A significant change to the ATO’s General Interest Charge. From July 1 2025, interest charges on tax debt will no be longer tax-deductible.
This change will act as a further disincentive for business to use the ATO as a "banker". In addition, this adds to the powers revised in 2023 for disclosing overdue debts to credit reporting agencies.
In essence, it a mandate to recoup more than $50 billion in ATO debt owed, most of it held by Australia's small-medium businesses.
Business
All entities will see any ATO interest being non-deductible for 1 July, 2025. However, interest on loans used to pay these tax liabilities will remain deductible.
Personal
There is no change to the existing rules for interest on personal debt. Interest on externally borrowed funds to pay personal tax debts has never been deductible.
Overall, the ATO has tightened its stance in regard to payment of taxes and its general attitude toward debt collection and interest and penalty waivers.
In 1999, the penalty arrangements for late payment were streamlined with the introduction of a uniform tax deductible general interest charge (GIC). This actually moves in relation to market interest rates, currently 11.17%.
Therefore the impact of the change of status to non-deductible results in a "grossed up" interest rate for business of effectively 14.9%.
Obviously the best response is to make sure that ATO bills and debts are paid on time and in full to minimise the risk of non-deductible interest or ATO penalties being applied.
If prompt payment in full is not possible, request an extension of time and keep to that agreement. If you have a dispute or are having trouble in meeting commitments, there are useful ATO resources available at the link below.
https://www.ato.gov.au/General/Paying-the-ATO
As a general rule - it is always better to keep the lines of communication open with the ATO, as they take the view that bad news is better than no news. An alternative strategy is to speak to your accountant or legal team for support or advice in acting on your behalf.
If financing can be obtained at a more cost effective rate, consider drawing debt to repay your ATO obligation in full, therefore turning non-deductible interest into deductible.
Consider having a commercial finance broker provide a review of your entire asset and debt structure to assess refinance options.
The ATO has the ability to report tax debt where the following criteria applies:
- The business has an ABN and is not an excluded entity;
- The debt is $100,000 or more and is overdue by more than 90 days;
- There are no ATO payment arrangements in place to manage your tax debt; and
- There are no current Inspector-General of Taxation Ombudsman (IGTO) dealings.
Once a Notice of Intent is issued, a business will need to pay their debt or enter into an appropriate payment arrangement within 28 days to prevent disclosure.
A disclosed debt can impact a business’s ability to maintain a fluid financial arrangements with lenders and suppliers alike.
Tax arrears are often the cause of a lack of planning and failure to understand the cycle of your business cash flow. Sure, there can be unexpected events (such as bad debts or inventory delays) but in our experience basic cash flow planning can eradicate or help you to prepare for these issues.
Talk to your adviser or accountant to better understand the cycle of your cash flow. There may be opportunity to improve or at least plan for it.
Further tips can be found in our guide: Proactive Cash Flow Strategies for Business Owners
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The team at MCP Financial Services has specialised expertise in structuring complex debt arrangements. We can assist with review and restructuring, refinancing and renegotiating.