ATO interest is no longer deductible: what a tax debt really costs now

From 1 July 2025, the interest the ATO charges you is no longer deductible. The general interest charge for the September 2025 quarter is 10.78% a year, compounded daily. Carry an $80,000 tax debt for twelve months at that rate and it costs about $9,100. Under the old rules a company on the 25% rate got roughly $2,280 of that back as a deduction. Not any more. The debt did not change and the rate did not change. The after-tax cost of carrying it went up by exactly a third.

What changed, and the Act that did it

The measure was announced on 13 December 2023 in the 2023–24 Mid-Year Economic and Fiscal Outlook. It became law on 27 March 2025, when the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025 received Royal Assent as Act No. 29 of 2025.

Schedule 2 of that Act is titled "Denying deductions for interest charges" and runs to four items. It repeals paragraph 25-5(1)(c) and subsection 25-5(7) of the *Income Tax Assessment Act 1997* — the tax-related-expense provisions that carried the deduction. It inserts a new subsection 26-5(1A): "you cannot deduct under this Act the general interest charge or the shortfall interest charge." And it sets the start date: the amendments apply in relation to assessments for income years starting on or after 1 July 2025.

Read that application provision properly, because it is not identical to "interest incurred from 1 July 2025". For a business with a 30 June year end the two line up exactly. For an entity on a substituted accounting period they do not. The ATO's guidance on denying deductions for ATO interest charges confirms that a substituted-accounting-period entity keeps the deduction until its next accounting period starting after 1 July 2025. An entity on a December balance date is therefore still under the old rules for interest incurred in September 2025.

One thing the rule does not care about is how old the underlying debt is. GIC accruing now on a 2022–23 liability gets no deduction. What matters is the income year in which the interest is incurred, not the year the tax related to.

The rates, and how they are set

Both charges are set by formula, reset every quarter, and are generally announced about two weeks before the quarter begins.

For the September 2025 quarter the ATO's published general interest charge rates are 10.78% a year, or 0.02953425% a day. The shortfall interest charge rates for the same quarter are 6.78% a year, or 0.01857534% a day. The quarter before, April to June 2025, ran at 11.17% and 7.17%.

The base for both is the monthly average yield on 90-day bank accepted bills published by the Reserve Bank. SIC adds an uplift factor of 3 percentage points under section 280-105 of Schedule 1 to the *Taxation Administration Act 1953*. GIC adds 7 under section 8AAD of the same Act. The four-point gap between 10.78% and 6.78% is exactly that difference in uplift, which puts the base rate for the September quarter at 3.78%.

Both compound daily, which is the part people underestimate. A nominal 10.78% compounded daily comes out at about 11.38% over a full year.

What a tax debt costs now: a worked example

Take a building company in Robina. It is a base rate entity, so it pays company tax at 25%. At 1 July 2025 it has $80,000 of unpaid tax sitting on its integrated client account.

Hold that for one quarter — 90 days at 0.02953425% a day, compounding — and the GIC is $2,154.66. That figure is exact, because the September quarter rate is known.

A twelve-month figure requires an assumption, and here it is: the illustration below holds the rate at the September 2025 quarter's 10.78% for a full year. Rates reset quarterly, so treat it as an illustration and not a forecast.

Twelve months at 10.78% compounded daily on $80,000 is $9,104.58 of interest.

• Before 1 July 2025. The $9,104.58 was deductible. At the 25% company rate the deduction was worth $2,276.14. Real after-tax cost: $6,828.43, or 8.54% of the debt.
• From 1 July 2025. No deduction. Real after-tax cost: $9,104.58, or 11.38% of the debt.

The change costs that company $2,276 in a year on an $80,000 debt. That is the entire effect of the amendment on one business.

For a sole trader the gap is wider, because the deduction was worth more. On the 37% marginal rate plus the 2% Medicare levy, the same $9,104.58 of interest used to cost $5,553.79 after tax, or 6.94% of the debt. It now costs the full $9,104.58. That is a $3,551 swing on a single $80,000 debt.

Interest incurred before 1 July 2025 is still deductible

Do not over-correct. GIC and SIC incurred before 1 July 2025 remain deductible in the 2024–25 and earlier income years. If you are finalising a 2025 return, the interest in it is still claimable.

GIC on unpaid income tax is incurred daily, so a debt running across 30 June 2025 splits cleanly by date. SIC does not behave that way. SIC is incurred in the income year you are served the notice of amended assessment. A 2022–23 shortfall amended in August 2025 produces SIC that is entirely non-deductible, even though almost all of the interest period sits before the change. That is the whole rule, and there is no apportionment in it.

There is a second asymmetry worth knowing about remissions. The ATO's guidance on the general interest charge sets out that if you claimed a deduction for pre-1 July 2025 interest and the ATO later remits it, the remitted amount goes back in as assessable income in the year the remission is granted. Interest incurred after the change was never deductible, so a remission of it is not assessable at all. Post-change, a remission is a straight reduction in cost.

Remission, and when the ATO will consider it

The Commissioner's power to remit GIC and SIC survived the amendment untouched. It is discretionary, it is not automatic, and it is decided on what you put in front of them.

The ATO's guidance on remission of interest charges sets out what it weighs. For GIC: what specific event caused the late payment, whether that cause was inside or outside your control, what steps you took to limit the damage, the supporting evidence, and your prior lodgement and payment history. The policy sits in PS LA 2011/12. For SIC the factors differ — how the ATO became aware of the shortfall matters, and a voluntary disclosure is weighed differently from an audit finding. That policy is PS LA 2006/8.

The review rights are not the same either. If the ATO refuses to remit GIC you cannot lodge an objection and the Administrative Review Tribunal cannot hear it. You can submit a fresh request with information you left out, or seek judicial review in the Federal Court. For SIC you can object where the amount still payable is more than 20% of the shortfall itself, and go to the Tribunal from there.

Two practical points. Remission deals with interest already charged, not interest still to come. And a payment arrangement does not stop the meter: the ATO's own guidance states that GIC continues to accrue while a debt on your account is overdue.

How a commercial loan now compares

This is where the arithmetic turned over.

An ATO debt at the September 2025 GIC rate costs about 11.38% a year after tax, because there is no longer any tax relief on the other side of it. For a company on the 25% rate, a deductible commercial facility would have to charge roughly 15.2% before it cost the same. For a sole trader on 39%, roughly 18.7%.

Those equivalences only hold if the interest on the replacement borrowing is itself deductible to you. For a business borrowing to clear a business tax debt it generally is. For an individual borrowing to pay a personal income tax bill it generally is not, and that needs checking before anyone relies on the comparison.

Rate is also not the only term that matters. Establishment costs, security, covenants and whether credit is available to you at all are separate questions with their own answers. Nothing set out here is a recommendation to borrow. If you want to understand what a commercial facility would actually involve, that is a conversation for our commercial and business lending team.

What the change did do is remove the argument that used to end the conversation. The ATO was never a cheap lender. The deduction just made it look like one.

What to do about it

Start with the number. Pull your ATO account summary and find out what GIC is actually accruing, because most business owners carrying a debt have never looked. Then split it at 30 June 2025, because the two sides are treated differently in your return, and your taxation and compliance work has to reflect that split rather than assume it.

After that it stops being a tax question and becomes a cash flow one. Whether a debt is cleared, refinanced or paid down over time depends on what else that money is doing in the business, which is forecasting and budgeting and business advisory territory. The answer is genuinely different for every business. What is no longer different is the price of doing nothing about it.