New ATO Rule from 1 July 2025: Interest Charges No Longer Tax Deductible

From 1 July 2025, interest charges on unpaid tax debts – known as the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) – will no longer be tax-deductible.

This change reflects a broader shift in the Australian Taxation Office’s (ATO) approach to debt recovery and is a clear signal that using the ATO as a form of short-term finance will come at a higher cost.

Who is Impacted?

Business:
All entities, including companies and trusts, will no longer be able to claim a deduction for ATO interest charges incurred from 1 July 2025. However, interest on commercial loans used to repay these tax debts may still be deductible – a potentially important consideration for managing cash flow.

Personal:
There is no change to the existing treatment of personal tax debts. Interest on externally borrowed funds used to repay personal tax liabilities has never been deductible.

Overall, this change reinforces the ATO’s tightened stance on tax compliance. Over recent years, we’ve seen a more active approach to debt collection, limited flexibility around interest and penalty waivers, and increased powers to disclose overdue debts to credit reporting agencies.

What does this mean for you?

This change may impact how you manage your tax obligations going forward. If you or your business currently carries a tax debt – or expects one to arise – now is the time to act.

• Pay off ATO debts before 30 June 2025 to preserve potential deductibility of any interest incurred

• Review your cash flow position and consider if alternative, deductible finance may be appropriate

• Maintain open communication with the ATO if full repayment isn’t immediately possible – setting up a payment plan can help you avoid further penalties and disclosure to credit agencies

Don’t wait to act

Proactively managing your tax position ahead of this change can reduce your future tax costs and avoid unwelcome surprises.

If you’re unsure how this affects you or your business, contact to your Morrows advisor. We can help you explore your options, assist with payment plans, or review whether financing solutions may make sense in your circumstances.

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