ATO Interest Charges Hit Harder: Tax Deductions Gone from 1 July 2025

The Federal Government has announced that from 1 July 2025, (subject to the measures being introduced as law) businesses and individuals will no longer be able to claim a tax deduction for interest charges imposed by the Australian Taxation Office (ATO). This change, announced in the 2023–24 Mid-Year Economic and Fiscal Outlook, , reflects a significant shift in how taxpayers will need to approach their tax debts and planning strategies.

What Is Changing?

Currently, interest paid on tax debts — including General Interest Charge (GIC) and Shortfall Interest Charge (SIC) — is deductible when it relates to business or investment income. This enables taxpayers to reduce their overall taxable income when they incur ATO interest on overdue amounts.

However, under the proposed reforms, from 1 July 2025, deductions will no longer be available for these interest charges, regardless of whether the tax debt relates to business or investment activities (ATO, 2024).

Why the Change?

The rationale behind this measure is to align the treatment of ATO-imposed interest with the broader community expectations. The federal government aims to discourage late payment of tax liabilities and ensure that those who fail to meet their obligations are not rewarded with a tax deduction. Essentially, this measure removes what could be seen as an unintended benefit for non-compliance.

Who Will Be Affected?

This change will impact a wide range of taxpayers, including:

• Small to large businesses that use ATO payment plans.
• Investors and property owners managing tax debts related to income-producing activities.
• Individuals with outstanding ATO liabilities attracting interest charges.

For example, a business that previously deducted thousands of dollars in ATO interest on unpaid GST or PAYG debts will no longer be able to offset these costs against taxable income.

Key Points to Note

• Interest charges on or after 1 July 2025 will potentially be non-deductible, regardless of when the underlying tax debt arose (Kreston Stanley Williamson, 2024).
• Interest already incurred before 1 July 2025 remains deductible under the current law, but careful record-keeping is required to distinguish pre- and post-1 July 2025 charges.
• The loss of deductibility could significantly increase the after-tax cost of late tax payments, adding to business cash flow pressures.
• Remission of interest by the ATO, where possible, will become a more attractive option for managing debts given the absence of deductibility benefits.

Strategic Implications

For businesses and individuals, this measure reinforces the importance of proactive tax compliance and debt management. Taxpayers should consider:

• Avoiding ATO interest altogether by meeting tax payment deadlines or entering timely payment arrangements.
• Negotiating interest remissions where circumstances permit.
• Reviewing and updating cash flow forecasts to accommodate the full cost of ATO interest where unavoidable.
• Seeking professional advice to understand how existing debts and future liabilities may be impacted.

Final Thoughts

The removal of deductibility for ATO interest charges marks a significant tightening of tax compliance incentives. Businesses and individuals will need to adopt stricter financial discipline to avoid the higher effective costs of non-compliance.

Planning now, ahead of the effective date, will be critical in mitigating future tax and cash flow risks.