ATO debt interest changes start on 1 July 2025 with shortfall interest charges on income tax and general interest charges to the ATO no longer tax deductible. From the start of the new financial year, interest on repayments to the ATO, depending on when remitted and incurred, will not be treated as eligible tax deductions. Instead of being able to deduct these outgoings from pre-tax income, the costs will need to come from the bottom line – from income on which tax has been paid.
This is an important change to the business tax laws and one which may be of significance to many operators. The announcement of the change was made in the 2023/24 MYEFO – the Federal Government’s Mid-Year Economic and Fiscal Outlook but is now due to come into effect from the start of the 2025/2026 financial year.
Businesses have an expectation that their operational costs including interest charges will be deductible. Many count on it. This could have consequences, especially for smaller businesses where the bottom line, the profit margin, represents the return or income for the owner. We offer finance products which may be used for tax payments and do include deductible interest and competitive interest rates. With the late RBA rate cut, it may be more affordable than you think to finance your tax payments. We update on the details of the changes and the solutions available.
ATO Debt Interest Changes
Changes to the tax deductibility of interest on debts to the ATO were part of the 2023/24 MYEFO and come into effect from 1 July this year. When a debt is incurred and when a payment is remitted do have significance to the change.
GIC are general interest charges and they are charged on a daily basis. SIC which are charges on unpaid income tax shortfall are applied in the financial year of the service of the notice of assessment.
The financial year in which charges are incurred affects the deductible of the interest. If the charge was incurred before the change comes into effect – pre-1 July 2025, interest is deductible for the 2024/25 and earlier financial years.
Where a charge in years prior to 1 July 2025 are deducted from the taxable income however the remittance or payment of the charge occurred in a later year, the amount paid is to be included in the year of payment assessment. That may affect the deductibility status. Business owners may be advised to consult with their accountant re their specific situation and ensure all relevant payments are made prior to 30 June 2025 to ensure they are tax deductible.
All new interest charges that are incurred on or after 1 July 2025 are not a tax deduction. These include the GIC and SIC on tax payments that are late, and on the outstanding amounts for the year pre and post 1 July this year.
Businesses that may be subject to the change in tax deductible status of interest charges may have to pay a lot more in real terms when this change comes into effect. Considering your financing options now may allow you time to prepare and reduce the cost of repaying debts to the ATO.
The Real Cost of Upcoming ATO Debt Interest Changes
These upcoming changes mean the expectation that the costs of running a commercial operation are tax deductions is no longer a reality. The interest accrued on paying outstanding debts to the taxation office will no longer be treated as a business expense, but a penalty.
With these expenses not able to be deducted from pre-tax income, they need to be covered by profit. From funds on which you have already paid tax. Essentially adding to the real cost. The interest rate charged by the ATO and accounting for making the payment from post-tax income makes it larger expense in real terms. A rough estimation could mean businesses are paying up to a 15% interest rate on these interest charges. An extremely high rate considering the rates available on commercial finance.
Commercial Loans for Tax Payments
A workable and attractive alternative to continuing to make non-deductible payments to the ATO is to take on a commercial loan for the debt. Our portfolio of commercial loans includes facilities to suit all types and sizes of businesses for expenses not suited to secured and asset acquisition financing. We secure the most competitive rates from a vast lender network to ensure the solution is affordable and works with individual cash flow requirements. And interest on business loans is deductible.
Unsecured Business Loans are one option to consider. This is a versatile credit facility as it can be used for many general business expenditure items, including tax bills. With no collateral required, even small businesses may use this option. Our rates are competitive, terms are flexible, and the interest is deductible.
Another option to consider is a Business Overdraft Facility. Many businesses will already operate with a line of credit and/or know the flexibility that such a facility can offer. Our access to non-bank lenders offering overdrafts may present an even more affordable option than your bank overdraft.
Speak our brokers for quotes on options to suit your business.
To discuss commercial loans to address the upcoming ATO debt interest changes, contact Business.Finance on 1300 000 033.
DISCLAIMER: THE SPECIFIC PURPOSE IN PROVIDING THIS ARTICLE IS FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED AS THE SOLE SOURCE OF FINANCIAL INFORMATION ON WHICH TO MAKE BUSINESS FINANCE DECISIONS. BUSINESS OWNERS WHO REQUIRE ADVICE OR GUIDANCE AROUND THEIR SPECIFIC FINANCIAL CIRCUMSTANCES ARE RECOMMENDED TO CONSULT WITH AN ADVISOR OR ACCOUNTANT. NO LIABILITY IS ACCEPTED IN REGARD TO ANY MISREPRESENTATIONS OR ANY ERRORS RE ANY DATA, SPECIFICS, POLICIES AND OTHER INFORMATION AS SOURCED FROM OTHERS.
