ATO interest charges are no longer deductible: the implications for tax debt management
From 1 July 2025, the general interest charge and shortfall interest charge imposed by the ATO are no longer deductible. This applies regardless of when the underlying tax debt arose. The change is straightforward in its mechanics and significant in its practical effect — it has altered the cost calculus of carrying an ATO debt in a way that warrants careful consideration from any taxpayer currently on a payment plan or likely to need one.
What the numbers mean now
The general interest charge is currently running at 11.17% per annum. It was already one of the more expensive forms of finance available to Australian businesses and individuals. Without the deduction that previously offset a portion of that cost, the after-tax burden is now materially higher. For a taxpayer in the 47% bracket, the loss of deductibility represents a cost increase of roughly 44% on the same debt. Treating an ATO payment plan as a routine financing tool is no longer a neutral decision.
Refinancing as a response
For businesses, refinancing an ATO debt with a bank or commercial lender may restore the deductibility of the interest — provided the borrowing can be traced to a debt that arose from carrying on a business. This applies across a range of tax obligations, not only income tax. Interest on funds borrowed to pay GST, PAYG withholding, PAYG instalments, or fringe benefits tax liabilities can be deductible where the connection to business activity is established and documented.
The position for individuals is more nuanced
Sole traders genuinely carrying on a business can generally deduct interest on borrowings used to retire tax debts arising from that business. An employee or investor whose tax debt relates to salary, rental income, dividends, or other investment income cannot — refinancing may reduce the interest rate, but it will not generate a deduction.
Where a taxpayer has mixed income sources, apportionment applies. A sole trader who also derives employment income will need to allocate the tax debt between the two income streams before a deduction entitlement can be quantified. The proportion attributable to business activity is deductible; the remainder is not.
Companies, trusts, and partnerships
For companies and trusts, interest on borrowings used to pay their own tax debts arising from business activity is generally deductible. The position changes where a director or beneficiary borrows personally to meet the entity's obligations — that interest is not ordinarily deductible to the individual.
Partnerships present additional complexity. Interest on a borrowing at the partnership level to retire a business tax debt is generally deductible. However, the ATO's position is that where an individual partner borrows personally to pay their share of a partnership tax liability, that interest is treated as a personal expense and is not deductible — regardless of the business character of the underlying partnership activity.
In practice
The practical consequence of this change is that ATO payment arrangements should now be evaluated as what they are: high-cost, non-deductible finance. For many taxpayers, the case for refinancing through a commercial lender — where the interest is deductible and the rate may be lower — is stronger than it has previously been. But the deductibility of that interest is not automatic, and acting without confirming the position first can produce an outcome no better than the one being replaced.
If you have an outstanding ATO debt or anticipate one, we would encourage a conversation before any financing arrangement is put in place.
Corinne Kirk
Partner, Accountant
1300 102 542 | 0405 106 401
corinne@egu.au
This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.