Understanding the End of Tax Deductions for ATO Interest Charges

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Understanding the End of Tax Deductions for ATO Interest Charges

From 1 July 2025, the Australian Taxation Office will no longer allow deductions for General Interest Charge (GIC) and Shortfall Interest Charge (SIC). This represents a significant shift in how businesses and individuals manage tax debts. For years, taxpayers relied on deductions for these charges to soften the impact of late payments or underpaid tax. That option is about to end, and it is crucial to prepare now.

This blog explains what the change means, how it will affect you, and what steps you should take. It also outlines how Trinity Accounting Practice can help you prepare for the new rules.

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What Are ATO Interest Charges?

General Interest Charge (GIC):

• Imposed when tax is not paid by the due date
• Applies to income tax, BAS, GST, superannuation, and other obligations
• Calculated daily and compounded

Shortfall Interest Charge (SIC):

• Applies when the ATO amends an assessment and finds you underpaid tax
• Covers the period between the original due date and the amended assessment
• Often applies to businesses and individuals after ATO reviews or audits

These charges are not penalties. They are interest designed to encourage timely payment and compensate the government for the late receipt of revenue.

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What the Law Says Before 1 July 2025

Until 30 June 2025:

• GIC and SIC are deductible expenses
• Taxpayers can claim them in their tax return for the year in which the expense is incurred
• If the ATO later remits the charge, you must include the remitted amount as assessable income

This has allowed many businesses to reduce the net cost of late payments. For example, a $10,000 GIC bill could generate a deduction worth $3,000 if the business is in the 30% company tax bracket.

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What Changes From 1 July 2025

From 1 July 2025:

• GIC and SIC are no longer deductible
• If incurred after this date, they cannot be claimed in your tax return
• If interest incurred before 1 July 2025 is remitted after that date, the remission remains assessable income
• If interest incurred after 1 July 2025 is remitted, there is no assessable income because no deduction was allowed

The change applies regardless of the year of income that the underlying tax relates to. Even if the charge relates to a 2023 return, if the GIC is incurred after 1 July 2025, no deduction is available.

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Why Has the Law Changed?

The government introduced this change to:

• Discourage taxpayers from delaying payment of tax debts
• Ensure that ATO interest is treated differently from commercial interest expenses
• Increase revenue integrity by removing what they see as an unintended concession

The expected impact is tens of millions of dollars in additional revenue per year. For taxpayers, it means interest costs will rise sharply.

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Example Scenarios

Scenario 1: Deduction before 1 July 2025

• A company incurs $5,000 in GIC in April 2025.
• The deduction is available in its 2024–25 tax return.
• Net cost after a 30% deduction = $3,500.

Scenario 2: Interest incurred after 1 July 2025

• The same company incurs $5,000 in GIC in August 2025.
• No deduction is available.
• Net cost = $5,000.

Scenario 3: Remission of pre-1 July GIC

• If the April 2025 $5,000 charge is later remitted in October 2026, the remission is assessable income.

Scenario 4: Remission of post-1 July GIC

• If the August 2025 $5,000 charge is later remitted, it is not assessable income.

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Impact on Businesses

The removal of deductions increases the effective cost of GIC and SIC:

• Interest rates are already high, ranging between 8% and 11% depending on the period
• Without a tax deduction, the effective cost rises by 25% to 30% for many businesses
• For some small businesses, this will make it more expensive to carry tax debt compared to borrowing from a bank or lender

The ATO applies GIC daily and compounds monthly. Over time, debts can grow quickly. With no deduction, the financial pressure is even greater.

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Impact on Individuals

For individuals:

• Deductibility of GIC often provided some relief when facing late payment interest
• From 1 July 2025, that relief is gone
• Taxpayers in higher brackets (32.5% and 45%) will feel the biggest increase in net cost

Anyone with outstanding personal tax debts should aim to pay or refinance before June 2025 to lock in deductions while they are still available.

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Why This Matters for Small Businesses

Small businesses are the group most exposed:

• Around 2.6 million small businesses operate in Australia
• Many use GIC deductibility as a way to manage cash flow when tax obligations are delayed
• The loss of deductibility will make it more important to pay on time or seek financing

If a business with a $50,000 tax debt delays payment for 12 months, the GIC could exceed $7,000. Without a deduction, the full cost is payable.

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Alternative Financing Options

Because ATO interest is no longer deductible, many businesses should consider alternatives:

• Business loans or overdrafts from banks
• Short-term financing arrangements
• Using credit facilities with lower net costs
• Negotiating structured payment plans with the ATO

Interest on commercial loans remains deductible. In some cases, borrowing to pay tax may cost less after tax than carrying an ATO debt.

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The Role of ATO Payment Plans

The ATO does offer payment plans:

• These plans spread repayment over time
• Interest may still apply, but the structure provides cash flow relief
• The ATO expects taxpayers to engage early rather than ignore debts

With deductibility ending, negotiating payment plans early will be essential. It may reduce GIC exposure and demonstrate good faith.

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Remission of Interest

The ATO can remit GIC and SIC in cases of:

• Serious hardship
• Fair and reasonable circumstances outside your control
• Mistakes caused by the ATO itself

But remission is not automatic. Taxpayers must apply and justify the request. The trend in recent years has been towards fewer remissions, especially where the delay is within the taxpayer’s control.

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Compliance and Risk Management

The removal of deductibility is part of a broader trend. The ATO is tightening compliance across:

• Small business lodgement
• Cash flow management
• Tax debt enforcement

Interest is one of the ATO’s most effective tools to encourage compliance. Without deductibility, the deterrent effect is even stronger.

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Tax Planning Before 30 June 2025

You should take action now:

• Review any outstanding tax debts
• Pay GIC and SIC before 30 June 2025 where possible
• Consider refinancing with deductible commercial loans
• Lodge returns promptly to avoid unnecessary shortfall interest
• Plan cash flow to prevent debt accumulation in 2025–26

Acting before the deadline can save thousands of dollars in non-deductible costs.

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How Trinity Accounting Practice Helps

Trinity Accounting Practice provides expert advice on:

• Tax planning for businesses and individuals
• Debt management strategies
• Cash flow forecasting
• ATO negotiations and remission applications
• Structuring finance to minimise costs

Our team has supported clients for over 22 years. We know how to navigate ATO rules and protect your position.

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Key Takeaways

• GIC and SIC remain deductible until 30 June 2025
• From 1 July 2025, they are no longer deductible
• Net costs will rise significantly for those carrying ATO debt
• Businesses and individuals should act now to manage obligations
• Professional advice is critical to minimise exposure

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Final Word

The removal of deductions for ATO interest is not a minor adjustment. It will reshape how taxpayers manage late payments and tax debt. By planning ahead, you can avoid unnecessary costs and protect your business or personal finances. Trinity Accounting Practice is here to guide you every step of the way.

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🌐 www.trinitygroup.com.au
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