Deductions for ATO Interest Charges to Be Removed from 1 July 2025

Running into cash flow challenges with the ATO is stressful enough without additional tax complications. From 1 July 2025, a significant change is coming that could impact your bottom line – ATO interest charges will no longer be tax deductible. At Invigor8, we recognise that this creates an additional financial burden, particularly for small businesses operating on tight margins. The impact is real: a $500 General Interest Charge that previously cost you $275 after tax deductions (at a 45% tax rate) will soon cost the full $500. The good news? With proper planning and proactive strategies, you can minimise or even eliminate these charges altogether. From setting up separate accounts for tax obligations to considering alternative financing options, our team can help you implement practical solutions that protect your business from these increased costs.

If you have an outstanding debt with the Australian Taxation Office (ATO), it may soon become more costly. From 1 July 2025, two key types of ATO interest charges will no longer be tax deductible.

What Are the ATO Interest Charges?

There are two main types of interest charges that may apply to your tax debt:

General Interest Charge (GIC):

Applied to overdue tax liabilities to encourage timely payment and ensure fairness among taxpayers. GIC is calculated daily on a compounding basis. For the July–September 2025 quarter, the annual GIC rate is 10.78%.

Shortfall Interest Charge (SIC):

Imposed when a shortfall in tax occurs due to an amendment or correction to your tax assessment. Also calculated daily on a compounding basis, the SIC annual rate for July–September 2025 quarter is 6.78%.

What’s Changing?

Until now, both GIC and SIC could be claimed as tax deductions, reducing the overall cost for individuals and businesses with outstanding tax liabilities. However, under new legislation, GIC and SIC amounts incurred on or after 1 July 2025 will no longer be tax deductible—regardless of whether the original tax debt arose before that date. As they are not deductible, any GIC or SIC that is later remitted will no longer need to be included as assessable income.

This change effectively increases the after-tax cost of these charges, with the impact becoming more significant as your marginal tax rate rises.

Example

Jane incurs GIC of $500.

Before 1 July 2025 (Deductible)

GIC ($500) is tax-deductible.

Jane’s taxable income is reduced by $500. If Jane’s marginal tax rate is 45%, she saves:

$500 × 45% = $225

From 1 July 2025 (Non-Deductible)

GIC is no longer deductible.

Jane pays the full $500 out of pocket—no tax saving.

How to Minimise the Impact

Here are several strategies to reduce your exposure:

Pay ATO debts promptly:

The GIC accrues daily and at a relatively high rate. Paying off your tax debt quickly will minimise these charges.

Consider alternative financing:

In some cases, it may be beneficial to borrow at a lower interest rate to repay ATO debt. For business-related tax debts, the interest on such loans may still be deductible. However, this usually doesn’t apply to tax debts arising from employment or investment income.

Set up a payment plan (if needed):

While the ATO may allow instalments, GIC continues to accrue on any outstanding balance, even under a payment plan.

Plan ahead for future obligations:

Avoid future interest charges by regularly setting aside funds for upcoming tax liabilities—such as GST, PAYG withholding, and income tax. Keeping these amounts in a separate account can help ensure timely payment. 

Super Guarantee Increase to 12%: Final Step Effective 1 July 2025

The Super Guarantee (SG) is the minimum amount of Superannuation that employers must contribute on behalf of eligible employees. It is calculated as a percentage of an employee’s ordinary time earnings (OTE) and must be paid to a complying Super fund by the required deadlines.

The SG rate has been increasing gradually over the years. The final scheduled increase will take effect from 1 July 2025, raising the SG rate from 11.5% to 12%. This marks the completion of the government's long-term plan to increase the Super Guarantee rate gradually.

From 1 July 2025, employers must apply the 12% Super Guarantee rate to all salary and wage payments made on or after that date — even if the payment covers work done before 1 July. This means your payroll system must calculate Super based on the date of payment, not the pay period.

To prepare for the change, ensure your payroll systems are updated to apply the 12% rate to all payments made on or after July 1, 2025.

For businesses using cloud-based payroll software like Xero, the Super Guarantee rate should update automatically. However, it’s essential to check your settings to ensure the 12% rate is correctly applied. If your software doesn't update automatically, you may need to adjust the SG rate to stay compliant manually.

Let us know if you would like help with how to avoid paying interest to the ATO then book a free consultation or contact us today and let's discuss the solutions!