ATO interest charges are no longer deductible – what you can do

From 1 July 2025, ATO interest charges (GIC and SIC) are no longer tax-deductible. If you carry tax debt, leaving it with the ATO is now significantly more expensive.

Leaving tax debts with the ATO used to be painful, but at least the interest was deductible. That safety net is now gone.

From 1 July 2025, both the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) are no longer tax-deductible, regardless of whether the underlying tax relates to past or future income years.

With GIC currently sitting at 11.17%, ATO debt is now one of the most expensive forms of finance available and unlike a bank loan, there’s no tax deduction to soften the blow.

We’re already having very different conversations with clients across Parramatta and Western Sydney about payment plans, refinancing and cash-flow strategy as a result.

What changed (and why it matters)

Until 30 June 2025, GIC and SIC were generally deductible. That meant the after-tax cost of ATO interest was lower, particularly for businesses.

That’s no longer the case.

Now:

• GIC and SIC are non-deductible
• The full interest cost is borne by the taxpayer
• Long-term ATO payment plans are far less attractive

Is refinancing ATO debt an option?

In many cases, yes, but only if it’s done carefully.

Businesses may be able to refinance tax debts through a bank or commercial lender. Unlike ATO interest, interest on these loans may still be deductible, provided the borrowing relates to business activities.

This can apply where funds are borrowed to pay business-related tax debts such as:

• Income tax
• Capital gains tax (CGT)
• GST
• PAYG instalments
• PAYG withholding for employees
• Fringe Benefits Tax (FBT)

However, deductibility is not automatic. The purpose and tracing of the borrowing matters.

How the rules apply

Sole traders

If you are genuinely carrying on a business, interest on money borrowed to pay tax debts arising from that business is generally deductible.

Example

Sam runs a café as a sole trader. He borrows $30,000 to pay a tax debt that arose entirely from café profits. The interest on that loan should be fully deductible.

If Sam also earns salary or wages and part of the tax debt relates to employment income, the interest must be apportioned.

For example: 

• $20,000 relates to business income
• $10,000 relates to employment income
• Only two-thirds of the interest would be deductible

This apportionment step is often missed — and regularly challenged by the ATO.

Employees and investors

If your tax debt relates to:

• Salary or wages
• Rental income
• Dividends
• Other passive investments

Then interest on borrowings used to pay that tax debt is not deductible. Refinancing may still reduce your interest rate compared to the ATO, but it won’t create a tax deduction.

Companies and trusts

If a company or trust borrows money to pay its own business tax debts, interest will usually be deductible where the debt can be traced back to business activities.

This commonly includes:

• GST
• Company income tax
• PAYG withholding
• FBT

However, if a director or beneficiary borrows personally to cover those debts, the interest is not normally deductible to them. This distinction catches many people out, particularly in small groups where personal and business finances blur.

Partnerships: where it gets tricky

Partnerships sit in a grey area and require careful structuring.

If the partnership itself borrows to pay tax debts arising from the partnership business, interest is generally deductible If an individual partner borrows personally to pay tax on their share of partnership profits, the ATO treats this as a private expense, and the interest is not deductible

We regularly see this misunderstood, even among experienced business owners.

Quick summary: what to do now

• Leaving tax debt with the ATO is no longer cheap.
• Because GIC and SIC are non-deductible, the real cost of inaction is higher than ever.
• Refinancing may help, but only if the debt relates to a business activity, the borrowing structure supports deductibility, and mixed-purpose debts are correctly apportioned

Talk to an adviser before arranging finance. Once a loan is in place, fixing deductibility issues is far harder.

How C&N Accountants can help

We help businesses and individuals across Parramatta and Western Sydney navigate tax debt strategically – not reactively.

Our team can:

• Analyse whether refinancing improves your position
• Determine whether interest will be deductible
• Structure borrowings correctly from the outset
• Liaise with the ATO where payment plans or disclosures are needed

If you’re carrying tax debt or considering refinancing, speak to us before making the move. With the right structure, you can reduce costs and avoid expensive surprises.