If you’ve ever had to pay interest on a tax debt, there’s a change coming that might affect your bottom line. Starting July 1, 2025, the Australian Taxation Office (ATO) will no longer allow taxpayers to claim a tax deduction on interest charges applied to outstanding tax debts.
That’s right—any interest you pay on your tax bills after this date will come straight out of your pocket, with no chance of getting a portion of it back at tax time.
Let’s dive into what’s changing, why it matters, and how you can prepare ahead of time.
First Things First – What’s Changing Exactly?
Under the current rules, if you owe money to the ATO and they charge interest (called the General Interest Charge (GIC) or the Shortfall Interest Charge (SIC)), you can generally claim that interest as a tax deduction if the debt is related to your business or income-generating activity.
But from July 1, 2025, that changes for everyone. Whether you’re a small business owner, a freelancer, or an investor—if you’re hit with an ATO interest charge, you won’t be able to deduct it anymore.
So, What Does This Mean for You?
This change could increase tax costs for thousands of Australians. Here’s why:
- No deduction means more after-tax out-of-pocket cost – You’ll pay the interest and get no relief at tax time.
- Cash flow might feel tighter – Especially for small businesses that rely on deductions to ease their tax burden.
- Late payments just got more expensive – Missing an ATO deadline will now hurt more financially than it used to.
Imagine this: Let’s say you’re self-employed and fall behind on your tax payments. If the ATO charges you $1,000 in GIC and you used to get $300 back in your tax return thanks to deductions, now that full $1,000 stays gone. No partial return, no tax relief.
Why Is This Change Happening?
According to the official budget announcement, this move is about ensuring fairness. The idea is that “taxpayers who pay their tax on time should not be subsidising those who don’t.” In other words, the government wants to close the indirect benefit that late-payers receive through the current deduction system.
It’s a money-saving strategy too. This change is expected to bring in more tax revenue—around $500 million over five years—by discouraging late payments and withdrawing the deduction benefit.
Who’s Impacted the Most?
The short answer: Businesses and individuals that find themselves with overdue tax bills. That includes:
- Small business owners juggling cash flow ups and downs
- Contractors and freelancers with fluctuating income
- Property investors who run into shortfalls with rental income
- Anyone facing ATO penalties for underpayment or late lodgment
How to Stay Ahead of the Change
Now’s the time to start thinking about how to protect your finances from this upcoming shift. Here are a few strategies to keep in mind:
1. Don’t Delay—Pay on Time
This is the most obvious—but also the most effective—step you can take. By making sure your tax obligations are paid in full and on time, you avoid ATO interest charges altogether. No interest, no problem.
2. Keep a Tax Buffer
If you’re self-employed or run a small business, setting aside money throughout the year for tax time can be a lifesaver. Think of it like a rainy-day fund, but specifically for the ATO.
3. Consider Prepaying Some Expenses
Timing is everything in tax planning. Prepaying certain business expenses (like rent, subscriptions, or some insurances) before EOFY might reduce your taxable income and help you avoid underpayment issues.
4. Talk to a Tax Professional
If you’re ever unsure about your tax position, don’t wing it. A registered tax agent (like us at Prudent Accountants & Co!) can help you plan ahead and avoid getting caught out by changes like this one.
5. Set Up a Payment Plan—But Use It Wisely
The ATO offers payment plans if you’re in a tough spot. Just remember, starting in 2025, any interest on those plans won’t be deductible. Pay off what you can early, or look into other finance options if possible.
Let’s Put That into Perspective
Interest from the ATO currently sits at around 11% (yes, you read that right!). That’s higher than most credit card rates. And from July 1, 2025, any interest you pay isn’t just costly—it’s also completely out-of-pocket with no tax return benefits.
Put simply: waiting to pay your tax debt will soon hit even harder.
What Should You Do Right Now?
This change might still be over a year away, but it’s better to get prepared early. Here’s your to-do list:
- Review your current tax position
- Check for any existing ATO interest-deductible arrangements (they might be impacted in future)
- Plan for EOFY with a tax expert
- Consider short-term finance alternatives for future cash shortfalls
Final Thoughts – Stay Informed, Stay Ahead
The removal of tax deductions for ATO interest may seem like a small tweak, but for many Australians, it marks a major shift in managing tax debt.
By staying informed and proactively managing your tax affairs, you can avoid costly surprises down the road.
At Prudent Accountants & Co, we’re here to help you navigate these changes with confidence. Whether you’re a small business owner, investor, or freelancer—we can work together to keep your tax strategies effective and up to date.
Got questions about how this might affect you? Don’t wait —reach out to our team today and let’s plan ahead.
After all, when it comes to taxes, a little preparation goes a long way.
Need Help Navigating the 2025 Tax Changes?
Contact Prudent Accountants & Co for tailored advice, smart strategies, and peace of mind as we approach these upcoming accounting shifts.
Your future self (and your wallet) will thank you!
Disclaimer: This article is intended to provide general information only. It does not constitute tax, financial, or legal advice. You should seek professional advice tailored to your specific circumstances before making any decisions.
