A quiet but costly change is coming for Australian businesses.
From 1 July 2025, interest charges you owe to the ATO on outstanding tax debts will no longer be tax-deductible.
Until now, many businesses have treated ATO interest as a normal expense — a painful but claimable cost. The new rule removes that deduction entirely, meaning every day a tax debt remains unpaid will cost even more.
Here’s what the change means, how to prepare, and how Carmody Accounting can help you avoid unnecessary interest altogether.
What’s Changing from 1 July 2025
The Tax Law Amendment (Denying Deductions for ATO Interest Charges) Act 2025 changes how two common ATO charges are treated:
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General Interest Charge (GIC) – applied when tax debts aren’t paid on time.
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Shortfall Interest Charge (SIC) – applied when the ATO adjusts a tax return and you owe extra.
From 1 July 2025, neither of these interest charges will be deductible, regardless of when the original debt was incurred. Any interest charged on or after that date is pure cost to the business.
Why the Change Matters
The ATO introduced this law to encourage timely tax payments and discourage businesses from treating interest as “cheap credit.”
The Financial Impact
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If you owe $50,000 in tax and delay payment for six months at roughly 10% interest, you’ll pay about $2,500 in charges.
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Previously, you could deduct that $2,500 — reducing your taxable income and saving around $625 (if you were on a 25% tax rate).
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From 2025–26, that deduction is gone — you pay the full $2,500 out of pocket.
For small businesses operating on tight cash flow, this is a major shift.
When the Rule Applies
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Applies to income years starting on or after 1 July 2025.
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If your business uses a substituted accounting period that starts later (e.g. September year-end), the rule begins at your first period after that date.
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All interest charged from that time — even on old debts — is non-deductible.
How to Avoid ATO Interest Charges
1. Pay on Time
Simple but powerful. Automate BAS and PAYG payments through cloud software or set calendar reminders for due dates. If cash flow is tight, talk to your accountant early.
2. Use Payment Plans Proactively
The ATO offers arrangements that pause enforcement action and reduce interest if you contact them before default. Early negotiation beats reactive damage control.
3. Forecast Cash Flow
Late payments usually happen because businesses don’t forecast tax outflows. Build GST, PAYG and super into your weekly budget so you always know what’s coming.
4. Reinvest Refunds Wisely
Use refunds or windfalls to pay down tax balances first — they’re guaranteed returns by avoiding 10% interest.
5. Avoid ‘Rolling Debts’
Many businesses use new liabilities to cover old ones — a cycle that creates continuous interest charges. Break the pattern with a structured repayment plan and tight bookkeeping.
Implications for Small and Medium Businesses
1. Higher After-Tax Costs
Interest on ATO debts is now a direct expense with no offset. This reduces profit and available cash for growth.
2. Cash Flow Planning
Expect less wiggle room at tax time. Your budget should include potential interest costs as non-deductible items.
3. Increased Compliance Focus
The ATO is linking late payment data to credit agencies and super records through STP. Persistent delays could affect business credibility and future finance applications.
4. Tax Planning Shifts
Accountants will now prioritise debt repayment and cash forecasting as part of tax strategy. The focus moves from “deducting interest” to “avoiding it altogether.”
Example Scenario
Before July 2025:
Lisa’s Café owes $20,000 in BAS arrears. The ATO charges 10% interest ($2,000 per year). Lisa claims this as a deduction, saving $500 in tax (25% rate).
After July 2025:
Lisa still owes $2,000 interest — but can’t deduct it. Her out-of-pocket cost increases by $500. That’s a 2.5% hit to profit for a single small café — just from timing alone.
How to Stay Ahead of the New Rules
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Check for Outstanding Debts – Review your ATO portal now and settle balances before 30 June 2025 so existing interest remains deductible.
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Review BAS Cycles – If you’re consistently late, work with your accountant to adjust lodgement frequency or delegate to a bookkeeper.
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Set Up Direct Debit – Link your business bank account to the ATO for automatic payment of instalments to avoid forgetting due dates.
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Use Digital Reminders – Calendar alerts and SMS reminders from your software can prevent accidental oversights.
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Keep Communication Open – If you can’t pay on time, tell your accountant immediately. Proactive communication often avoids penalties.
Frequently Asked Questions
Q1. Does this apply to individuals as well as companies?
Yes. Any taxpayer — individual, partnership, trust or company — can no longer claim ATO interest charges as a deduction from 1 July 2025.
Q2. Can I still deduct interest for years before 2025-26?
Yes, interest incurred before 1 July 2025 remains deductible under existing law. Only charges from that date forward are excluded.
Q3. Will this affect my payment plan interest?
Yes. Any interest accruing under an ATO payment plan after 1 July 2025 is non-deductible, even if the plan started earlier.
How Carmody Accounting Can Help
We work with businesses across Penrith and Western Sydney to stay ahead of ATO changes. Our team can:
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Review your tax position before 30 June 2025 to minimise exposure.
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Set up automated BAS and PAYG payments to eliminate interest risk.
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Create cash-flow plans that account for new non-deductible costs.
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Negotiate payment arrangements with the ATO on your behalf.
Proactive tax management can save thousands in avoidable interest and stress.