Do you have an outstanding debt with the Australian Taxation Office? Your repayment costs will likely increase from 1st July 2025. New legislation removes tax deductibility for two key ATO interest charges from this date.

Understanding ATO Interest Charges

The ATO applies two main interest charges:

1.  General Interest Charge (GIC): This charge kicks in if you pay your tax bill late. The ATO uses GIC to encourage timely payments. It aims to prevent late payers gaining an unfair advantage over those who pay promptly. 

GIC compounds daily on the outstanding amount. The annual rate for July to September 2025 sits at 10.78%.

2. Shortfall Interest Charge (SIC): This applies if you initially underpaid your tax due to a later amendment to your assessment. SIC is also calculated daily, compounding on the shortfall amount. The current annual SIC rate is 6.78%. It covers the period from the original tax due date up to the correction date.

What Exactly Changed?

Previously, taxpayers could deduct both GIC and SIC amounts. This deduction lowered the actual, after-tax cost of these charges for individuals with an income tax liability.

The government has now passed laws removing this deduction. For any GIC or SIC incurred on or after 1 July 2025, no deduction is allowed. This rule applies even if the original tax debt existed before this date.

Because these charges are no longer deductible, their true after-tax cost rises for most people. 

Managing ATO Debt: Smart Strategies

The best approach is to pay off your ATO debt as quickly as possible. The General Interest Charge (GIC) rate is relatively high and increases daily until the debt is cleared.

The sooner you pay it off, the less interest you’ll be charged.

If you can’t pay the debt immediately, consider other options—such as borrowing from a lender with a lower interest rate. In some cases, the interest on a loan used to pay a tax debt may be tax-deductible, but usually only if the debt relates to business activities. 

Interest on loans for tax debts from employment or investment income generally isn’t deductible.

The ATO may allow you to set up a payment plan, but interest will still apply under the GIC while you’re making installments.

It’s also smart to plan ahead so you can meet future tax obligations on time. This might involve regularly setting aside money for tax instalments, GST, PAYG withholding, and other ATO payments. Keeping these funds separate makes it easier to stay on top of your payments.

If you’re struggling with ATO debt or want to stay on track, we’re here to help. We can work together on a plan that keeps you compliant and protects your cash flow.