From 1 July 2025, the ATO has removed one of the last remaining “safety nets” for businesses that fall behind on tax debts.
Until now, the interest charged by the ATO on overdue tax — the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) — was tax-deductible. That meant if your business paid interest to the ATO, you could offset some of that cost at tax time.
But that benefit ends on 1 July 2025.
In this guide, we explain the change in simple English and show how to protect your business from unnecessary costs.
What Has Changed?
The government has introduced a rule preventing businesses from deducting ATO interest from their tax return. That means:
Before 1 July 2025:
ATO interest charges were tax-deductible.
After 1 July 2025:
ATO interest charges are no longer deductible.
This applies to:
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companies
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sole traders
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partnerships
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trusts
Any interest charged after 1 July 2025 is simply an expense — with no tax benefit.
Why the Rule Changed
There are two main reasons.
1. Encourage timely tax payments
The government wants to reduce overdue tax debts and encourage businesses to meet their obligations on time.
2. Improve fairness
If ATO interest is deductible, businesses that pay late have a tax advantage over those who pay on time.
How This Will Affect Your Business
1. Higher costs
Interest becomes more expensive because you can’t deduct it.
2. Lower profit
Interest now directly reduces your net profit.
3. Greater pressure to pay tax on time
Late BAS and PAYG instalments will have a more severe impact.
Practical Example
Let’s say your business owes $40,000 and the ATO charges 10% interest.
Interest: $4,000
Under the old rules:
If your tax rate was 25%, you could deduct that interest and save $1,000.
Under the new rules:
You lose the deduction.
You pay the full $4,000 — no tax benefit.
What Types of Interest Are Affected?
This rule applies to:
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General Interest Charge (GIC)
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Shortfall Interest Charge (SIC)
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interest on late BAS
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interest on payment plans
In short: if it’s interest charged by the ATO after 1 July 2025, it is no longer deductible.
What Businesses Should Do Now
1. Check your current ATO debts
Log in to the ATO Business Portal or MyGov Business.
If you have any overdue amounts:
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pay them ASAP
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or set up a payment plan
2. Strengthen your cash-flow planning
Project your BAS, tax and super payments for the next 12 months.
3. Automate your BAS and PAYG payments
Set reminders or use direct debit to avoid missing due dates.
4. Update your pricing or billing cycles
If you consistently fall behind because clients pay late:
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shorten invoice terms
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use progress payments
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require deposits
5. Build a cash buffer
Aim for 1–2 months of operating expenses saved.
6. Talk to Carmody Accounting
We can help you structure your cash flow so you never fall behind on tax again.
How This Affects Payment Plans
If you are on a payment plan that extends past 1 July 2025:
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interest charged up to 30 June 2025 remains deductible
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interest charged after 1 July 2025 is not deductible
This applies even if it’s the same debt.
How This Impacts Business Tax Returns
You will see:
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a higher taxable income
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a higher tax bill
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lower net profit
Businesses that used to rely on the deductibility of ATO interest will feel the impact immediately.
FAQ
Is ATO interest still tax-deductible in 2025?
No. After 1 July 2025, ATO interest on tax debts is no longer deductible.
Does this affect individuals as well as businesses?
Yes. All taxpayers are affected.
What if the interest relates to older debts?
Interest charged before 1 July 2025 remains deductible.
Interest charged after that date is not.
How Carmody Accounting Can Help
We can help you:
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clear tax debts before the deadline
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negotiate with the ATO
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set up a realistic payment plan
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build cash-flow systems
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avoid future interest charges