ATO Interest No Longer Tax Deductible From 1 July 2025 – What You Need to Know
- David Tilley
- May 27
- 2 min read
From 1 July 2025, interest charged by the ATO on late or underpaid taxes will no longer be tax deductible. This is a significant change for anyone who has ever paid tax late or had their tax returns adjusted by the ATO.
What is changing?
The government has passed a new law that removes the tax deduction for two types of ATO interest charges:
General Interest Charge (GIC):Â Charged when tax is paid late (including GST, PAYG, income tax, FBT, etc.).
Shortfall Interest Charge (SIC):Â Charged when the ATO amends your tax return and finds you owe more than you originally declared.
Until now, these interest charges were generally tax deductible for individuals and businesses. That meant the effective cost was reduced depending on your marginal tax rate. For example, someone on the top tax rate only wore about 53% of the cost after tax. That will no longer be the case.
From the 2025–26 financial year onwards, the full amount of any ATO interest will be a real cost to you, with no offsetting tax deduction.
Why is this happening?
The Government has said the change is designed to encourage people and businesses to:
Pay the right amount of tax on time
Avoid relying on the ATO as a de facto lender
Level the playing field for those who do the right thing from the outset
The measure is also expected to raise around $500 million over the next few years.
What does this mean for you?
This is a wake-up call for taxpayers who are managing cash flow by delaying tax payments or who often find themselves with amended assessments from the ATO. After 1 July 2025, those interest charges will hit harder.
Key points to keep in mind:
Interest from the ATO is expensive. The current GIC rate is over 11% per annum and compounds daily.
You will no longer get any tax relief on these charges. From a tax perspective, they become a pure cost.
This applies even if the tax relates to an earlier year. If the interest is charged after 1 July 2025, the deduction is gone.
What should you do now?
If you or your business have any unpaid tax or are prone to receiving ATO amendments, now is the time to:
Review your position before 30 June 2025. Consider paying any overdue amounts to avoid nondeductible interest costs.
Think about funding options. In some cases, it may be more cost-effective to borrow from a bank or other lender to pay tax on time. Interest on business loans may still be deductible in many cases, whereas ATO interest soon will not be.
Plan ahead. Work with us to stay on top of obligations and minimise the risk of future adjustments by the ATO.
What is not changing?
You can still claim interest deductions on loans taken out for business or investment purposes (as long as the interest is not private or capital in nature).
Any ATO interest charged before 1 July 2025 remains deductible under current rules.
Need Help?
If you would like to discuss your tax position or are unsure how this change might affect you or your business, please get in touch with our office. We are here to help you stay informed, prepared and one step ahead.