For many businesses, the ATO has long been viewed as a reluctant creditor – a source of enforced but manageable debt when cash flow is tight. But from 1 July 2025, that picture is set to change in a big way.
With legislation now passed, interest charges on overdue ATO debts will no longer be tax-deductible. This shift could have significant financial and strategic implications for businesses that have previously relied on ATO payment plans or deferred tax as a short-term funding option.
So, what’s changing, and what should your business be doing now?
What’s Changing?
Currently, businesses that owe money to the ATO may be charged interest, known as the General Interest Charge (GIC), which is set at 10.78%. While that’s a hefty rate, it has been partially offset by the fact that businesses can claim the interest as a tax deduction.
From 1 July 2025, that deduction will no longer be available. That means the real cost of unpaid ATO debt will increase significantly.
For example:
- At the current GIC of 10.78%, a business paying 30% company tax would previously see an effective rate of 7.54%.
- From 1 July, that full 10.78% becomes the out-of-pocket cost.
- And if GIC increases, so will the actual cost to your bottom line.
For small businesses, the effective interest rate is estimated to exceed 14%, while for individuals on the top marginal tax rate, it could reach 20% or more.
Why It Matters
If your business has historically relied on ATO payment plans as a temporary solution to manage cash flow, especially during growth phases, seasonal slowdowns, or major investments, this change could impact your working capital and financial flexibility.
Here are some key risks to consider:
- Higher effective cost of unpaid tax debt: The same balance will now cost more to carry.
- Tighter cash flow management: With fewer tools in the toolkit, you may need to reassess how you handle short-term gaps or timing mismatches.
- Reduced viability of ‘parking’ tax debt: Deferring ATO obligations may no longer be a sensible or strategic option.
- Potential for compliance and reputational issues: A growing ATO debt could affect your credit profile or lead to escalation.
What Should You Do Now?
If your business carries (or is considering carrying) ATO debt, now’s the time to review your position and consider proactive steps.
Here’s how you can get ahead of the change:
Review Your Current ATO Position
Understand any existing tax liabilities or arrangements, and model how the change will affect your cash flow and cost of funds.
Engage with Your Advisors
Your accountant, finance broker, or tax agent can help you assess the implications and determine whether it’s time to restructure.
Explore Working Capital & Finance Options
There may be more efficient funding vehicles available, such as:
- Business loans or lines of credit
- Debtor or trade finance
- Short-term working capital solutions
- Specialist ATO debt finance
These options allow you to pay down ATO debt, maintain compliance, and preserve cash flow, without paying a premium.
Ledge Can Help
At Ledge Finance, we specialise in supporting businesses structure finance solutions that work, including funding to manage ATO obligations, support cash flow, or enable sustainable growth.
Our team can help you:
- Understand how the ATO interest deductibility change may impact your business
- Review your cash flow and funding strategy
- Identify finance options that could be more cost-effective than unpaid ATO debt
- Engage with lenders and advisors to build a practical plan
If you’d like to understand what these changes mean for your business and how Ledge can help you navigate funding solutions, reach out to our team today.
Please note that the information provided here is general and does not constitute financial, tax, or other professional advice. You should consider whether the information is appropriate for your needs and seek professional advice before making any decisions.
