ATO interest is no longer tax-deductible — here's what your debt really costs now
In plain English
From 1 July 2025, general interest charge (GIC) and shortfall interest charge (SIC) stopped being tax-deductible. That quietly turned ATO debt from tolerable working capital into some of the most expensive money in Australia: at the current 11.43% p.a., non-deductible GIC costs a company on the 25% rate the same as a bank loan at over 15%. If you're carrying tax debt because it felt cheaper than borrowing, that logic is now backwards.
What changed on 1 July 2025
For decades, ATO interest was deductible like any other business borrowing cost. That ended with GIC and SIC incurred on or after 1 July 2025 — no deduction, regardless of when the underlying debt arose. Interest incurred before that date stays deductible under the old rules, so a long-running debt now has two layers: old deductible interest and new non-deductible interest piling on top.
The change was designed to do exactly what it's doing: make owing the ATO painful enough that businesses stop using it as a lender. Two side effects worth knowing:
- Remitted post-June-2025 GIC isn't assessable. Because the new interest was never deductible, the ATO wiping it doesn't create taxable income — a remission is now worth its full face value, tax-free.
- SIC is caught too. The shortfall interest charge on amended assessments (7.43% this quarter) is equally non-deductible.
The real after-tax cost: a worked example
Deductibility was doing more work than most owners realised. To compare a non-deductible cost with a deductible one, you gross it up by your tax rate — because deductible interest is partly refunded at tax time and non-deductible interest is paid entirely from after-tax profit.
Take a company with a $150,000 ATO debt at GIC of 11.43% — roughly $17,100 of interest a year:
| Before 1 Jul 2025 (deductible) | Now (non-deductible) | |
|---|---|---|
| Interest charged | $17,100 | $17,100 |
| Tax saved by deduction (25% company rate) | $4,275 | $0 |
| True after-tax cost | $12,825 | $17,100 |
| Deductible loan rate that costs the same | 11.43% | 15.24% |
The general rule: divide the GIC rate by (1 − your tax rate). At the 25% small-company rate, 11.43% non-deductible ≈ 15.2% deductible-equivalent. At the 30% company rate it's ≈ 16.3%, and for a sole trader on a high marginal rate it can push past 17%. And that's before compounding — GIC compounds daily, so the effective annual cost runs higher than the headline rate again.
In plain terms: the ATO is now one of the most expensive lenders your business can have, and it's a lender that can also issue garnishee notices and director penalty notices.
Still carrying ATO debt at 11.43% non-deductible?
A specialist can run the refinance-vs-negotiate maths on your actual numbers in one free call.
Refinance, negotiate, or pay down: the maths
There are three levers, and they're not mutually exclusive:
- Pay it down harder. The simplest arbitrage: every dollar off the ATO balance now earns a guaranteed, tax-free 11.43%+ return. Very few uses of spare cash in a small business beat that. If you're on a payment plan, shortening it or making lump-sum payments ahead of schedule is usually the highest-return move available.
- Refinance into deductible debt. Borrowing to pay out a business tax debt generally produces deductible interest — so a secured business loan at, say, 10.5% deductible (after-tax cost ≈ 7.9% at the 25% rate) now clearly beats GIC's 17.1-thousand-dollar-a-year after-tax bite on the same balance. Even some double-digit specialist lending can win the comparison. Refinancing also ends ATO enforcement risk on that debt. The caveats: compare after-tax cost to after-tax cost; watch fees and establishment costs; and think hard before securing previously unsecured tax debt against your home — see can the ATO take my house?
- Negotiate the interest away. The ATO can remit GIC where circumstances beyond your control caused the debt and it's fair and reasonable — and post-2025 remissions are tax-free. A strong remission case can beat both other options, because wiped interest costs 0%. Requests have got harder since the rule change (everyone had the same idea), but well-evidenced cases still succeed: see how GIC remission works.
What the ATO page doesn't tell you
The comparison that matters isn't GIC vs a bank rate — it's after-tax vs after-tax. A 12% deductible loan costs a 25%-rate company 9% in real terms; GIC "at 11.43%" costs 11.43%, because there's no deduction softening it — equivalent to a 15.24% loan. Owners who skip the gross-up routinely conclude the ATO is their cheapest creditor when it's now their dearest. Run the numbers on your own tax rate before deciding the debt can wait.
If you can't refinance and can't pay faster
Some businesses can't borrow (no security, bruised credit — perhaps from tax debt credit reporting) and can't accelerate payments. Then the question stops being "how do I carry this more cheaply" and becomes "should this debt exist at this size at all". At 15%+ effective and compounding, a debt the business can only just service will quietly grow relative to the business's ability to pay it — the maths only points one way.
For companies with total liabilities under $1 million, small business restructuring can compromise the debt — principal and interest together — while you keep trading; compare SBR vs liquidation. For the wider menu, see rescue options. The non-deductibility change effectively put a countdown timer on drifting: every quarter of "we'll deal with it later" now costs measurably more than it did before July 2025.
Frequently asked questions
Is interest I was charged before 1 July 2025 still deductible?
Yes. The change applies to GIC and SIC incurred on or after 1 July 2025. Interest that accrued before then remains deductible under the old rules — the cut is by when the interest was incurred, not when the debt arose or when you pay.
If the ATO remits my GIC, is that taxable income?
For GIC incurred from 1 July 2025 — no, because it was never deducted. Remitted interest from before that date is generally assessable (you got the deduction, so the wipe-back is income). This makes remission of new interest unusually valuable.
Is interest on a loan I take out to pay my tax debt deductible?
Generally yes, where the borrowing relates to a business tax debt — which is precisely why refinancing now often beats carrying GIC. (For individuals, interest on borrowing to pay a purely personal tax debt is a different story.) Confirm your specific structure with your accountant before committing.
Does the change affect payment plans?
Directly, yes: GIC keeps accruing inside a payment plan, and all of it (post-June 2025) is now non-deductible. A two-year plan quietly costs 20–30% more in real terms than the same plan did before the change — a strong argument for shorter terms, bigger upfront payments, and a remission request once you've built a good record.
What's the difference between GIC and SIC?
GIC (11.43% this quarter) applies to unpaid debts. SIC (7.43%) applies to shortfalls when an assessment is amended — a gentler rate for the period you didn't know you owed the money. Both compound daily, both stopped being deductible on 1 July 2025, and both can be remitted.
Why did the government make this change?
Explicitly to stop businesses treating the ATO as a cheap involuntary lender. Collectable tax debt had grown enormously, much of it owed by small business. Removing the deduction — alongside firmer collection — is designed to push tax debt to the front of the payment queue. Planning on the old "the ATO is patient and cheap" assumption no longer works.
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