As of 1 July 2025, the Australian Taxation Office (ATO) has officially removed the ability for taxpayers to claim a tax deduction on interest charged for unpaid tax debts.
This confirmed change affects individuals, sole traders, and businesses who previously claimed ATO interest as a deductible expense. Below, we explain what’s changed, who’s impacted, and what you can still do when lodging your 2024–25 tax return to make the most of the final year of deductibility.
What Changed and Why It Matters
From 1 July 2025, ATO interest on unpaid tax debts is no longer deductible for any taxpayer type.
Previously, taxpayers could claim a deduction for interest on overdue tax, BAS, or PAYG debts when the debt related to earning assessable income. This helped reduce the overall cost of carrying ATO debt for businesses and individuals managing short-term cash flow.
The new law — now in effect — removes that option entirely. The government’s intention is to discourage taxpayers from treating ATO debt as a form of low-cost finance and to promote faster repayment of outstanding balances.
Before and After Comparison
| Tax Year | Interest on ATO Debt | Deductible? | Notes |
|---|---|---|---|
| 2024–25 and earlier | Yes – if related to business or income-producing activity | ✅ Deductible | Final year of eligibility |
| 2025–26 onwards | No – applies to all taxpayers | ❌ Not Deductible | Applies to individuals, sole traders, companies, and trusts |
This change means that any ATO interest accrued from 1 July 2025 onwards cannot be claimed as a deduction. However, interest charged up to 30 June 2025 can still be claimed in your 2024–25 return if it was linked to income-generating activity.
For more on related tax updates, see our Tax Changes 24–25 Guide.
Who Is Affected and the Real-World Impact
The removal of ATO interest deductibility applies to all taxpayers — including individuals, sole traders, partnerships, companies, and trusts — with outstanding tax balances.
For individuals, this includes unpaid income tax, HELP or HECS debts, and overdue superannuation contributions. For businesses, it covers ATO interest on GST, PAYG instalments, and income tax debts. Even where payment plans are active, the interest portion is now a non-deductible expense.
Why It Matters
Without deductibility, the effective cost of ATO interest increases by your marginal tax rate.
Example: If a business incurred $5,000 in ATO interest and previously claimed a 30% deduction, they saved $1,500 in tax. Now, that saving no longer applies — the full $5,000 becomes a direct cost to the business.
With ATO interest rates exceeding 10%, carrying tax debt is now more expensive than most commercial loans. This change will tighten cash flow for many small businesses and shift the incentive toward repaying tax debts faster.
The Key Impacts
- Higher after-tax cost for ATO debt from FY2025–26 onward.
- Cash flow pressure on small and medium businesses with ongoing payment plans.
- No deduction available for interest charged after 30 June 2025.
- Need for improved debt management to prevent compounding costs.
For more context on what can still be claimed in 2024–25, read our guide on Claimable Expenses.
What You Can Do When Lodging Your 2024–25 Return
If you had ATO debt or interest charges during the 2024–25 financial year, you may still be eligible to claim deductions for interest incurred before 30 June 2025. Moving forward, however, you’ll need to adjust repayment and cash flow strategies to account for non-deductible interest.
1. Review ATO Interest Charged Before 30 June 2025
Check your myGov or Business Portal account to identify ATO interest charges issued before the rule change. If these relate to income-producing activities, you may still claim them in your 2024–25 return.
2. Separate Pre- and Post-1 July Interest
When preparing your return, ensure your tax agent correctly distinguishes between interest charged before and after 1 July 2025. Only pre-EOFY amounts remain deductible.
3. Review and Update Payment Arrangements
Any ongoing ATO payment plan will now accrue non-deductible interest. If possible, shorten payment terms or consider alternative finance options such as a business loan or overdraft (where interest remains deductible).
4. Adjust Budgets and Cash Flow Forecasts
The removal of deductibility effectively increases operating costs. Review your financial plan for FY2025–26 to ensure you’ve accounted for this.
5. Seek Professional Tax Advice
Your tax agent can confirm which interest amounts remain deductible, ensure your 2024–25 return is accurate, and help minimise future ATO interest exposure.
For a broader look at common tax pitfalls, see Common Tax Mistakes and How to Avoid Them.
Managing Tax Debts Going Forward
The ATO’s removal of interest deductibility reinforces the importance of proactive debt management. With higher ATO interest rates and fewer tax offsets available, paying debts promptly or refinancing through commercial lenders may be the smarter long-term approach.
Practical Next Steps
- Review your ATO account regularly to monitor balances.
- Explore refinancing or business loan options where interest remains deductible.
- Update your budgeting to reflect higher after-tax costs.
- Avoid new debts where possible — prevention is more cost-effective than interest management.
You can read more about how ATO interest is applied directly from the ATO’s resource: ATO – General Interest Charge (GIC).
And if you want to get your finances ready for the new financial year, explore our guide on How to Prepare for Tax Season.
At TaxReturn.com.au, we help Australians stay informed and compliant — ensuring you claim every deduction available while preparing for future rule changes.
Need help with your 2024–25 tax return?
We’ll make sure your interest deductions are correctly claimed and your ATO obligations are managed efficiently under the new rules.
General Advice Warning – “Any financial advice provided by TaxReturn.com.au is general in nature and is not personal financial advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of it regarding your own objectives, financial situation and needs.”
