ATO Interest No Longer Deductible from 1 July 2025

Take outs:

• The Australian Government has introduced a Bill proposing that from 1 July 2025, general interest charges (GIC) and shortfall interest charges (SIC) will no longer be tax-deductible. This means ATO interest will be treated like a penalty, increasing the real cost of late or underpaid taxes.
  
  
• Businesses may maintain interest deductibility by refinancing ATO debt through commercial loans. However, strict documentation and a clear link to business activity are essential. Tailored advice from a tax professional is strongly recommended.
  
  
• The ATO is shifting to a stricter compliance posture, reducing flexibility around lodgement extensions and applying tighter rules on GIC/SIC interest remission. Businesses should improve tax planning and cash flow management to avoid non-deductible interest.

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

The Australian Government has introduced a Bill proposing that from 1 July 2025, general interest charges (GIC) and shortfall interest charges (SIC) will no longer be tax-deductible. If enacted, this will increase the after-tax cost of delayed or underpaid tax liabilities.

ATO interest will therefore be treated like a penalty or fine with every dollar paid coming straight off your bottom line.

Key Considerations:

Refinancing ATO Debt:
Making Interest Potentially Deductible

While ATO interest will no longer be tax-deductible from 1 July 2025, businesses may still be able to maintain deductibility by refinancing ATO debts through commercial finance arrangements.

To prepare for these changes, businesses should consider the following:

The ATO's Shift in Focus

The ATO has signalled a significant shift in its compliance approach. Moving away from the supportive stance adopted post-COVID, the ATO is now emphasising timely lodgement and payment of tax debts to ensure fairness across all taxpayers.

This change in focus means that businesses and their accountants will have less flexibility in obtaining lodgement extensions. While accountants operating under the Tax Agent Lodgement Programme may still access extended deadlines, the general expectation is that businesses will need to proactively plan and meet their lodgement and payment obligations on time.

Tighter rules on interest remission

Previously, ATO staff often exercised discretion in remitting GIC and SIC. However, the ATO has now indicated that remission decisions will more closely follow established guidelines, limiting the circumstances in which interest relief is granted.

The remission of interest is governed by section 8AAG of the Taxation Administration Act 1953. The Commissioner may remit interest if:

Given that the ATO is approaching interest remission requests more strictly, businesses should expect fewer instances of interest remission and should plan accordingly to minimise exposure to GIC and SIC.

We will continue to monitor the implementation of this measure and provide further updates as additional guidance becomes available.

If you have any questions about how this change may affect your specific circumstances or would like to discuss strategies to minimise its impact, please don’t hesitate to contact us.