ATO interest charges are no longer deductible, so what are your options? 

As we explained in the July edition of our newsletter, general interest charge (GIC) and shortfall interest charge (SIC) imposed by the ATO are no longer tax-deductible from 1 July 2025. This applies regardless of whether the underlying tax debt relates to past or future income years. 

With GIC currently at 11.17%, this is now one of the most expensive forms of finance in the market and unlike in the past, you won’t get a deduction to offset the cost. For many taxpayers, this makes relying on an ATO payment plan a costly strategy. 

A couple of options may help alleviate some of the pressure: 

1. Organise an interest payment plan with the ATO (discussed in our September newsletter edition). 

1. Refinancing ATO Debt (discussed below). 

Refinancing ATO Debt 

Businesses can sometimes refinance tax debts with a bank or other lender. Unlike GIC and SIC amounts, interest on these loans may be deductible for tax purposes, provided the borrowing is connected to business activities. 

While tax debts will sometimes relate to income tax or CGT liabilities, remember that interest could also be deductible where the borrowed funds are used to pay other tax debts incurred in the course of running a business, such as: 

• GST 

• PAYG instalments 

• PAYG withholding for employees 

• FBT 

However, before taking any action to refinance ATO debt, it is essential to carefully consider whether the interest will in fact be deductible. 

Individuals 

For individuals with a tax debt, the treatment of interest on borrowings used to pay that debt depends on whether the debt arose from a business activity: 

• Sole traders: If you are genuinely carrying on a business, interest on borrowings used to pay tax debts from that business is generally deductible. 

• Employees or investors: If your tax debt relates to salary, wages, rental income, dividends, or other investment income, the interest is not deductible. Refinancing may still reduce the overall cost if the new loan’s interest rate is lower than the GIC, but it won’t generate a tax deduction. 

Example:
Sam is a sole trader who runs a café. He borrows $30,000 to pay his tax debt, which arose entirely from his café profits. The interest on the loan should be fully deductible. 

However, if Sam also earns salary from a part-time job and some of his tax debt relates to that employment income, only a portion of the interest on the loan will be deductible. 

If $20,000 of the tax debt relates to his business and $10,000 relates to his wages, then only two-thirds of the interest expenses would be deductible. 

Companies and Trusts 

If a company or trust borrows to pay its own tax debts (income tax, GST, PAYG withholding, FBT), the interest is usually deductible because the borrowing is directly related to carrying on the business. 

However, if a director or a beneficiary borrows money personally to pay the company’s or trust’s tax debts, the interest they incur is generally not deductible to them personally, the deduction is only available to the entity that incurred the tax liability. 

Practical Takeaways 

• Avoid heavily relying on ATO payment plans as a long-term solution, GIC is now a pure cost. 

• Seek advice before refinancing ATO debts to ensure any new borrowing is structured in a way that maximises potential deductibility. 

• Keep records: the ability to trace the borrowing to the underlying business tax debt is crucial. 

• Consider cash-flow planning earlier in the year to minimise exposure to GIC and SIC.