ATO INTEREST WILL NO LONGER BE TAX DEDUCTIBLE FROM 1 JULY 2025

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We wish to inform you of a significant change in tax legislation that may impact your financial planning and tax obligations.
 
What Is Changing from 1 July 2025?
Effective from 1 July 2025, interest charges imposed by the ATO—specifically the General Interest Charge (GIC) and Shortfall Interest Charge (SIC)—will no longer be tax-deductible. This change applies to all taxpayers, including individuals and businesses, and encompasses interest incurred on or after this date, regardless of when the underlying tax debt arose. 
 
What Is the Current ATO Interest Rate?
As of the quarter ending 30 June 2025, the ATO’s interest rates are:
 

  • General Interest Charge (GIC): 11.17% per annum

(GIC is punitive and used broadly for late or unpaid debts)
 

  • Shortfall Interest Charge (SIC): 7.17% per annum 

(SIC is less punitive and applies to underpaid tax resulting from an amended assessment (not fraud or evasion))
 
These rates are subject to quarterly adjustments and are compounded daily.
 
What ATO Interest Is Currently Deductible?
Under current legislation, both GIC and SIC are tax-deductible when incurred in the course of earning assessable income. This means that businesses and individuals can claim these interest charges as deductions, reducing their taxable income. 
 
What Are the Implications for Our Clients?
The removal of deductibility for ATO interest charges will increase the after-tax cost of carrying tax debt. For example:

  • Before 1 July 2025: A business with a 25% tax rate paying $10,000 in GIC could claim a $2,500 tax deduction, effectively reducing the cost to $7,500. 
  • After 1 July 2025: The full $10,000 in GIC will be non-deductible, increasing the financial burden. 

This change highlights the importance of timely tax payments and proactive debt management. 
 
What Interest Remains Tax Deductible?
Interest on loans or finance facilities obtained from external lenders to pay tax liabilities remains tax-deductible, provided the funds are used for income-producing purposes. This includes business loans or overdrafts used to settle tax debts. 
 
Is There an Opportunity to Maintain the Tax Deductibility of the Interest if the ATO Debt Is Refinanced with Another Lender?
Yes. Refinancing ATO debts through commercial loans or finance facilities can preserve the tax deductibility of interest payments. By replacing ATO debt with structured finance from external lenders, businesses may benefit from lower interest rates and maintain deductibility, thus improving cash flow management. 
 
What Should Our Clients Be Doing Now?
To prepare for this change, we recommend the following actions:

  1. Review Outstanding Tax Debts: Assess any existing ATO debts and consider settling them before 1 July 2025 to take advantage of current deductibility provisions. 
  2. Evaluate Financing Options: Explore refinancing ATO debts with external lenders to maintain interest deductibility and potentially secure lower interest rates.
  3. Enhance Cash Flow Management: Implement strategies to ensure timely payment of future tax liabilities, reducing exposure to non-deductible ATO interest charges.
  4. Consult with Advisors: Engage with your accountant or financial advisor to develop a tailored plan addressing these changes and optimizing your tax position.

 
If you have any questions or require assistance in navigating these changes, please do not hesitate to contact our office on (02) 8543 6800.