2025 ATO Shake-Up: Why Carrying Tax Debt is About to Cost You More (And What to Do About It)

For years, many Australian small businesses have treated the Australian Taxation Office (ATO) as an unofficial lender of last resort. When cash flow gets tight, entering an ATO payment plan—while not ideal—has often been seen as a manageable, and crucially, tax-deductible cost of doing business.

That approach has become significantly more expensive.

A major legislative change was introduced on July 1, 2025, that will fundamentally alter the economics of carrying a tax debt. If your business relies on ATO payment arrangements, you need to understand this change immediately and adjust your strategy.

Here is what is changing, the severe risks of ignoring it, and the strategic solutions available.

The Change: Deductibility Disappeared

Currently, if your business incurs General Interest Charge (GIC) or Shortfall Interest Charge (SIC) on unpaid tax liabilities, that interest expense is generally tax-deductible.

The high interest rate charged by the ATO (currently over 11% compounding daily) was somewhat softened by the ability to claim it as a business expense against your income.

Effective 1 July 2025, this has stopped!

The Financial Impact: Doing the Math

This isn't just a minor tweak; it effectively increases the cost of carrying ATO debt by your business tax rate.

Let’s look at a hypothetical example for a Base Rate Entity (small business company with a 25% tax rate):

• Scenario: Your business accrues $20,000 in GIC over a year on a large, outstanding tax debt.

• Before 1 July 2025: You claim a $20,000 deduction. At a 25% tax rate, this reduces your tax payable by $5,000. The net cost of that interest to your business is $15,000.

• After 1 July 2025: You pay the $20,000 interest. You get zero deduction. The net cost to your business is the full $20,000.

  
  

In this scenario, the legislative change instantly increases the effective cost of servicing that debt by 33%. The "Bank of ATO" is no longer offering a discount.

The Warning: The Dangers of "Head in the Sand"

Facing a significantly higher cost to service tax debt, some business owners might feel tempted to ignore the obligations or miss payments on existing plans. This is the worst possible move.

The ATO is more aggressive than ever in tax collection, and they hold a powerful card: your credit report.

The ATO has the power to disclose your business tax debt information to Credit Reporting Bureaus (such as Equifax, Illion or CreditorWatch) if you meet certain criteria:

• You have an ABN.

• Your tax debt is at least $100,000.

• The debt is overdue by more than 90 days.

• You are not "effectively engaging" with the ATO (i.e., you don't have an active payment plan in place).

  
  

The Credit Freeze

In the current lending environment, an ATO default is an almost universally "automatic decline" for mainstream lenders. It signals unmanageable risk.

If you need to buy new equipment, secure working capital, or refinance a property, an ATO default on your file will likely make those applications dead on arrival.

Do not neglect your payments to the point where a default is listed. The damage can take years to undo.

The Solution: Strategic Refinancing

Given the July 2025 changes, leaving a large debt sitting with the ATO is no longer smart financial management. The solution is to shift the debt away from the ATO to a commercial lender.

By obtaining a commercial business loan to pay out the ATO debt in full, you achieve two critical goals:

1. You Restore Deductibility: While ATO GIC is becoming non-deductible, interest incurred on a commercial loan borrowed specifically to extinguish a business tax liability generally remains a tax-deductible business expense under standard tax laws.

2. You Protect Your Credit: Paying the ATO debt to zero immediately removes the risk of a credit default listing, keeping your options open for future growth funding.

   
   

Act Now, Before the Rush

July 1, 2026, might seem far away, but lenders will be flooded with applications as the deadline approaches.

If your business is currently carrying significant ATO debt, now is the time to review your position. Don't wait until the interest becomes 30% more expensive to manage.

Contact us today to discuss your options for restructuring your business debt and preparing for the 2025 changes.

Disclaimer: This information is for general educational purposes and should not be taken as specific legal or taxation advice. Businesses should consult with their accountant or tax advisor regarding how the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2024 applies to their specific circumstances.