ATO to Deny Deductions for Interest on Late Tax Payments from 1 July 2025 – What It Means for You
The ATO has announced a significant change that will affect many Australian businesses and individuals from 1 July 2025. Under the new rule, interest charged by the ATO on overdue tax debts will no longer be tax-deductible.
This is a big shift — especially for small business owners who often use short-term deferrals as a way to manage cash flow. If you’ve previously relied on claiming interest on late tax payments as a deduction, this change could increase your out-of-pocket costs. Here’s what you need to know and how you can prepare.
What’s Changing?
At the moment, if you’re late in paying your tax — whether it’s BAS, PAYG, superannuation, or income tax — the ATO charges interest on the amount owing. That interest, known as the General Interest Charge (GIC) or Shortfall Interest Charge (SIC), is generally tax-deductible for businesses or individuals running a business.
But from 1 July 2025, that will no longer be the case. The government has confirmed that interest on unpaid ATO debts will no longer be a deductible expense.
Why This Matters
While interest charges from the ATO aren’t usually high compared to commercial lending rates, the ability to claim them as a tax deduction helps to reduce their sting. Losing this deduction will increase the real cost of any tax paid late.
This is especially important for:
Small and medium businesses who use ATO payment deferrals as part of cash flow management
Property investors and sole traders with variable income who sometimes fall behind on payments
Taxpayers in payment plans who have previously factored in deductibility of interest when budgeting
Why the ATO Is Making This Change
The ATO is trying to curb the practice of using unpaid tax bills as a form of short-term finance. By removing the tax deductibility of interest, the ATO is signalling that late payment should be the exception, not a planning tool.
This change also aligns with the government’s broader efforts to improve compliance and reduce the tax debt gap.
How to Prepare Before 1 July 2025
Now is the time to rethink how you manage your tax obligations. Here are some practical steps that can help reduce your exposure to ATO interest charges:
- Pay on Time Wherever Possible
The best way to avoid ATO interest? Don’t incur it. Set up calendar reminders, automate payments, and talk to your accountant about expected payment dates so you’re not caught off guard.
- Build a Tax Buffer
Consider setting up a separate bank account to regularly set aside money for tax obligations — similar to a GST or tax provision account. This helps prevent the temptation to use that money elsewhere and puts you in a stronger position at tax time.
- Speak Up Early if You’re Struggling
If you’re likely to have trouble meeting a payment, reach out early. The ATO is more likely to offer flexible options or payment plans if you act before the due date.
- Compare Costs: ATO vs Commercial Credit
In some cases, using a business overdraft, short-term loan or line of credit might now be a better option than deferring tax payments, since commercial interest remains deductible — while ATO interest won’t be.
- Always Lodge On Time – Even If You Can’t Pay
Even if you can’t pay your tax in full, it’s important to lodge your returns on time. This avoids extra penalties and keeps you in a better position to negotiate with the ATO.
Make time to review your cash flow with your accountant. Forecasting ahead lets you see potential pressure points in advance and plan accordingly.
From 1 July 2025, the tax system is getting a little less forgiving. Interest on late tax payments will no longer be deductible, which makes it more important than ever to stay on top of your tax obligations and avoid falling behind.
If you’re not sure how this change might affect you or your business, now’s the time to start the conversation. At SKD Accountants, we work closely with clients across Melbourne to stay ahead of tax changes, improve cash flow, and minimise unnecessary costs.