Until recently, falling behind on a Business Activity Statement wasn't pleasant, but it wasn't catastrophic either. The Australian Taxation Office would tack on interest, and at tax time you'd claim that interest as a deduction, quietly clawing back a quarter or more of the cost. For a lot of small business owners, ATO debt functioned as a slow, annoying, but ultimately tax-effective line of credit.
That era is over. As of 1 July 2025, interest charged by the ATO is no longer tax-deductible — not for companies, not for trusts, not for sole traders. If you're carrying any unpaid tax or superannuation debt into the 2025-26 year, the real cost of that debt just jumped substantially, and a lot of business owners won't notice until their accountant delivers the bad news at tax time.
Here's what changed, why it matters more than the headline suggests, and what to do about it.
What GIC and SIC Actually Are
The ATO charges two different kinds of interest, and the new rule hits both.
General Interest Charge (GIC) applies to any tax or superannuation liability you haven't paid by its due date — overdue BAS, income tax, PAYG instalments, super guarantee charge, the lot. It compounds daily, which means a debt sitting on the books for months grows faster than a simple annual rate would suggest.
Shortfall Interest Charge (SIC) applies in a narrower situation: when the ATO amends an assessment because you (or your accountant) underestimated the tax owed in an earlier year. It's lower than GIC, but it's still a real cost, and it's now non-deductible too.
Both rates are set quarterly, tied to the 90-day bank bill rate plus a legislated uplift. Through 2025 they've hovered in the 10.5–11.2% range — which, before the deduction was removed, worked out closer to 7–8% after-tax for a typical small business. Now it's the full sticker price, with no offset at all.
The Rule That Actually Matters: When It Was Incurred, Not When It's Paid
The single most important detail — and the one that trips people up — is the effective date test. It's not about when you pay off the debt. It's about when the interest was incurred.
- GIC or SIC that accrued before 1 July 2025 is still deductible, even if you pay it off next year.
- GIC or SIC that accrues on or after 1 July 2025 is not deductible, even if it relates to a much older tax debt from 2022 or 2019.
That second point is the sting. A three-year-old unpaid BAS debt doesn't get grandfathered in. Every day of interest that ticks over from 1 July 2025 onward loses its deductibility, regardless of how old the underlying liability is. If you've been letting an old ATO balance drift because "the interest is basically half price after tax anyway," that math no longer works.
Why the Real Cost Jumped More Than the Headline Number
It's tempting to read "interest isn't deductible anymore" as a modest tax-time inconvenience. It's bigger than that, for two compounding reasons.
First, the after-tax gap was doing real work. For a company paying the 25% small business tax rate, a deduction on 11% GIC brought the effective cost down to roughly 8.25%. For a sole trader in a higher marginal bracket, the effective rate could drop closer to 6–7%. That gap is gone. GIC at 11% is now just... 11%. Compare that to a typical small business overdraft or line of credit sitting somewhere around 7–9%, and ATO debt has flipped from being one of the cheaper ways to fund a cash flow gap to being one of the more expensive ones.
Second, GIC keeps accruing even while you're on an approved ATO payment plan. Setting up an instalment arrangement stops the ATO chasing you for the full amount immediately, but it does not stop the daily compounding. A payment plan spread over 18–24 months, once a reasonably comfortable way to manage a cash crunch, now quietly compounds a non-deductible cost the entire time.
What to Do If You're Carrying ATO Debt Right Now
None of this means panic — it means treating ATO debt like what it now actually is: expensive, undiscounted borrowing. A few practical moves:
Compare it honestly against a real loan
Run the numbers. If your bank or a business lender will refinance the debt at a lower rate — and especially if that loan's interest remains deductible because it's genuinely connected to your business activity — refinancing can meaningfully cut the real cost. A transport or trade business carrying $30,000 in ATO debt at 11% versus a business line of credit at 6-7% is looking at a real difference over a 12-month payoff, not a rounding error. Get advice before you do this — deductibility of the new loan's interest depends on how the funds are used and your entity structure, and it's easy to assume it carries over when it doesn't automatically.
Ask about remission — it still exists
The ATO can still remit (reduce or cancel) GIC and SIC in specific circumstances: genuine financial hardship, an ATO processing error, natural disasters, or serious illness. Remission was never automatic, and it isn't guaranteed now either, but it's worth formally requesting rather than assuming it's off the table. It costs nothing to ask.
Shorten the payment plan if you can
Because GIC compounds daily regardless of arrangement status, the fastest way to cut the total interest bill is simply to compress the timeline. A payment plan that clears a debt in 6 months instead of 18 will rack up meaningfully less non-deductible interest, even at the same rate — worth stretching for if it's genuinely achievable without starving the business of working capital elsewhere.
Get ahead of the next BAS before it becomes a debt at all
The cheapest GIC is the GIC you never incur. The businesses that get blindsided by this change tend to be the same ones that treat GST and PAYG withholding as part of general operating cash rather than money that's already spoken for. Forecasting upcoming BAS and PAYG obligations, and setting aside funds specifically for them, is the single most effective defence against the new rules — because it's a defence that doesn't depend on interest rates, remission policy, or refinancing terms at all.
Why This Comes Back to Your Books
That last point is really a bookkeeping problem wearing a tax-policy costume. The businesses most exposed to non-deductible GIC aren't necessarily the ones with the worst revenue — they're the ones with the least visibility into what they owe the ATO at any given moment. If your GST and PAYG liabilities are buried inside a single operating cash balance instead of tracked as a distinct, always-visible obligation, it's easy to spend money that was never really yours to spend, and easy to be surprised when a BAS falls due.
Clear, current, and specific records make that gap visible before it becomes a debt — and they make it far easier to answer the exact question this rule change turns on: when was this interest incurred, and does it fall before or after 1 July 2025? Reconstructing that after the fact from a bank statement is painful. Having it already recorded, transaction by transaction, is not.
Keep Your Tax Obligations Visible, Not Buried
Non-deductible ATO interest is a strong argument for treating tax and super liabilities as their own line item, not an afterthought inside general cash flow. Beancount.io offers plain-text accounting that gives you complete transparency and control over your financial data — every BAS provision, every GIC charge, every payment plan instalment recorded in version-controlled, human-readable files instead of a black box. Get started for free and see why developers and finance professionals are switching to plain-text accounting.