ATO Interest Charges Are Now Non-Deductible

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

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If your business has ever dealt with late tax payments or general interest charges from the Australian Taxation Office (ATO), there’s 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.

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This change has significant implications for how businesses handle tax debts, manage cash flow, and structure their financial reporting. At Trinity Accounting Practice, we’re 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’s 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’s now changing.

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What’s 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’ll 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 debt originally arose.

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Why Has the ATO Made This Change?

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 don’t

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

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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 circumstances, but this is strictly limited and case-by-case.

If your entity is registered for GST or income tax and deals with the ATO, these rules 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 ChargesDescriptionGeneral Interest Charge (GIC)Interest on late tax debts (e.g. income tax, BAS, PAYG)Shortfall Interest Charge (SIC)Charged on tax shortfalls where the ATO amends an earlier assessment

However, administrative penalties and late lodgement penalties are already non-deductible, and that continues.

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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 have higher real cost
• You won’t recover any part of the interest charge via tax returns
• Future budgeting must account for interest as a full expense

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

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Example: How the New Rule Affects Your Business

Let’s say your business had a $100,000 tax debt unpaid for 6 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 reduce your tax by $1,250

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Under New Rules (from 1 July 2025):

• You can’t claim the $5,000
• Your out-of-pocket cost remains the full $5,000

That’s a 25% increase in 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:

✅ Stay Ahead of Lodgement Dates

Set reminders and automate ATO lodgement deadlines to prevent interest charges from accruing.

✅ Review Your Tax Payable Forecast

Build tax payments into your cash flow planning to avoid last-minute funding issues.

✅ Pay ATO Debts as a Priority

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

✅ Explore Payment Arrangements Early

If you can’t pay a tax debt in full, arrange an ATO payment plan as early as possible. This may reduce GIC accrual.

✅ Use Accounting Software with ATO Integration

Using tools like Xero (which we are certified advisors in) helps track obligations in real-time and stay compliant.

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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
• Small private use of GIC, if clearly personal and not business-related, may still be eligible for review by the ATO 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

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

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Real-World Scenario: Business Owner Impact

Case Study: Mark’s Construction Company

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 strategy becomes expensive. Trinity Accounting Practice restructured his payment process:

• Set up automated tax savings each month
• Implemented a Xero-based cash flow tracker
• Advised early payment plans 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 (FAQs)

Can I still claim interest on a business loan?

Yes. Interest on commercial loans (e.g. for equipment, property, 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
• 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 myGov or business portal notifications. Regularly review these to track interest costs.

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 tax deductible. Speak to us at Trinity Accounting or our mortgage team at Nexus Wealth Partners for options.

Key Takeaways for Business Owners

• From 1 July 2025, ATO interest charges 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

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

Final Word: Don’t Let ATO Interest Eat Your Profits

Tax interest used to be a deductible cost of doing business. That time is ending. Now, it's more important than ever to be proactive with your tax compliance and avoid letting the ATO charge you more than necessary.

With Trinity Accounting Practice, we make sure your financial operations are clean, compliant, and cost-effective. Let’s work together to minimise tax and maximise peace of mind.

Book a Tax Planning Session

👉 Trinity Accounting Practice
✅ Accounting Firm in Beverly Hills
☎️ 02 9543 6804
📍 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 www.trinitygroup.com.au
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