ATO debt has always been something business owners try to avoid, but from 1 July 2025, the stakes became much higher. Changes to interest deductibility mean that leaving tax debts unpaid can quietly cost your business far more than it used to.
If you currently have an ATO payment plan, are carrying overdue tax liabilities, or are simply trying to understand your exposure, this guide will walk you through what has changed, why it matters, and how to approach ATO debt in a more informed way.
No scare tactics. Just clarity.
What Changed With ATO Interest Deductibility?
Until recently, interest charged by the ATO was unpleasant but at least partially softened by tax deductions.
From 1 July 2025, that changed.
General Interest Charge (GIC) and Shortfall Interest Charge (SIC) imposed by the ATO are no longer tax deductible, regardless of:
- When the original tax debt arose
- Whether the debt relates to prior or current income years
- Whether you are already on a payment plan
This means businesses now wear the full after-tax cost of ATO interest.
With GIC rates exceeding 11 per cent and compounding daily, this has transformed ATO debt into one of the most expensive forms of finance on the market.
Why This Matters More Than Many Businesses Realise
ATO debt often feels manageable because it does not behave like a traditional loan. There is no application process, no credit check, and no formal approval.
But that convenience comes at a cost.
Previously, a business paying ATO interest could claim a deduction, reducing the real impact. That buffer is now gone.
What this means in practice:
- Interest costs hit cash flow harder
- Payment plans become more expensive over time
- The longer the debt remains outstanding, the more it drains profitability
- Comparing ATO debt to bank finance now looks very different
Ignoring the change does not make it go away. It just makes the bill larger.
Understanding Which Interest Is No Longer Deductible
The rule change is narrow but powerful.
No Longer Deductible
- ATO General Interest Charge (GIC)
- ATO Shortfall Interest Charge (SIC)
- Any GIC or SIC applied on or after 1 July 2025
This applies even if the original tax debt relates to:
- Income tax
- GST
- PAYG instalments
- PAYG withholding
- Fringe benefits tax
The trigger is the date the interest is charged, not the age of the debt.
What Has Not Changed
While ATO interest is now non-deductible, broader tax principles around interest deductibility remain intact.
Interest may still be deductible if:
- The money is borrowed externally
- The borrowing relates directly to business activity
- The funds are used to pay business-related tax debts
- The loan is structured and documented correctly
This distinction is critical and often misunderstood.
Refinancing ATO Debt: When Interest May Still Be Deductible
For many businesses, refinancing ATO debt with an external lender may significantly reduce the after-tax cost of carrying that debt.
Why This Can Work
Australian tax law considers the use of borrowed funds, rather than the identity of the original creditor.
If money is borrowed to meet business tax obligations, interest on that borrowing may be deductible, provided the borrowing:
- Is directly connected to income-producing activity
- Is not private or domestic in nature
- Is properly traced and documented
This does not make ATO debt disappear, but it can materially change the cost of carrying it.
How This Applies to Different Business Structures
Companies and Trusts
If a company or trust borrows to pay its own tax liabilities, interest on that borrowing is generally deductible, assuming the tax debt arose from carrying on a business.
Examples include:
- Company income tax
- BAS liabilities
- PAYG withholding
- FBT
However, if a director or beneficiary borrows personally to cover those debts, the interest is usually not deductible to them.
The entity that owes the tax must also be the entity that borrows the funds.
Sole Traders
Sole traders are often in a grey area, but the principle is similar.
If the tax debt arose from running the business, interest on a loan used to pay that debt is generally deductible.
If the tax debt relates to non-business income, such as wages or investment income, the interest is not deductible.
Where debts are mixed, apportionment is required.
Partnerships
Partnerships are more complex.
- Borrowing at the partnership level to pay partnership tax debts may allow deductibility
- Individual partners borrowing personally to cover their share of tax liabilities generally cannot deduct the interest
This is an area where assumptions can quickly lead to costly errors.
A Simple Cost Comparison
Consider a business with $100,000 owing to the ATO.
Option 1: ATO Payment Plan
- Interest at approximately 11 per cent
- Daily compounding
- No tax deduction
- Full interest cost absorbed by the business
Option 2: Commercial Business Loan
- Interest at 8 to 9 per cent
- Interest potentially deductible
- Predictable repayment terms
- Lower after-tax cost
The difference over time can be substantial, particularly for businesses already under cash flow pressure.
Common Mistakes That Undo Deductibility
Even when refinancing makes sense, poor execution can eliminate the benefit.
Common pitfalls include:
- Using personal loans or credit cards
- Mixing borrowed funds with private expenses
- Paying the ATO from an account with multiple uses
- Borrowing in the wrong entity
- Failing to document the purpose of the loan
Interest deductibility relies heavily on clear tracing. Once that trail is muddy, deductions become vulnerable.
Managing ATO Debt More Strategically
The change to interest deductibility has shifted how ATO debt should be viewed.
Good practice now includes:
- Reviewing ATO balances regularly
- Comparing ATO interest costs to external finance
- Modelling after-tax costs, not just headline rates
- Keeping lodgements up to date, even if payment is delayed
- Acting early, rather than waiting for debt to escalate
ATO compliance and business debt management are no longer separate conversations.
When Professional Advice Makes a Real Difference
This is not an area where generic advice works well.
Small differences in structure, timing, or documentation can completely change the outcome.
Professional guidance can help:
- Confirm whether the interest will be deductible
- Structure borrowing correctly from the start
- Avoid accidental mixed-purpose loans
- Reduce long-term business risk
- Create a realistic plan to clear ATO debt, not just manage it
Let’s Talk About What This Means for Your Business
ATO debt is not unusual, but carrying it without understanding the full cost can quietly erode cash flow and profitability.
The team at Accounts All Sorted helps business owners:
- Understand how ATO debt impacts their tax position
- Assess whether refinancing makes sense
- Keep compliance on track while protecting cash flow
- Put practical systems in place to avoid future surprises
If ATO interest or payment plans are sitting in the background of your business, it may be worth taking a closer look now rather than later.
Talk To Us Today