ATO interest no longer deductible

For income years commencing on or after 1 July 2025, general interest charges (GIC) or shortfall interest charges (SIC) imposed by the Australian Taxation Office (ATO) are no longer deductible.

For manufacturing businesses where cash is king, effective management of debt and financing arrangements is crucial to navigating the ATO’s upcoming changes.

Economic hardships, increased costs, challenging trade conditions and unpredictable global supply continue to create tough trading conditions for Australian businesses.

The ATO has also felt the impact of strained commercial conditions, with an estimated $105.1 billion currently owed to the ATO as stated by the Commissioner of Taxation, Rob Heferen, at a recent address at the UNSW ATAX International Conference on Tax.

As part of the ATO’s increasing review activities and tough stance on collecting debt, Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024 received Royal Assent on 27 March 2025, removing the ability for taxpayers to claim an income tax deduction for interest imposed by the ATO from 1 July 2025.

GIC and SIC

Interest is imposed by the ATO to encourage taxpayers to correctly prepare and pay their tax filing obligations.

GIC is imposed where tax or some other liability remains unpaid after the date on which it should have been paid. Interest is imposed daily and is intended to:

• encourage timely payment of taxes;
• ensure late paying taxpayers don’t have an unfair financial advantage over compliant taxpayers; and
• compensates the community for the cost of late payment.

SIC is imposed where a tax shortfall arises because of an amendment of a tax filing in respect of the period when the filing was originally due and when the assessment is corrected. SIC is levied at a concessional rate as an acknowledgement that a taxpayer is often unaware of the tax shortfall until an amendment is assessed. The ATO allows for a taxpayer to pay SIC within 21 days from the date the amendment notice is issued. If the amount remains unpaid after this date, GIC will be applied.

Interest imposed prior to 1 July 2025

GIC or SIC incurred prior to 1 July 2025 is expected to remain deductible for the 2024-25 income year. Similarly, interest imposed prior to 1 July 2025 and subsequently remitted will remain assessable in the year the interest is remitted.

From 1 July 2025

Interest deductions are no longer available to taxpayers for income years commencing on or after 1 July 2025 in respect of interest incurred from that date.

To manage finance obligations, businesses should consider:

1. Minimising ATO debts
   • This might include accelerated payment of payment plans in place and timely payment of upcoming liabilities.

2. Refinancing to more favourable finance arrangements
   • Consider alternative financing opportunities for the business that offer lower or competitive rates of interest.

• Higher interest rates on bank funded loans might result in higher interest costs but may be beneficial overall to the business when accounting for tax deductions at year end.

3. Taking advantage of lodgement extensions
   • Lodgement and payment concessions exist for certain electronic filings, and for income tax and fringe benefits tax returns lodged by your tax agent.

• Electronically lodged quarterly Business Activity Statements (BAS) automatically benefit from a two week lodgment and payment extension. Tax agent lodged BAS receive an additional two week lodgement and payment extension.

For example: BAS for the quarter ended 30 June 2025

Now is the time for businesses to act decisively – to tighten tax strategies, stay ahead of ATO scrutiny and turn compliance into a competitive advantage.

Author – Courtney Ashworth, senior manager, Tax Services, RSM Australia.