As we head further into the 2025/2026 Financial Year, it is a good time to discuss a change that snuck up on July 1. It wasn’t rolled out to fanfare and ceremony, but to any business with an unpaid tax bill, it’s enormous. The rule is straightforward but heart-stopping: ATO interest charges are no longer deductible.
If you have ever had a payment plan with the Australian Taxation Office (ATO) or were in arrears on a bill, you are well aware of the General Interest Charge (GIC) or Shortfall Interest Charge (SIC). Until last year, while unpleasant, that interest could be claimed as an expense, taking some of the bite out of it. This is now no longer the case.
This not only relates to new debt, it is also for any GIC or SIC that has been incurred on or after July 1, 2025, regardless of how old the initial debt was. To recap; GIC relates to General Interest Charges (GIC) which are applied when a business tax debt or liability is past due. Alternatively, Shortfall Interest Charges (SIC) are used when your tax return is amended and a shortfall has been determined. Either way, having an ATO debt will become a lot more costly.
But here’s the crucial part, and why you’re reading this: There is a pathway through this. While ATO interest itself is now off the table, the interest on a commercial bank loan used to pay off that ATO debt can still be perfectly deductible. The catch? It has to be structured correctly. This isn’t a magic trick; it’s about applying long-standing tax principles to a new reality.
This guide will take you through what changed, why you should care, precisely who gains from refinancing, and the step-by-step process so that you get it right.
What Actually Changed on July 1, 2025
Historically, the ATO interest charges were taxed no differently than any other interest expense paid to finance business commitments. New legislation has come down hard.
Before July 1, 2025: The GIC and SIC payments were a tax deduction for the majority of companies and individuals.
After July 1, 2025: Interest due from and after this date on SICs and GICs is not tax-deductible. Whether the tax is due from a prior income year or you’re already on a prior payment schedule, it doesn’t make a difference. It’s the date of charge.
The Bottom Line: Now, with the deductibility eliminated, you’re paying the entire, after-tax price. An 11% GIC rate now feels like an 11% price, whereas previously, for a business that’s operating on a 25% tax rate, it was more of an 8.25% price after the deduction. That’s a big increase.
The Lifeline: How Bank Interest Can Still Be Deductible
This is the key concept to understand. New legislation only says that interest paid to the ATO is not deductible. It didn’t alter what constitutes interest deductible in Australia.
The general rule is that you may claim interest deductions when the money borrowed is for the purposes of deriving assessable income or for the purpose of gaining or producing assessable income from business.
This is where the ATO’s own ruling, TR 95/25, is useful. This ruling clearly says that if you borrow money to consolidate a debt that you already have, interest on the new loan continues to be deductible if the original debt was for income-generating purposes. It is always a question of “use” of borrowed money.
What This Means in Practice
If you’re a company and use a bank loan to settle an ATO debt that arose from business activities (e.g., company income tax, BAS, instalment activity statements, or PAYG withholding), then interest paid on the bank loan would normally be deductible.
A Caution in Warning: This is not to say all loans to settle the ATO can be deducted. The strategy will only work on two legs:
- The Purpose: You must have had the original tax liability due to your business or income-streaming activity.
- The Paper Trail: You need to document every move carefully so that the direct connection between the loan and the business debt will clearly be evident.
Who Can and Who Can’t Use This Strategy?
This is not a cookie-cutter solution. Your personal situation determines if and when this refinancing measure will be viable for you.
Businesses, Trusts, and Partnerships: In business ventures of these sorts, this approach is simplest. Interest on a commercial loan to pay business-related ATO debts is generally allowable, provided that paper is in position.
Sole Traders: The same principle will apply. If your ATO debt arose as a result of continuing your business, then interest on a properly constructed refinance will be deductible. Your tracing and your facts must be as clear as crystal.
Non-Business Individuals (Employees/Investors): This is the group who are disadvantaged. If you borrow to settle an Australian domestic bill for tax (such as tax on your income or investment profits), interest cannot be deducted. The ATO always applies this as a domestic/private cost. Avoid the costly error of thinking otherwise.
Not sure what category you are in? This is where a brief consultation with an advisor will save you heaps of time and possible distress.
Why This Matters So Much: The Numbers Do Not Lie
Let’s leave theory behind and look at reality. The pragmatic effect of this shift can most clearly be appreciated from side-by-side analysis.
Scenario: Your business has $120,000 owing to the ATO.
Option 1: Leave it with the ATO.
- You’ll repay GIC at market rate (~11% p.a.).
- It compounds daily.
- Most importantly, it’s no longer deductible.
- Your net cost is the whole 11%.
Option 2: Refinance using a Business Bank Loan.
- You take up a business loan or an overdraft at a variable rate of, say, 9% p.a.
- Interest on this overdraft is deductible because it’s used for business.
- For a company that is taxed 25%, the after-tax rate on the loan is 9% x (1 – 0.25) = 6.75%.
- You also get more stable terms of repayment and eliminate compounding daily.
The Payoff: By refinancing, you can quite literally reduce your carrying cost on the debt by nearly half. That margin is not an abstraction of paper; it’s actual money that remains in your business.
Your Practical Cheat Sheet
Let’s condense the rules into three simple lines:
- ATO Interest (GIC/SIC) incurred on or after 1 July 2025 → NOT DEDUCTIBLE.
- Bank/Overdraft Interest used to pay/refinance an ATO debt → OFTEN DEDUCTIBLE for business taxpayers, if the borrowing is for income-producing purposes and is cleanly documented.
- Individuals paying personal tax → NO DEDUCTION for interest on a loan to pay that tax.
How to Structure the Refinance Correctly: A Step-by-Step Guide
Getting this wrong can nullify the entire benefit. Here’s how to get it right.
1. Pick the Right Product in the Right Name:
- Use a business loan or overdraft facility. Do not use a personal loan or credit card.
- This is crucial: The loan must be taken out in the name of the entity that owes the tax. Your company must borrow for the company’s tax debt. Your trust must borrow for the trust’s debt. Mixing entities is a classic mistake.
2. “Paper the Purpose” – Create a Paper Trail:
- Don’t just transfer the money. Formally document the purpose of the loan.
- For a company, pass a board resolution or create a minute stating: “The purpose of this loan is to provide working capital to discharge the company’s business tax liabilities with the ATO.”
- For a sole trader, create a simple file note for your records stating the same.
3. Keep the Tracing Impeccably Clean:
- This is the step everyone rushes and many get wrong.
- When the bank lends the money, have it paid into a dedicated, segregated business account. Do not pool it with other money.
- Immediately transfer the exact amount from that account to the ATO. Do not use the money for anything else. The transaction should be: Bank Loan -> Segregated Account -> ATO, all in the same day if possible.
4. Store All the Evidence:
- Keep a dedicated file with: The loan contract, the bank statement showing the drawdown, the bank statement showing the transfer to the segregated account, the receipt from the ATO, and your board minute/file note.
5. Manage the Ongoing Risk:
- Remember that variable rates can go up. Factor this into your cash flow.
- Create a plan to pay down the principal over 12-24 months. This isn’t free money; it’s a strategy to manage cost.
- Review your deductibility annually. If your business circumstances change, you may need to adjust.
Common Pitfalls to Avoid (We See These All the Time)
- The Mixed-Purpose Account: Paying the ATO from an account you also use for school fees or groceries is a surefire way to “muddy the waters” and invite scrutiny.
- Using a Credit Card: Tempting for points, but a terrible idea. The high rates are bad enough, but the comingling with personal purchases makes tracing nearly impossible.
- The Home Loan Redraw: This is complex. Redrawing from a mortgage that has a private purpose creates a mixed-purpose loan and can lead to long-term apportionment headaches.
- The Wrong Entity Borrows: Your family trust cannot borrow money to pay the tax bill of your unrelated trading company. The entities must match.
- Assuming an ATO Plan is Cheaper: This was sometimes true before. Now, with the loss of deductibility and daily compounding, a commercial loan is almost certainly cheaper on an after-tax basis.
Frequently Asked Questions (FAQs)
Q: My ATO payment plan started before July 1, 2025. Can I still claim the interest?
A: You can only claim the interest that was incurred up to June 30, 2025. Any GIC or SIC added to your account on or after July 1, 2025, is not deductible, even though the plan is old.
Q: Doesn’t the ATO sometimes remit (waive) interest?
A: They can, in cases of genuine hardship or if the delay was their fault. However, you should never plan your cash flow around this possibility.
Q: If I borrow money personally and then on-lend it to my company to pay its tax, can I claim the interest?
A: This is a complex area of related-party lending. It can work, but only under very strict conditions with a formal agreement. Do not attempt this without specific written advice from a tax advisor.
Q: Where do I find the current GIC rate?
A: The ATO updates and publishes it quarterly on their website.
The Take-Home Message
The landscape changed on July 1, 2025. ATO interest now carries its full, undiluted cost. However, for business owners, the principles of tax deductibility remain intact. By strategically refinancing an ATO debt with a commercial loan, you can swap a non-deductible expense for a deductible one, significantly lowering your real-world costs.
This isn’t about exploiting a loophole; it’s about applying fundamental tax law correctly. The difference between success and failure lies entirely in the details: purpose, entity, and meticulous documentation.
Need a Clear Plan for Your Situation?
We can help you navigate this change with confidence. We can:
- Quantify the exact after-tax cost of your options using your real numbers.
- Prepare the precise paperwork you need to keep your interest deductible.
- Set a realistic cash-flow plan to help you clear the debt efficiently.
If you’re ready for the next step and to discuss your business, get in touch now.
This advice is general in nature, and personalised advice for your situation should be sought before making decisions.
