From when can I no longer claim a deduction for interest charged by the Australian Taxation Office (ATO)?

From 1 July 2025, interest charges imposed by the ATO — including the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) — will no longer be deductible for tax purposes.

How will this change affect my business’s cash-flow and tax planning?}

Because the interest will no longer reduce taxable income, the real after-tax cost of holding an ATO tax debt increases. For example, if your business was paying ATO interest and claiming it as a deduction, your net cost will now rise (effectively by your tax rate). This change makes it more urgent to pay tax liabilities on time or consider alternative funding arrangements.

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ATO Interest Charges Are Now Non-Deductible: What Your Business Needs to Know

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Introduction

If your business has ever dealt with late tax payments or general interest charges from the Australian Taxation Office, there is an important change you need to be aware of. As of legislation passed in 2023 and effective from 1 July 2025, you can no longer claim a tax deduction for ATO interest charges.

This change has significant implications for how businesses handle tax debts, manage cash flow, and structure their financial reporting. At Trinity Accounting Practice, we are here to break down what this new rule means, how it affects your tax planning, and what you can do to reduce its impact.

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What Are ATO Interest Charges

When your business pays its tax obligations late, the ATO charges interest on the unpaid amount. These charges include:

General Interest Charge (GIC): Applied to unpaid tax liabilities
Shortfall Interest Charge (SIC): Charged when there is a discrepancy between what you paid and what you should have paid

Historically, businesses could treat these charges as a tax-deductible expense, which reduced their overall tax payable. That is now changing.

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What Has Changed and When Does It Apply

Under the updated rules, from 1 July 2025 onwards, ATO interest charges will no longer be tax deductible for businesses. This means:

You cannot offset these charges against your assessable income
You will bear the full financial cost of late payment interest
There is now a stronger incentive to pay tax liabilities on time

This applies to interest incurred on or after 1 July 2025, regardless of when the underlying debt originally arose.

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Why This Change Has Been Made

The ATO and Treasury introduced this legislation to:

Discourage intentional or habitual late payment of taxes
Promote better tax compliance and timely lodgement
Ensure fairer treatment between taxpayers who meet obligations on time and those who do not

By denying deductions on ATO interest charges, the government aims to reinforce the message that tax debts should be prioritised like any other financial obligation.

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Which Entities Are Affected

The change applies to most businesses, including:

Sole traders
Partnerships
Companies
Trusts

All business structures are expected to comply. Only individual taxpayers who incur interest personally, not through a business or trust, may still be able to claim deductions in certain limited circumstances on a case-by-case basis.

If your entity is registered for GST or income tax and deals with the ATO, these rules will likely affect you.

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What Charges Are No Longer Deductible

From 1 July 2025, the following will not be deductible:

Non-Deductible ChargeDescriptionGeneral Interest Charge (GIC)Interest on late tax debts, including income tax, BAS, and PAYGShortfall Interest Charge (SIC)Charged on tax shortfalls where the ATO amends an earlier assessment

Administrative penalties and late lodgement penalties were already non-deductible, and that continues unchanged.

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How This Affects Business Cash Flow

This change puts pressure on business cash flow in several ways:

Late tax payments now carry a higher real cost
You will not recover any part of the interest charge via your tax return
Future budgeting must account for interest as a full, non-deductible expense

Businesses may need to re-evaluate how they manage working capital and pay ATO liabilities faster to avoid unnecessary financial strain.

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Example: How the New Rule Affects Your Business

Consider a business with a $100,000 tax debt unpaid for six months. The ATO charges $5,000 in GIC.

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Under Previous Rules

You could claim $5,000 as a tax deduction
If your tax rate is 25%, you effectively reduced your tax by $1,250

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Under New Rules (from 1 July 2025)

You cannot claim the $5,000
Your out-of-pocket cost remains the full $5,000

That is a 25% increase in the effective cost due to lost deductibility.

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What Trinity Accounting Practice Recommends

To help our clients stay ahead of this change, we recommend the following strategies:

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Stay Ahead of Lodgement Dates

Set reminders and automate ATO lodgement deadlines to prevent interest charges from accruing. Our bookkeeping team helps clients stay on top of BAS, PAYG, and income tax due dates throughout the year.

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Review Your Tax Payable Forecast

Build tax payments into your cash flow planning to avoid last-minute funding issues. Knowing your estimated tax liability each quarter allows you to set aside funds progressively.

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Pay ATO Debts as a Priority

If you need to delay any payment, avoid doing it with the ATO. The consequences are now costlier than ever given the lost deductibility.

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Explore Payment Arrangements Early

If you cannot pay a tax debt in full, arrange a payment plan with the ATO as early as possible. This may reduce the GIC that accrues on the outstanding balance.

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Use Accounting Software with ATO Integration

Using tools like Xero helps track obligations in real time and stay compliant. As certified Xero advisors, we can set up your system to flag upcoming tax deadlines automatically.

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Exceptions or Special Cases

There are no major exemptions for this rule once it takes effect. However:

Interest incurred before 1 July 2025 may still be deductible under existing law
Limited personal use of GIC, if clearly not business-related, may still be eligible for review on a case-by-case basis

We advise keeping separate accounts and clear documentation of all ATO correspondence to support your tax position if queried.

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Record Keeping and Reporting Tips

From 1 July 2025:

Keep separate accounts for ATO interest charges in your general ledger
Ensure your chart of accounts flags non-deductible charges
Your accountant should adjust your tax return accordingly
Prepare a reconciliation schedule if you have mixed deductible and non-deductible interest across financial years

At Trinity Accounting Practice, we handle this for all our clients as part of our end-of-year reconciliation and tax planning process.

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Case Study: Construction Business Owner

Mark owns a small construction business and has historically delayed paying quarterly BAS. Over the past year, his ATO interest charges reached $12,000. Previously, he claimed this amount and saved roughly $3,000 in tax.

From 1 July 2025, this approach becomes expensive. Trinity Accounting Practice restructured his payment process:

Set up automated tax savings each month into a dedicated account
Implemented a Xero-based cash flow tracker
Advised early payment arrangements with the ATO

As a result, Mark reduced his interest charges by 70% and avoided future non-deductible costs.

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Frequently Asked Questions

Can I still claim interest on a business loan?

Yes. Interest on commercial loans, such as for equipment, property, or vehicles, remains tax deductible. Only ATO interest charges are affected by the new law.

Does this apply to prior years?

No. The rule change only applies to interest incurred on or after 1 July 2025. Past interest remains deductible under existing law.

Is there a way to reverse ATO interest charges?

You may request remission or reduction of interest in limited situations such as ATO error, natural disasters, or serious illness. However, remission is not automatic and must be formally requested. We help clients lodge remission applications when justified.

Will the ATO notify businesses when interest applies?

Yes, interest charges are included on your ATO statements, activity statements, and portal notifications. Regularly reviewing these helps you track interest costs before they escalate.

Should I refinance tax debt through a loan?

In some cases, yes. A business loan or line of credit may be cheaper than ATO interest and remains tax deductible. Speak to us at Trinity Accounting Practice or our mortgage brokerage division, Nexus Wealth Partners, for lending options.

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Key Takeaways for Business Owners

From 1 July 2025, ATO interest charges (GIC and SIC) are no longer deductible
Plan ahead and manage tax obligations to avoid unnecessary costs
Consider the long-term cash flow impact of late payments
Speak to your accountant about how to restructure payments and reporting
Refinancing tax debt through a commercial loan may be a more cost-effective option

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How Trinity Accounting Practice Can Help

We are proactive advisors who specialise in small and medium business compliance. We can assist with:

Reviewing ATO debts and interest history
Updating your chart of accounts for non-deductible expenses
Setting up payment arrangements with the ATO
Creating custom tax calendars to meet due dates
Providing tax-effective strategies to reduce the risk of interest costs

For businesses that need broader strategic financial oversight, our Virtual CFO division, VCFO Australia, provides cash flow forecasting, budgeting, and compliance support to help you stay ahead of your obligations.

Our business advisory team can also help you restructure your payment processes and plan for the impact of this change on your overall financial position.

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Conclusion

Tax interest used to be a deductible cost of doing business. That time is ending. Now, it is more important than ever to be proactive with your tax compliance and avoid letting ATO interest charges eat into your profits.

With Trinity Accounting Practice, we make sure your financial operations are clean, compliant, and cost-effective.

Book a tax planning session with Trinity Accounting Practice today.

Trinity Accounting Practice

Accounting Firm in Beverly Hills, Sydney

Phone: 02 9543 6804

Address: 159 Stoney Creek Road, Beverly Hills NSW 2209

Website: www.trinitygroup.com.au

Weekend and after-hours appointments available

Book online now

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Our Virtual CFO division, VCFO Australia, provides strategic financial management, budgeting, forecasting, and compliance support for growing businesses and not-for-profits.

Learn more about what we offer

Discover the industries we specialise in

Our mortgage brokerage division, Nexus Wealth Partners Pty Ltd, assists clients with home loans, refinancing, and business finance.

Disclaimer: Information provided on this website is intended as a general overview only and does not replace professional advice tailored to your personal circumstances.

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