Don’t Get Caught With Non-Tax Deductible Debt
From 1 July 2025, interest on ATO tax debts, including those under payment plans, is no longer tax-deductible. That means the cost of carrying a tax debt just went up.
What does this mean for business owners?
Previously, the interest charged by the ATO (known as the General Interest Charge or GIC) could be claimed as a tax deduction. Now, without that deduction, the after-tax cost of carrying a tax debt has increased, potentially making it more expensive than other financing options.
The ATO’s General Interest Charge (GIC) is already steep — 10.78% for Q1 FY26. Without the tax deduction, the after-tax cost of that debt jumps even higher. For many businesses, ATO debt is now the most expensive kind of debt you can carry.
Why does it matter if business owners have tax debt?
While carrying tax debt isn't necessarily considered wrong, there are a few reasons why it's not really right. Carrying tax debt doesn’t just impact your bottom line, it can have broader consequences for your business operations, financial stability, and reputation. Here’s how:
Tax debt affects your ability to access business finance
Lenders routinely check your tax position when assessing credit applications. An outstanding ATO debt (even if you’re on a payment plan) can make you look high-risk. This could lead to loan rejections, stricter lending conditions, or higher interest rates. Some financiers may even require proof that your tax obligations are up to date before approving funding.
Raises red flags with creditors and the ATO
A history of late or unpaid tax signals poor financial management, which can damage your credibility with both the ATO and creditors, such as suppliers or lenders. The ATO may also view continued non-payment as a warning sign and increase scrutiny on your business, leading to more frequent reviews or audits.
Creates hurdles for renewing licences or contracts
Many industries require up-to-date tax compliance to renew business licences, tender for government contracts, or maintain professional registrations. If you have outstanding tax debts, you might find yourself unable to continue operations or secure important work opportunities.
Could result in enforcement action
The ATO has a broad range of powers when it comes to recovering unpaid tax, including garnishing bank accounts, issuing Director Penalty Notices, and initiating legal action. Leaving your tax debt unmanaged puts your business at risk of serious enforcement measures.
What can you do to clear tax debt?
Rather than letting unpaid tax accumulate, consider smarter strategies:
Tax deductible finance
Business finance (like a business loan or line of credit) may be used to pay off your tax debt. Interest on commercial finance will generally be tax deductible, and in many cases, the interest rate will be lower than the rate the ATO charges. For example, a business loan with an interest rate of 9% already attracts an interest saving compared to the ATO's 10.78%. Factoring in the tax deductible debt leads to even more savings vs using non-deductible debt through the ATO.
Work with your accountant to forecast and plan for upcoming tax bills
One of the most effective ways to avoid unnecessary ATO interest charges is to plan ahead. A good business accountant can help you forecast your business income, calculate your likely tax obligations, and generate cash flow to meet your BAS, PAYG, and income tax payments. This proactive approach ensures that tax liabilities don’t come as a surprise, and it reduces the need to rely on costly short-term solutions or fall behind. Regular check-ins also allow you to adjust your plan as your business circumstances change, helping you stay in control of your cash flow year-round.
Review your business structure to ensure you’re operating in the most tax-effective way
The structure of your business, whether it’s a sole trader, partnership, company, or trust, can significantly impact how much tax you pay and how efficiently you can manage cash flow. An outdated or unsuitable structure may lead to higher tax obligations, limited flexibility in distributing income, or missed opportunities for legitimate deductions. A business structure review can identify whether there are more efficient ways to operate, reduce taxable income, and protect your assets. In some cases, restructuring may even allow for better financing options and reduce reliance on ATO payment plans altogether.
Need help navigating these changes?
Bonerath & Co can help you understand the impact of these new rules and create a strategy to manage your tax and cash flow more efficiently. Talk to us before the next BAS deadline.
