ATO interest is no longer tax deductible. What does carrying tax debt cost now?

For years, one quiet consolation of owing the ATO money was that the interest it charged could be claimed back as a tax deduction. It softened the blow of carrying a tax debt on a payment plan, and plenty of businesses factored it into their thinking without ever saying so out loud.

That changed on 1 July 2025. If your business carries a tax balance, it’s worth understanding exactly what changed and re-running the numbers.

What changed on 1 July 2025?

The ATO’s explanation of the law change, denying deductions for ATO interest charges, is short and clear. Two interest charges are affected:

• General interest charge (GIC), which applies to tax paid late, including amounts on payment plans.
• Shortfall interest charge (SIC), which applies when an amended assessment increases the tax owing.

The key line: any GIC or SIC incurred on or after 1 July 2025 is not deductible, regardless of whether the debt relates to an earlier income year. The ATO’s media release adds that interest charged before 1 July 2025 remains deductible under the old rules.

So it’s the date the interest is incurred that matters, not the age of the debt. An old BAS balance still accruing GIC today produces non-deductible interest.

Why does non-deductibility make tax debt more expensive?

Because a deduction reduced the real cost. When GIC was deductible, part of every dollar charged came back through a lower tax bill. Now none of it does.

Illustrative only, using round numbers, not real rates or a real business:

	Before 1 July 2025	From 1 July 2025
GIC incurred over a year	$10,000	$10,000
Deduction available	Yes	No
Tax saved, if the business’s tax rate were 25%	about $2,500	nil
After-tax cost of that GIC	about $7,500	$10,000

The GIC amount itself hasn’t changed in this example. The business simply keeps less of the benefit. For a business carrying a large balance for a long time, the difference adds up.

Does this change the case for a payment plan?

It changes the arithmetic, not necessarily the answer. The ATO’s guidance for businesses that can’t pay on time notes that GIC continues to apply to payment plans and that paying faster reduces the total. With GIC now non-deductible, the reward for paying faster is bigger.

A payment plan still has real advantages: it’s quick to set up, it stops escalation, and it keeps you engaging with the ATO, which matters for credit reporting. It’s often the right first step. What’s changed is that a plan stretched over a long period now costs relatively more than it did.

How do I compare carrying the debt with paying it out?

Fairly, on the same basis. That means comparing total after-tax cost over the same period, then adding the non-cost factors.

Step 1: the cost of carrying the debt. Ask your tax agent to estimate the GIC you’d incur over the remaining plan term if you keep paying as scheduled. Remember it’s all non-deductible now.

Step 2: the cost of a payout loan. Get the full cost of a loan over the same period: establishment costs, ongoing charges and interest. Ask your accountant how those costs would be treated for tax in your business, rather than assuming.

Step 3: the cash-flow difference. Compare the plan instalment with the loan repayment. A loan with a different schedule can free up monthly cash even if the total cost is similar.

Step 4: the non-cost factors. These often decide it:

Factor	Carrying the debt on a plan	Paying it out with a loan
ATO as a creditor	Yes, with collection powers	No
Risk if a payment slips	Plan may be cancelled; enforcement can resume	Dealt with by the lender under the loan terms
Director penalty exposure	Remains for unpaid PAYGW, GST and SGC	Cleared for the amounts paid
Credit reporting risk for large debts	Reduced while the plan is compliant	Removed for the paid debt
Effect on other finance	Banks often decline with an ATO balance	ATO balance gone from the picture

The director penalty rules deserve special attention. Where PAYG withholding, GST or super guarantee charge wasn’t reported within three months of the due date, the only way to have a director penalty remitted is for the company to pay the amount in full. For some directors, that alone makes a payout the clear choice.

If you’d like a figure for the loan side of the comparison, start a 60-second enquiry. There’s no credit check when you first enquire.

What kind of loan pays out ATO debt?

Most often, a property-secured business loan. These run from $20,000 to $5,000,000 as first mortgages, second mortgages behind an existing lender, or caveat loans, and the ATO is usually paid directly at settlement. Lenders focus on the property and the repayment plan, so a tax balance that would stop a bank application is routine.

Without property, unsecured and cash-flow options, typically $5,000 to $500,000 and sized on turnover and bank statements, can sometimes clear smaller balances. Our pages on business loans with ATO debt and borrowing while on a payment plan go into detail, and using property equity explains the secured route.

Are there other ways to reduce what the ATO charges?

A few, and your tax agent is the right person to pursue them:

• Lodge everything on time, even if you can’t pay. It avoids failure-to-lodge penalties and gives the ATO an accurate figure.
• Pay down faster where cash allows, because GIC accrues on the outstanding balance.
• Ask about remission of GIC where there are genuine reasons, such as circumstances outside your control.
• Keep current obligations current. Adding new debt to an old balance makes every option harder.

Why not just pay the ATO down faster from cash flow?

If the business can do that comfortably, it’s often the cheapest option of all, because every extra payment reduces the balance that GIC accrues on. The catch is that most businesses carrying tax debt got there because cash was tight in the first place. Diverting too much cash to the ATO can leave the business short for wages, suppliers and the next BAS, which starts the cycle again. A sensible middle path for some owners is to clear the old balance with a loan and use a small buffer, such as a line of credit, to make sure new obligations are paid on time. The point is to stop the old debt costing non-deductible interest without creating a new problem somewhere else.

Illustrative example: re-running an old decision

Illustrative only, not a real client. A Melbourne landscaping company has been on a long ATO payment plan since before July 2025. When it was set up, the directors reasoned that the GIC was at least deductible. Their accountant points out that all GIC from 1 July 2025 isn’t, and that part of the balance relates to PAYG withholding that was reported late, leaving the directors personally exposed.

They compare the remaining plan, including non-deductible GIC, with a second mortgage over one director’s investment property. The loan pays the ATO in full at settlement, resolves the director penalty exposure and reduces the monthly outgoing. They choose the loan and agree with their accountant to review refinancing to a bank in two years.

Tax debt costing more than it used to? Let’s put a number on the alternative.

We help owners compare the real cost of carrying tax debt with clearing it, and ATO balances of every size are normal for us. A sixty-second enquiry, no credit check when you first enquire, and no lender list on the receiving end. A specialist calls you with the loan side of the comparison.

Please include the ATO balance, whether it’s on a plan, and any director penalty notices. Accurate details give you a comparison you can rely on. See if you qualify →