Important Tax Update: ATO Interest Will No Longer Be Deductible from 1 July 2025

Posted on by Admin

11 April 2025

The Government’s controversial plan to deny tax deductions for ATO interest charges is now law, taking effect from 1 July 2025. It has sharp implications for you personally and your business.

From 1 July 2025, you will no longer be able to claim a tax deduction for interest paid to the ATO, specifically:

  • General Interest Charge (GIC) – for late payment of tax;
  • Shortfall Interest Charge (SIC) – where a tax shortfall has been identified after self-assessment.

It’s a significant shift— these amounts must now be paid from after-tax income, making the cost of late or unpaid tax significantly higher—in many cases more expensive than commercial borrowing.

What’s Changing?

Up until now, the interest you have paid to the ATO could be claimed as a deduction, which helped to soften the blow.

From 1 July 2025:

  • GIC and SIC will be non-deductible;
  • You will be paying that interest out of after-tax dollars.

So, while the ATO is still charging interest on late or underpaid tax, the tax system will no longer share in the cost.

What Does That Mean for You?

Many businesses occasionally defer tax payments as a form of short-term working capital. It’s not uncommon, but that practice will need a rethink.

With deductibility removed, the effective cost of funding via unpaid tax will almost certainly exceed commercial borrowing rates.

  • The GIC rate is currently above 11% p.a;
  • Without a deduction, the effective after-tax cost can exceed 16%, depending on your tax rate.

That’s likely much higher than the cost of a loan from a bank or other commercial lender.

In other words, using the ATO as a fallback funding source is about to become a very expensive option.

ATO vs Bank: What’s the Real Cost of Paying Late?

The below demonstrates the after-tax effective cost comparing between funding methods pre and post legislative changes for a base rate corporate business taxpayer.

No Exceptions, No Carve-Outs

We know some businesses choose to delay tax payments during tight periods. If you’ve ever thought- “It’s easier than going to the bank” that may no longer hold true.

There are no exclusions in the Bill—not for inadvertent errors, not for small business, and not for those experiencing genuine cash flow pressure.

It’s a blunt instrument, and while it may drive behavioural change, it could hit smaller operators harder than intended.

This is a one-size-fits-all measure.

Overall Theme by The ATO

The Commissioner will retain the discretion to remit GIC and SIC, but this is rarely granted unless:

  • The delay is due to exceptional circumstances, and
  • The taxpayer has an otherwise strong compliance history.

Given how strict GIC remission already is, it’s unlikely this discretion will offer much relief under the new regime.

We are noticing a much stricter enforcement of the ATO’s penalty regime that could impact your business.

  1. Director Penalty Notices (DPNs):
    • The ATO is intensifying its use of DPNs, making directors personally liable for certain company tax debts, including Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), and Superannuation Guarantee Charge (SGC) obligations.
    • As a director, you could be held personally responsible for your company’s unpaid tax debts if they remain unreported and unpaid within specified timeframes.​
       
  2. Increased Penalty Units:
    • The value of a penalty unit has risen from $313 to $330. This increase applies to infringements occurring on or after 7 November 2024. ​
    • Many administrative penalties imposed by the ATO are calculated based on the penalty unit value.
    • Penalty units apply broadly but are scaled based on taxpayer size and nature.
    • SGEs and larger entities face significantly higher penalties due to multipliers.
    • Penalties apply for late lodgements, record-keeping failures, and incorrect disclosures.
    • Due to ATO systems now being more automated, they detect trends in late lodgements which allows a noticeable change in ATO’s approach.
       
  3. Expanded Penalty Provisions:
    • From 1 July 2026, penalties will apply to large taxpayers that mischaracterise or undervalue interest or dividend payments to avoid withholding tax. Additionally, tax scheme penalties will extend to taxpayers in a loss position.

Summary

With the new law now passed, the removal of deductions for ATO interest (GIC and SIC) has been met with strong concern across the profession and wider business community.

The change will increase the cost of doing business, disproportionately affect small businesses, and potentially shift viable debts into unrecoverable territory.

While the ATO retains discretion to remit interest, this is already applied strictly—and there’s no indication the approach will soften under the new rules.

We believe there is a compelling case for the Government to consider a one-off GIC remission amnesty prior to 1 July 2025. This would support willing taxpayers in regularising historical debts while interest remains deductible, reduce the administrative burden of recovering legacy liabilities, and help transition businesses into the new regime fairly.

Next Steps

  • Settle balances while interest is still deductible.
  • Review your cash flow practices and any reliance on delayed tax payments.
  • Reach out to your banking relationship manager or lender to explore funding alternatives.
  • If you would like us to help model the potential cost impact for you, let us know so we can assist you in your preparations ahead of time.

This new rule is part of a broader push by the Government and ATO to tighten compliance and encourage timely tax payments.

We are here to help you prepare—before 1 July 2025 arrives and beyond.

Author:
Michelle Saunders, Managing Director

This newsletter is current as of  11 April 2025, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
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