ATO Interest Charges No Longer Deductible
The cost of carrying outstanding debts with the ATO has increased significantly. Historically, the tax deduction on GIC cushioned its high rate, making the cost more manageable. However, effective 1 July 2025, the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) imposed by the ATO are no longer tax-deductible. With GIC currently sitting at 10.61%, this policy change makes an ATO payment plan one of the most expensive forms of finance available, pushing the full 10.61% cost directly to the bottom line. Taxpayers can no longer rely on a deduction to offset the high interest rate.
Refinancing
For many businesses and individuals, refinancing ATO debt with a commercial bank, non-bank lender, or specialist finance provider may now be a better strategy. Interest on these commercial loans is often deductible for tax purposes, provided the borrowing is genuinely connected to a taxable business activity. This connection—often referred to as the 'tracing' principle—is paramount. The potential deduction applies not only to income tax debts arising from a business but also to other critical business-related taxes like GST, PAYG instalments, PAYG withholding for employees, and FBT. A careful review of whether interest expenses on the new loan will be deductible is essential before taking any action.
Businesses compared to Individuals
The deductibility rules vary based on the borrower's entity type. When a company or trust borrows to pay its own business tax debts, the interest is typically deductible. By contrast, if a director or beneficiary borrows personally to cover those debts, the interest is generally not deductible for them. For individuals, deductibility depends entirely on the source of the original tax debt. Sole traders can usually deduct interest on loans used to pay tax debts that arose from their business. However, if an individual’s tax debt relates to salary, investment income, or rental income, the interest on the refinancing loan is not deductible. While refinancing may still secure a lower interest rate than GIC, it will not generate a tax deduction in these personal situations.
Takeaways
The practical takeaway is that outstanding ATO debt is now more costly than ever. Refinancing may provide both a critical tax deduction and access to lower market interest rates, but the key is accurately differentiating between tax debts related to a business activity and those that are not. If your situation is complex or involves mixed use (e.g., a single tax debt covering both business income and personal investment income), you will be required to apportion the interest deduction based on the ratio of the business debt to the total debt. This is a common area of ATO scrutiny, making professional advice indispensable. Talk to us before arranging finance to ensure your strategy is effective and avoids costly surprises.