For many taxpayers, having an outstanding debt with the ATO has just become more expensive. A recent change in tax law means that the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC) are no longer tax-deductible. This rule applies from 1 July 2025, and it affects all ATO interest charges, regardless of which income year the original debt relates to.

This change has major financial implications. The GIC rate is currently 11.17%, making it one of the most expensive forms of finance. In the past, the cost was partly offset by a tax deduction. That benefit is now gone. For many, relying on an ATO payment plan is no longer a cost-effective strategy.

Refinancing ATO Debt: A Potential Solution

One alternative for businesses is to refinance their tax debt with a bank or another commercial lender. Interest on a business loan can be tax-deductible, provided the borrowed funds are used for business purposes. This logic can extend to tax debts arising from business activities.

Eligible tax debts are not limited to income tax. You may be able to deduct interest on money borrowed to pay various business-related tax obligations. These can include GST, PAYG instalments, PAYG withholding for employees, and FBT.

However, you must carefully assess your specific situation. The deductibility of the interest is not automatic and depends entirely on the nature of the original tax debt.

For Individuals

The correct treatment for an individual depends on what generated the tax debt.

Sole Traders: If you operate a business, interest on a loan used to pay a tax debt from that business is generally deductible.

Employees or Investors: If your tax debt comes from salary, wages, or investment income like dividends and rent, the interest is not deductible. Refinancing might still lower your interest costs if you secure a lower rate, but it will not provide a tax deduction.

Consider this example. Sam is a sole trader who runs a café. He borrows $30,000 to pay a tax debt that came entirely from his café profits. In this case, the interest on the loan is fully deductible. However, if part of Sam’s debt was from a separate part-time job, only the portion of interest relating to his business debt would be deductible.

Considerations for Companies and Trusts

The structure of your entity matters. If a company or trust borrows money to pay its own business-related tax debts, the interest will typically be deductible. The situation changes completely if a director or a beneficiary borrows the money personally to pay the entity’s tax debt. In that case, the interest is not deductible for that individual.

The Complexities of Partnerships

Partnership arrangements require careful attention. If the partnership itself takes out a loan to pay a business tax debt, the interest is normally deductible. This includes debts for GST or PAYG withholding.

The ATO applies a different rule to individual partners. If a single partner borrows money personally to pay their share of the partnership tax debt, the interest is not deductible. The ATO considers this a personal expense, even if the underlying partnership is running a business.

Your Practical Next Steps

The key message is that ATO debts are now more costly. Refinancing with an external lender could provide tax deduction and potentially a lower interest rate. Your first step is to clearly distinguish between tax debts that come from business activities and those that do not. In mixed situations, you will need to apportion your deduction claim.

Do not proceed without a clear strategy. We recommend you speak with us before making any arrangement. With the right approach, you can manage your tax debts more effectively.