Is Interest Charged by the ATO Deductible?

Important 2025 Update for Australian Taxpayers

Big News on ATO Interest Deductions: 2025 Rules Change

What You'll Learn

• Important 2025 Update for Australian Taxpayers

Since July 2025, the rules have shifted for Australian business owners and individuals when it comes to claiming tax deductions on interest charged by the Australian Taxation Office (ATO). Historically, interest charges like the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) imposed by the ATO were tax deductible. This offered a small relief to those who found themselves facing delayed tax payments.

What Has Changed?

As of 1 July 2025, this is no longer the case. According to new legislation, you can no longer claim any tax deduction for interest the ATO charges on late or underpaid tax debts. This change is outlined under new section 26-5(1A) of the Income Tax Assessment Act 1997, applicable to all interest charges incurred on or after this date. (Source: ATO)

Why Was ATO Interest Previously Deductible?

The logic was simple: For businesses incurring interest as a cost of managing their tax affairs, deductions helped soften the blow if you found yourself on the wrong side of due dates. This included the GIC and SIC, which are charged when you underpay or pay tax late.

Who Does This Change Impact?

• Businesses: No more deductions for interest on overdue tax debts after 1 July 2025
• Individuals: You’ll feel the same pinch; plan ahead for your cash flow
• Accountants/Tax Professionals: It’s crucial to update your advice and communicate this change to all clients

Practical Impact:

If your business or you personally end up late with ATO payments, the interest is now a straight loss—there’s no tax offset. This makes it more important than ever to pay taxes on time or negotiate with the ATO early if you’re experiencing hardship.

What Can You Still Deduct?

• Interest paid on business loans (for income-generating purposes)—YES
• ATO interest charges incurred before 1 July 2025—YES (but only up to that date)
• ATO interest charges incurred after 1 July 2025—NO

Warning: If you rely on annual deductions for ATO interest to ease your cash flow, change your tax strategy ASAP. This could impact your overall tax bill.

Takeaways & Action Points:

• Review outstanding ATO debt and clear it before incurring extra costs
• Update your internal processes or personal reminders for timely tax payment
• Speak with your tax agent about other allowable deductions to optimise your tax position

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How do I get help with this from the ATO?

The ATO provides guidance through ato.gov.au, the Small Business Support Line (13 28 66), and Online Services for individuals and businesses. For complex situations, a registered tax agent provides advice tailored to your specific circumstances and professional indemnity protection. You can verify agent registration at the TPB register at tpb.gov.au.

What records do I need to keep for tax purposes in Australia?

Most tax records must be kept for five years from the date of lodgement or the date the transaction occurred, whichever is later. Records must be in English or convertible to English and must be sufficient to explain the income and deductions in your return. The ATO can request records at any time during the retention period.

When do I need a registered tax agent in Australia?

Consider a registered tax agent when your affairs involve multiple income sources, business activity, investment properties, capital gains, or overseas income. Agents extend your lodgement deadline, provide safe harbour protection, and take professional responsibility for the advice given. Verify registration at tpb.gov.au.

How does the ATO calculate penalties for compliance failures?

The failure to lodge penalty is based on penalty units ($313 per unit from 1 July 2023), accruing per 28-day period for late returns and BAS lodgements. Incorrect information penalties range from 25% to 75% of the tax shortfall depending on whether the behaviour was careless, reckless, or intentional. Proactive disclosure before an audit begins typically results in significantly reduced penalties.

What is the difference between tax avoidance and tax minimisation?

Tax minimisation is the legal arrangement of your affairs to reduce tax — claiming all eligible deductions, using appropriate structures, and timing income and expenses. Tax avoidance involves arrangements that technically comply with the law but achieve outcomes parliament did not intend. The ATO can apply Part IVA anti-avoidance rules to cancel benefits from avoidance arrangements.