For many taxpayers, leaving debts with the ATO has just become more expensive.
From 1 July 2025, general interest charges (GIC) and shortfall interest charges (SIC) imposed by the ATO are no longer tax-deductible, regardless of whether the underlying tax debt relates to past or future income years. With the GIC currently at 11.17%, this is now one of the most costly forms of finance available — and unlike before, there is no deduction to offset the expense. For many, relying on an ATO payment plan could now be an expensive strategy.
Refinancing ATO Debt
In some cases, businesses can refinance tax debts through a bank or other lender. Unlike GIC or SIC, interest on these loans may be tax-deductible if the borrowing is connected to your business activities.
This can include tax debts such as:
· GST
· PAYG instalments
· PAYG withholding for employees
· FBT
Before refinancing, it’s important to carefully consider whether the interest on the loan will be deductible.
Individuals
For individuals, whether interest is deductible depends on the source of the tax debt:
· Sole traders: If the tax debt arises from a business you genuinely operate, interest on borrowings used to pay that debt is generally deductible.
· Employees or investors: If the debt relates to salary, wages, rental income, dividends, or other investment income, the interest is not deductible. Refinancing may still reduce overall interest costs but will not generate a tax deduction.
Example: Sam runs a café as a sole trader. He borrows $30,000 to pay his tax debt, which arises entirely from his café profits — the interest is fully deductible.
If part of the debt relates to salary from a part-time job, only a proportion of the interest would be deductible. For instance, if $20,000 relates to his business and $10,000 to employment income, only two-thirds of the interest would be deductible.
Companies and Trusts
For companies or trusts, interest on borrowings to pay their own tax debts (income tax, GST, PAYG withholding, FBT) is usually deductible if the debt arises from carrying on a business.
However, if a director or beneficiary borrows personally to cover these debts, the interest is generally not deductible.
Partnerships
Partnership arrangements are more complex.
· If the borrowing is at the partnership level and relates to a tax debt from the partnership’s business activities, the interest is typically deductible. This includes GST or PAYG withholding obligations.
· If an individual partner borrows personally to pay their share of the partnership’s tax debt, the interest is treated as a personal expense and is not deductible, even if the partnership carries on a business.
Practical Takeaways
With GIC and SIC no longer deductible, leaving tax debts outstanding is now more costly than ever.
Refinancing with an external lender may:
· Provide a potential tax deduction (if connected to business activity)
· Access lower interest rates
The key is to distinguish between tax debts arising from business activities and other debts. In mixed situations, you may need to apportion any deduction.
If you’re unsure how these rules apply to your circumstances, talk to us before arranging finance. With the right strategy, you can manage tax debts efficiently and avoid unexpected costs.