From 1 July 2025, managing ATO tax debt is going to cost businesses more, with the ATO seeking to reduce the record-high $53 billion in collectable debt it reported at the end of FY24.
Under the newly passed legislation, taxpayers will no longer be able to claim a tax deduction for ATO interest charges, including the General Interest Charge (GIC) and Shortfall Interest Charge (SIC).
With the change it appears clear that the ATO is looking to change the perception that they are like a small business bank. But it was never actually the case. With interest cost well over 11% compounded daily, it is already both expensive and dangerous to carry ATO debt in this climate.
These changes, coupled with stricter ATO payment plan requirements are a wake-up call for those relying on ATO plans as a cash flow buffer.
Here’s what’s changing, why it matters, and how businesses can meet their tax debt obligations.
What are the ATO tax debt changes?
Currently, businesses that incur interest charges on tax debt can deduct these costs from their taxable income, reducing the overall financial burden of carrying tax debt. That will no longer be the case for General Interest Charge (GIC) or Shortfall Interest Charge (SIC) incurred on or after 1 July 2025.
“This is not a new cost – businesses have always paid interest on tax debts, which was tax deductible,” explains Campbell McCallum, Octet’s Chief Financial Officer. “Now, it’s not, which means it’s more expensive for businesses to carry that debt.”
Businesses may still apply for interest remission under existing ATO guidelines if there are valid grounds, but the criteria for ATO payment plans will be stricter. Payment plans for smaller debts (under $200,000) now require a 10% upfront payment and a 24-month repayment cap. Larger debts (over $200,000) will demand significantly more paperwork for businesses applying for payment plans, including multi-year financial statements, cash flow projections, and even collateral.
What do the ATO tax debt changes mean for SMEs?
For SMEs, and the financial advisors and brokers who support them, the removal of interest deductibility and tougher repayment terms could have consequences for those who’ve leaned on ATO arrangements as part of their cash flow strategy.
Without the tax deduction safety net, deferring tax obligations will become more expensive (well over 15% after tax) for the businesses that depend on them. For companies operating on thin margins or managing seasonal revenue flows, that could significantly constrain working capital.
“Many businesses underestimate their tax liabilities, leading to significant accumulations of debt. It’s crucial for business owners to maintain a proactive approach to their tax obligations,” says Olga Koskie, Principal at Tax Assure.
In August 2024, the ATO reported that small businesses owed approximately $35.6 billion in unpaid tax debts, accounting for about two-thirds of the total collectable debt.
The stricter payment plan approval process also reduces flexibility. Businesses may now be faced with administrative hurdles, or even see their applications declined.
Then there’s the enforcement. “If businesses aren’t in a payment plan, the ATO can take further action – even winding them up or holding directors personally liable,” warns Olga.
Impacts of removing interest deductibility on tax debt repayments
The ATO’s new approach sends a clear message that tax debts are no longer a low-cost way to smooth out cash flow. For businesses that rely on deferrals or late payments to manage liquidity, this marks a fundamental shift. It appears much riskier for businesses to have tax debt now than it was a year ago.
The example below shows the effect of the changes from 1 July 2025. Based on GIC for April to June 2025 of 11.17%, the additional cost to the business would be approximately $17,724 from 1 July 2025 onwards.
| Scenario |
Before 1 July 2025 |
From 1 July 2025 |
| Profit before interest and tax |
$300,000 |
$300,000 |
| Deductible Interest Rate (GIC) at 11.17% |
$59,079 |
$0 |
| Taxable profit |
$240,921 |
$300,000 |
| Taxation |
$72,276 |
$90,000 |
| Effective GIC % with tax deduction on interest removed |
|
15.36% |
| Additional cost to the business with tax deduction on interest removed |
|
$17,724 |
Note: The above table is based on an annual tax rate of 30% and assumes no change to the GIC after 1 July 2025.
The ATO has also increased the issuance of Directors Penalty Notices (DPNs) in the instances when a company fails to meet its tax obligations. This can have severe implications for a business.
“DPNs can trigger insolvency proceedings, leading to the liquidation of the company,” explains Campbell. “This not only affects the business’s operations but also impacts the directors’ personal finances and creditworthiness.”
Working capital solutions can help your business manage tax debt
While the changes bring more challenges for businesses, they also present an opportunity for businesses to reassess their financial strategy. Getting ahead of the changes now means SMEs can protect their bottom line and improve their financial resilience through smarter funding options that are less than 15.36%.
Paying down existing tax debts before the 1 July 2025 cut-off date will soften the transition. At the same time, looking beyond the ATO for support through tailored working capital finance could offer a smarter, more sustainable alternative for managing debt and improving cash flow.
“Working capital finance can help businesses not only repay existing debt but also meet their ongoing liabilities and accelerate cash flow, especially if their revenue is lumpy,” says Campbell. “Supplementary Trade Finance, for example, provides businesses with a revolving line-of-credit to pay suppliers, freeing up funds to separately meet tax debt obligations.”
Whether you’re a business owner navigating day-to-day operations or a commercial finance broker supporting clients through complex decisions, now’s the time to act.
Discover Octet’s working capital solutions today
Octet’s innovative working capital finance solutions, such as Trade Finance and Debtor Finance facilities, can help to optimise your cash flow, enabling you to efficiently repay ATO debt and minimise its impact on your business. By securing tailored finance, you can clear their ATO debts and focus on what you do best – growing your business.
Contact us today to discover how we can accelerate your business growth.
Olga Koskie is a lawyer and business advisor with more than 20 years’ experience. Tax Assure is a specialist tax debt advisory firm, working with the ATO and state revenue offices to support the management of accumulated tax debt.
Disclaimer: These comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
