From 1 July 2025, the rules around claiming tax deductions for interest on ATO debts changed. Interest charged by the ATO on ATO-administered debts is no longer deductible, and this is now in effect for the 2025–26 financial year.
Anthony Lai, Associate Partner at our Prahran office, is reminding clients that this change may have a direct impact on both individuals and businesses carrying ATO debt. With years of experience helping clients navigate complex tax matters, Anthony emphasises why it’s important to understand the practical implications of these rules.
The change applies to anyone with unpaid ATO debts, including income tax and business activity statements. Any interest on these debts from July 2025 onward cannot be used to reduce taxable income. Regular business loans, personal loans, or investment borrowings are not affected. The change is part of the government’s wider effort to tighten deductible expense rules and prevent taxpayers from reducing their tax bills through ATO interest.
Who this affects
The change mainly impacts:
- Individuals who have unpaid tax and were claiming interest charged by the ATO as a deduction.
- Businesses with unpaid income tax, business activity statements, or other ATO-administered debts.
It does not affect regular business loans, personal loans, or investment borrowings.
For example, if your small business carried unpaid business activity statements and was claiming the interest charged by the ATO as a deduction, your taxable income will now be higher than it would have been before July 2025, resulting in higher income tax. Similarly, an individual with unpaid tax from previous years will no longer get the same tax relief on the interest charged.
Why it matters
With the change now in place, the cost of holding ATO debt has increased. For businesses, this can put extra pressure on cash flow if budgets haven’t been updated from increased income tax. For individuals, taxable income may be higher than in previous years if you used to claim the deduction which leads to more tax paid. The exact impact depends on the size of the debt and the interest charged.
What you can do
Even though the change has already taken effect, there are ways to manage it:
- Review your ATO debts – know which debts you are paying interest on that is no longer deductible.
- Finance review/loan restructuring (for businesses only) – The change only affects interest charged by the ATO. Therefore, it’s possible to retain the deductible nature of interest charged on ATO debt incurred by running a business by restructuring your finances.
- Reassess repayment priorities – paying down debt sooner may now make more financial sense.
- Update your tax planning – speak to your Accountant to adjust strategies and avoid unexpected tax bills.
- Adjust cash flow forecasts – businesses should factor in the higher effective cost of ATO debt.
- Bring forward other deductions where possible – this can help offset the loss of the interest deduction.
The change only applies to interest charged by the ATO on ATO-administered debts, not all loans. But it’s a clear reminder to review your debts, adjust your planning, and make informed financial decisions. Being proactive now will help you avoid surprises when filing your 2025–26 tax return and keep your finances on track.
