From 1 July 2025, interest charged by the ATO is no longer tax-deductible. That means the interest on your tax debt now comes straight out of your cash flow, with no offset at tax time.
We’re already seeing businesses underestimate the impact, simply because they are still thinking about ATO debt the way they always have.
It’s a subtle shift, but one that can have a real impact for many businesses over time.
What’s Actually Changed
When tax is not paid by the due date, the ATO applies interest, commonly referred to as the General Interest Charge (GIC) or Shortfall Interest Charge (SIC). Until recently, that interest was generally deductible, which softened the impact.
That’s no longer the case. Any interest charged from 1 July 2025 onwards cannot be claimed as a deduction, even if the original tax debt relates to an earlier period.
The ATO interest rate has not changed, but the way it affects your cash flow has.
Why This Matters More Than You May Think
The ATO interest rate sits around the 11% mark and compounds over time. Without the deduction, the effective cost of carrying tax debt is now significantly higher.
For businesses that regularly rely on payment plans, this quietly increases costs in the background, turning what once eased short-term cash flow pressure into a growing and persistent expense over time.
At Stones Sharp, we are seeing this have a significant negative effect on the cash flow of small businesses. It reflects a firmer ATO stance in reining in outstanding tax debts, and it places greater pressure on businesses that may already be managing tight margins.
A Real-World Example
Under the old rules, the interest charged by the ATO could be deducted, reducing the after-tax cost. Under the new rules, that same interest is paid in full, with no tax offset. Over a year, the difference can amount to several thousand dollars, not because the debt has changed, but because the rules around interest have.
It’s this detail that many business owners have overlooked.
Say a business carries $100,000 in ATO tax debt for a year. At an interest rate of around 11 per cent, the ATO charges roughly $11,170 in interest.
After 12 months, the balance is about $111,170.
Before 1 July 2025
That interest was generally tax-deductible. For a company on a 25% tax rate, the real cost was closer to $8,400 after tax.
From 1 July 2025
That same $11,170 is no longer deductible. The business wears the full cost.
Same debt. Same interest rate. Higher real cost.
Rethinking How Tax Debt Is Managed
With interest no longer deductible, ATO debt now places greater pressure on cash flow. As a result, many businesses are reassessing how they manage tax liabilities.
Depending on the situation, that might mean clearing tax debt earlier to limit interest, or looking at alternative funding options where interest may still be deductible. For some, restructuring debt may offer a lower overall cost and more stable repayment terms.
From our perspective, it is now more important than ever for businesses to actively manage and budget future cash flow. In some cases, financing the debt through a third-party lender may provide greater certainty and preserve the deductibility of interest, depending on the structure and purpose of the borrowing.
There’s no one-size-fits-all solution, but doing nothing is now more expensive than it used to be.
When Refinancing Makes Sense
Refinancing ATO debt isn’t right for every business, but in the right circumstances it can be worth exploring. The decision usually comes down to comparing interest rates, understanding deductibility, and weighing up the impact on cash flow over time.
Replacing one liability with another isn’t about avoiding responsibility, it’s about choosing the most cost-effective structure for your business.
Stones Sharp can assist with helping you and your business seek finance from a lending institution.
How Stones Sharp Supports Clients Through Changes Like This
We work closely with clients to review tax positions, payment plans, and cash-flow strategies as rules change. With ATO interest now non-deductible, it’s become even more important to understand the true cost of holding tax debt.
That might involve reviewing existing arrangements, modelling the impact of interest, or exploring alternative options that better suit the business.
“Owing money to anyone can be overwhelming, particularly if owed to the ATO. Generally, there are options available to you and your business.” – Shane Borg
If you’re unsure how this change affects your business, Stones Sharp can help you look at the numbers and decide on the most sensible way forward. Get in touch with our team today.
