ATO interest is no longer tax deductible: what it means for carrying a tax debt

For years, carrying a tax debt had a quiet sweetener. The general interest charge the ATO added to unpaid amounts was tax deductible, which softened the real cost for businesses that paid tax. Many owners treated a payment plan as a reasonable, if unglamorous, form of finance.

That changed on 1 July 2025. This guide explains what changed, why it matters for any business with an ATO balance, and how to think about the options now.

What changed on 1 July 2025?

The ATO’s summary is short: taxpayers can no longer claim an income tax deduction for ATO interest charges incurred on or after 1 July 2025. It covers both:

• General interest charge (GIC) — charged on tax that’s paid late, including on debts in a payment plan
• Shortfall interest charge (SIC) — charged on shortfalls when an assessment is amended

The government announced the measure in the December 2023 Mid-Year Economic and Fiscal Outlook. The ATO confirms it is now law.

Why does it matter so much?

Because the effective cost of owing the ATO went up for businesses that pay tax.

Think of it simply. Before the change, if a business paid $10,000 of GIC and was in a position to claim it, the deduction reduced its taxable income — so the true, after-tax cost was less than $10,000. After the change, $10,000 of GIC costs $10,000. Nothing softens it.

At the same time, two things haven’t changed:

• GIC compounds daily. Interest is charged on interest.
• GIC still applies on payment plans. The ATO says so directly. A payment plan stops the debt from escalating to firmer action, but it doesn’t stop the interest.

Put together, a tax debt that runs for a year or two can cost noticeably more in real terms than it used to.

Is a payment plan still a good option?

Often, yes. Payment plans have real advantages:

• they’re available online for debts of $200,000 or less, and by phone for larger amounts
• they show the ATO you’re engaging, which matters for how it treats the debt
• instalments can be matched to your cash flow

What’s changed is the comparison. A payment plan used to look cheap relative to other ways of paying the debt because of the deduction. Without it, it’s worth putting the full cost of each option side by side.

How should you compare a payment plan with funding?

Ask your accountant to compare the options in total dollars over the same period, after tax. A simple framework:

Question	ATO payment plan	Business funding
Upfront cost	Usually none	Any establishment or legal costs
Ongoing cost	GIC, compounding daily	The lender’s charges — ask for the total in dollars
Tax treatment of the cost	Not deductible for GIC incurred from 1 July 2025	Ask your accountant how it’s treated in your circumstances
Effect on ATO balance	Reduces gradually	Cleared when paid
If an instalment is missed	The ATO may cancel the plan and take further action	The lender’s terms apply
Flexibility	Defined instalments	Depends on the facility
Security required	None	Depends on the option — property-secured or unsecured

There’s no universal winner. A business with a modest balance and steady cash flow may be better on a payment plan. A business with a larger balance, a clear exit (a property sale, a large receivable, a refinance) and a desire to clear the ATO quickly may find funding simpler — especially if the debt is creating other problems, like supplier concern or a looming director penalty notice.

What other costs come with ATO debt?

Interest is the visible cost. There are others:

• Debt disclosure. The ATO says it may report a business tax debt to credit reporting bureaus where at least $100,000 is overdue by more than 90 days, the business has an ABN, isn’t an excluded entity and isn’t effectively engaging with the ATO. It gives 28 days’ notice first. A listing can affect supplier terms and future finance.
• Director penalties. For companies, unpaid PAYG withholding, GST and super guarantee charge can lead to director penalty notices with a 21-day window.
• Refund offsets. Refunds and credits are generally applied against outstanding debts, which can disrupt cash flow you were counting on.
• Time. Managing a long-running tax debt takes owner attention every month.

What should you do first?

1. Get the real number. Pull your statement of account from Online services for business — it shows each account’s balance, overdue amount and payment reference number. See ATO statement.
2. Lodge everything that’s due. The ATO’s guidance is to lodge on time even if you can’t pay, and to contact it before the due date.
3. Download the transactions to see how much GIC has been added so far.
4. Talk to your accountant about the after-tax cost of each option.
5. Decide deliberately. A payment plan you’ve chosen is very different from one you drifted into.

If funding is on the table, the ATO payment deadline page shows what’s realistic by timeline, and a 60-second enquiry gets a real person looking at it.

An illustrative comparison

Illustrative example only — no real business, no real rates. A wholesale business owes the ATO about $140,000 across BAS and income tax. Its accountant models two paths over 12 months:

• Payment plan: monthly instalments, with GIC compounding daily on the reducing balance and no deduction for that GIC.
• Short-term secured funding: the debt paid in full now, with the facility repaid from the sale of a surplus warehouse unit that is already listed, plus trading income.

The accountant puts both in total dollars, after tax, with the timing of each payment. The business also weighs non-cost factors: the debt is above the disclosure threshold, and a supplier has asked about its tax position. In this illustration, the owner chooses to clear the ATO with funding and repay it from the unit sale — but the right answer depends entirely on the numbers and circumstances.

Does this change how you should plan for tax?

For many businesses, yes. With the deduction gone, it’s worth building tax into weekly habits so the ATO is never the default lender:

• Set aside GST and PAYG withholding in a separate account as you invoice and pay wages.
• Put every BAS date on a 90-day calendar — see the deadline calendar guide.
• Review PAYG instalments with your accountant if income has changed, rather than falling behind.
• Treat a growing ATO balance as an early warning sign, not a funding strategy — see cash crunch warning signs.

What should you ask your accountant?

Five questions get to the heart of it:

1. What is our full ATO balance today, including interest, across every account?
2. What would that balance cost us over the next six or twelve months on a payment plan, in dollars?
3. How would that compare with paying it now using funding, after tax?
4. Are all lodgements up to date, and does anything limit our options — for example, any late reporting by a company?
5. What should we change so the ATO isn’t our default lender next quarter?

Bring those answers to any funding conversation. They make it far easier to see whether clearing the debt now genuinely compares well.

Carrying ATO debt? Compare your options properly

The change on 1 July 2025 makes it worth looking again at how your business carries tax debt. Asking the Deadline Desk what’s possible involves no credit check, and your enquiry stays with one team instead of being shopped to a list of lenders. A real person looks at your ATO position and calls you back.

If you enquire online, please enter the full ATO balance from your statement and any notices you’ve received — accurate details are what let us match you to an option that genuinely compares well. Or ring 1300 752 188.