ATO interest charges no longer tax-deductible for businesses

From 1 July 2025, businesses can no longer claim income tax deductions for interest charges imposed by the Australian Taxation Office (ATO) on unpaid or underpaid tax liabilities. This change applies to both the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC) incurred in income years starting on or after 1 July 2025.

What Has Changed?

Previously, businesses could deduct ATO interest charges on overdue tax debts, reducing the overall cost of late or deferred tax payments. From 1 July 2025, businesses lose this entitlement. Any GIC or SIC incurred from this date is no longer tax-deductible, regardless of when the original tax liability arose.

This means businesses must now absorb the full cost of ATO interest charges without any tax offset.

Practical Example

If a business incurs GIC on an unpaid income tax liability after 1 July 2025, it cannot claim that interest expense as a deduction in its 2025–26 tax return or in any later income year.

Increased Cost of Carrying Tax Debt

This legislative change significantly affects businesses that manage cash flow by deferring tax payments. Without the benefit of a tax deduction, the effective cost of carrying tax debt increases, making delayed payments more expensive than in previous years.

Current ATO Interest Rates

The ATO applies GIC to unpaid tax liabilities at a rate that:

• Is reviewed quarterly
• Compounds daily

As of the most recent update, the GIC rate is 11.17%, which can quickly add to the cost of overdue tax obligations.

What Businesses Should Do Now

The removal of tax deductibility for ATO interest charges highlights the importance of timely tax compliance. Businesses should review their cash flow strategies, payment arrangements, and tax planning to minimise exposure to non-deductible interest costs.

Paying tax liabilities on time, or addressing payment issues early, can help businesses avoid higher after-tax costs associated with overdue tax debts.