ATO Tax Interest Charges Become Non-Deductible from July 2025 - 3 Smart Strategies for SMEs
- Steven Nicholson
- Jul 24
- 5 min read
From 1 July 2025, the Australian Taxation Office (ATO) no longer allow tax deductions for its interest charges, known as the General Interest Charge (GIC) and Shortfall Interest Charge (SIC). What once softened the impact of late or corrected tax payments, will now act as pure extra cost. ATO tax interest charges becoming non-deductible could significantly increase expenses for businesses struggling with ATO debts and could require a recalculation for those businesses using the bank of ATO as a cheap source of borrowings. Here's what you need to know, and the steps you can take.
Understanding the Change: What Are GIC and SIC?
GIC applies to unpaid tax liabilities after the due date and compounds daily.
SIC applies when adjustments show that tax was underpaid.
Under the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, effective 1 July 2025, any GIC or SIC incurred from that date is no longer tax deductible. This holds true even if a tax shortfall relates to prior years. The law applies to assessments for income years starting on or after 1 July. If you want to read more about this change, follow the link below to the ATO website.
The ATO’s official stance is that removing these deductions encourages timely tax payments, aligning fairness among taxpayers and bolstering tax compliance. By removing the rule where late tax penalties could effectively be tax-deducted, the ATO believes it is increasing the cost of the penalty and reducing the impact of non-compliance.
The Financial Impact: What You May Really Pay
The ATO’s GIC is amended quarterly and is currently 10.78% per annum for July to September 2025, down slightly from 11.17% for the April to June 2025 quarter. It is important to remember that the GIC compounds daily which means that interest accumulates faster than it would on a loan where interest is charged on a monthly basis.
Once non-deductible, the real after-tax cost increases. For a company with a 25% tax rate, the effective interest rate jumps to about 14.37%.
This will put real cash flow pressure onto those SMEs already struggling with rising costs from suppliers and increases to staff wages.
Scenario Example
If a business carries a $100,000 ATO debt:
Pre-change, interest costs (~11.17%) were deductible, reducing taxable income and saving 25% on the interest expense.
Post-change, full interest ($10,780/year) becomes a cash drain without tax relief, about $2,696 higher annual after-tax cost.
Multiply that across larger debt balances or longer payment periods, and the additional burden becomes substantial.
It is also important to consider any ATO debt payment plans in place, as the after-tax cost of these plans has now increased, and so it may be time to reconsider the most cost-effective strategy for managing ATO debt.
What SMEs Should Do Now: Three Smart Strategies
Strategy 1: Pay Down and Avoid New ATO Debts
· Any GIC/SIC incurred before 30 June 2025 remains deductible.
Set up payment plans to extinguish ATO debt as quickly as possible from this date.
If unable to pay fully, plan to pay down high-interest portions first. The SIC rate for July to September 2025 is 6.78%, which is considerably lower than the corresponding GIC rate of 10.78%.
Build disciplined cash reserves to pay tax obligations on time. A good idea is to maintain a separate business bank account and transfer 10% of all customer receipts into this account to cover the GST liability when it becomes due.
Use budgeting and cash flow forecasting tools to anticipate and allocate funds for GST, PAYG, super, and income tax. Engage a professional to assist you in building financial models specifically for your business.
Strategy 2: Explore Refinancing Options
For those businesses using the ATO as a cheap and accessible source of borrowing, it may be time to consider taking out a commercial loan to refinance outstanding ATO debts.
The new loan’s interest will be deductible to the extent that its use is for an income-generating purpose. Refinancing ATO to preserve operational cash flow in the business would normally be considered a legitimate purpose. Always confirm such decisions with your tax accountant before actioning.
Secured business loans (e.g. against property or equipment) would usually come with an interest rate of between 6% - 10%. Unsecured loans or lines of credit, including loans from non-bank lenders would usually come with a higher interest rate of between 12% - 20% depending on risk profile. Remember that these rates are effectively lower on an after-tax basis - an 18% unsecured loan interest rate drops to 13.5% after tax.
Loans also come with establishment fees and application costs which have to be added to the calculation of overall loan cost.
An important consideration when researching commercial loan options is the types of security and guarantees a lender may require. Personal guarantees and security over personal property such as the family home are common. This may not be a risk worth taking for the savings on offer.
Engage a finance broker to consider your individual business circumstances before making any decisions regarding refinancing.
Strategy 3: Consider a Small Business Restructure (SBR)
The SBR process allows financially distressed small businesses to access a single, streamlined process to restructure their debts, whilst allowing the owners to remain in control of their business.
It may be an option for small businesses that have good prospects and can demonstrate that they have the future cash flow to pay an agreed lower debt amount over a period of typically two years.
It can result in the reduction of ATO debt by up to 70% leaving a more manageable debt going forward.
There are several eligibility criteria that must be met to qualify:
Entity with the ATO debt must be incorporated under the Corporations Act.
It must have total liabilities which do not exceed $1m at the date of appointment.
It must have completed and lodged all BAS and income tax returns.
It must have paid all outstanding employee entitlements, including superannuation.
Willing to resolve that the company is insolvent or likely to become insolvent and that a small business restructuring practitioner should be appointed.
Engage a liquidator who specialises in SBRs for an assessment on whether this may be a good strategy for your business.
Final Thoughts: Act Now, Save Later
This reform marks a significant shift in the way businesses handle tax debt. Effective financial planning and proactive decision-making are no longer optional, they’re essential. Start now to minimise the financial impact and maintain control over your cash flow.
Always seek professional help in assessing your financial position and understanding your options. Information provided in this article is general advice only and does not take into account your individual circumstances. Only when you have this information can you make the best business decision regarding your ATO tax debt and its cost to your business.
Reach out to GearChange Business Advisory today for a no-obligation conversation about how an outsourced CFO can help your business navigate these changes.