So, what exactly has changed, and what can you do about it? Here’s the lowdown:
Say goodbye to tax deductions on ATO interest
In the past, if you owed money to the ATO and copped a general interest charge (GIC) or shortfall interest charge (SIC), you could soften the blow by claiming the interest as a deduction at tax time. That’s no longer the case from July 2025 onwards, regardless of whether your debt is old or new.
These interest rates are nothing to sneeze at either. The current GIC sits above 11%, making it one of the pricier options for anyone short on cash. Without the cushion of a tax deduction, leaving unpaid debts with the ATO could become a much more expensive habit.
Looking for alternatives? Refinancing might be worth a thought
If you’re staring down an ATO payment plan and the numbers aren’t adding up, you might be wondering if there’s a better option. For some businesses, taking out a loan with a bank or lender could help. Loans that are directly tied to your business activities could still have deductible interest, helping to ease the strain.
Refinancing might also make sense if your tax debt is linked to things like GST, PAYG instalments, employee withholding, or fringe benefits tax. But here’s the catch: whether the interest is deductible depends on what the debt relates to, so it’s always best to check the details for your situation.
Breaking down the rules for different types of taxpayers
The way these rules affect you will depend on whether you’re running a business, investing, or working as an employee. Here’s a quick summary:
Individuals
- Sole traders: If your tax debt comes from running your business, interest on a loan to pay that tax could still be deductible. For example, if you run a café and borrow to settle your tax bill from sales, you can generally claim that interest.
- Employees & investors: If your tax debt is from your salary, rental properties, or investments, any loan interest you pay won’t be deductible. You might still save if the new loan offers a lower rate, but don’t expect a tax break.
If your debt is a mix, partly from business and partly from your salary, you’ll need to divide up the loan interest accordingly. Only the slice related to your business activities can be claimed.
Companies and trusts
Companies and trusts can usually claim interest on a loan if it’s to pay their own business tax debts. If a director or beneficiary pays the debt with their own funds though they generally miss out on claiming the interest as a deduction.
Partnerships
Partnerships can claim interest when they borrow as a group to cover a business tax shortfall. But if an individual partner borrows to pay their share, the ATO sees it as a personal expense, not something you can deduct—even if the debt is linked to the partnership.
What does this mean for you?
With these changes, what used to be a handy tax deduction for late payment interest is off the table. Now, ignoring or delaying an ATO debt could cost you significantly more. Refinancing your tax debt with a traditional lender could give you access to a lower rate, and if the loan is for business purposes, let you keep some deductions.
The important bit? Make sure you understand where your debt comes from and whether you’re likely to be eligible for deductions. Sorting out business debts from personal ones can make all the difference.
Let’s Chat! LEAD Can Help
Finance rules can be complex, but you don’t have to figure it out alone. If you’ve got questions or need a game plan tailored to your situation, chat with our team at LEAD. We’ll help you stay on top of these changes and work with you to find the best approach for your business or personal finances.
