of the interest effectively came back at tax time.

From 1 July 2025, that changed. GIC and SIC incurred in income years starting on or after that date are no longer tax deductible. The ATO has published guidance for both businesses and tax professionals, urging business owners to take control of their debts before interest costs them more.

This guide looks at what the change means for decisions about tax debt. It isn’t tax advice — your accountant should confirm how it applies to you.

Why the change matters for cash flow

For many small businesses, the ATO has been an informal lender: GST and PAYG withheld funded the business between BAS dates, and when the bill couldn’t be paid in full, a payment plan spread it out. The interest was an annoyance, partly offset by a deduction.

Now the deduction is gone. The after-tax cost of every dollar of ATO interest has risen — and for a business carrying a large ATO balance for a long time, the difference can be significant.

At the same time, interest and fees on business borrowing used for a business purpose are generally still deductible under the usual rules. That shifts the comparison between “stay on the ATO plan” and “clear the debt with finance”.

How to compare the two options

The comparison needs to be like-for-like:

1. Same debt amount.
2. Same period — how long you’d take to repay under each option.
3. Total cost in dollars — all interest, charges and fees.
4. After tax — adjusting each option for whether its costs are deductible.

Illustrative structure (no real figures — use your own):

	ATO payment plan	Business finance
Debt cleared	Over the plan term	Immediately
Interest/charges	GIC on outstanding balance	Interest and fees on the facility
Deductible?	No (from 1 July 2025)	Generally yes, for business purposes — confirm
After-tax cost	Full GIC cost	Facility cost less tax benefit
Escalation risk	Continues if a payment is missed	Removed — ATO is paid
New lodgement requirements	Must stay up to date to keep the plan	Still apply, but no plan to default on

Ask your accountant to run the after-tax numbers for both, and ask your finance specialist for the total cost of finance in dollars over the period. Then compare.

The cost isn’t the only factor

Even where the after-tax costs are close, other factors can tip the decision:

Escalation. Once the ATO moves to stronger action — garnishee notices, director penalty notices, legal recovery — the stakes rise sharply. Directors can become personally liable for certain company tax debts. Clearing the debt quickly removes that risk.

Payment plan fragility. A plan works while every instalment is met and every new lodgement and payment is on time. Miss one, and the plan can be cancelled.

Credit and lending access. A large ATO debt can limit other finance options. Clearing it can open doors.

Mental bandwidth. Many owners say the biggest benefit of clearing ATO debt is no longer worrying about the next letter.

Which finance fits ATO debt?

Size and situation	Lane
Smaller debt, strong trading	Unsecured business loan — same day possible for smaller amounts
Larger debt, property available	Second mortgage — $20k to $250k possible same day
Urgent, escalation under way	Caveat loan — fastest property-backed lane
Very large debt	First mortgage business loan — up to $5m possible within 24–48 hours

ATO debt itself doesn’t rule out finance. It’s considered case by case, and a debt that’s been managed and lodged on time is viewed far more favourably than one that’s been ignored. See ATO debt and BAS.

Paying the ATO directly

When finance is used to clear ATO debt, funds can usually be paid straight to the ATO at settlement, using your payment reference. That gives certainty that the debt is cleared and avoids the money sitting in your account where other bills might claim it.

An illustrative scenario

A transport company carries around $140,000 of ATO debt on a two-year payment plan. With GIC no longer deductible from 1 July 2025, its accountant estimates the after-tax cost of staying on the plan has risen noticeably. A finance specialist provides the total cost of a property-secured facility over the same two years. With the after-tax numbers side by side — and the plan already at risk after a missed instalment — the directors clear the debt in full, paid directly to the ATO, and move GST and PAYG into a separate account from then on. (Illustrative only.)

Stop the debt rebuilding

Clearing ATO debt only helps if it doesn’t come back:

• Move GST, PAYG withheld and super into a separate account every pay run
• Lodge on time, even if you can’t pay in full
• Use a line of credit for genuine cash gaps, not the tax account
• Check margins — recurring tax debt often signals pricing that doesn’t cover costs

How to work out your own comparison

You’ll need a few numbers from your accountant and your finance specialist:

1. The ATO balance and the expected GIC over the time you’d take to repay it on a plan.
2. Your marginal tax rate — to understand what a deduction is worth to you.
3. The total cost of a finance option over the same period — interest and all fees, in dollars.
4. Whether those finance costs are deductible for your business.

With those, the comparison is straightforward: the after-tax cost of the plan versus the after-tax cost of the finance. Add a column for risk — what happens if one plan payment is missed versus one loan repayment — and the decision usually becomes clear.

Shortfall interest after an amendment

The change also affects shortfall interest charge, which can apply when an amended assessment increases tax owing. Businesses that discover an error in a past return and lodge an amendment may face both the extra tax and SIC, now without a deduction for the interest. Correcting errors promptly limits how much SIC accrues — and your accountant can advise on the best approach.

Remission requests

In some circumstances, the ATO may remit (reduce) GIC or SIC — for example, where delays were outside your control. It’s worth asking your tax agent whether a remission request is appropriate for your situation, particularly if you’ve since paid the underlying debt. Remission isn’t automatic, and each case is considered on its facts.

A note for directors

For companies, ATO debts can carry personal risk for directors in some circumstances, including through director penalty notices. Directors also carry duties to manage company money responsibly, as ASIC regularly reminds small business owners. Treating ATO debt as a priority — and clearing it sooner where the numbers support it — protects both the business and the people running it.

Is it time to clear the ATO debt?

With ATO interest no longer deductible, it’s worth running the numbers properly. Asking what clearing the debt would involve costs nothing and doesn’t trigger a credit check. Your details won’t be fired off to a list of lenders; a real person looks at the debt, any plan in place and your security, then calls you. Please give accurate figures for the amount owed and any payment plan, so we can help you compare options on real numbers. See if your business qualifies.