A major shake-up is coming to the way Australians manage their tax debts, and it’s set to hit the hip pocket of anyone who’s been relying on a little-known deduction to soften the blow of late payments.
For many, the current economic climate means every dollar counts, and unforeseen expenses can quickly lead to financial pressures.
This upcoming change directly impacts how individuals and businesses are managed when facing tax liabilities, potentially increasing the burden for some.
From 1 July, a longstanding tax perk will vanish, and the Australian Taxation Office (ATO) is urging taxpayers—especially those who sometimes fall behind—to get their affairs in order before the new rules kick in.
What’s changing?
For years, if you were charged interest by the ATO for paying your tax late or underpaying, you could claim that interest as a tax deduction.
This meant that, while you still had to pay the interest, you could at least reduce your taxable income by the same amount, taking a bit of the sting out of the penalty.
But thanks to the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, that’s all about to change.
From the start of the new financial year, interest charges from the ATO—specifically the General Interest Charge (GIC) and Shortfall Interest Charge (SIC)—will no longer be tax-deductible.
In other words, if you’re late or underpay, you’ll pay the full whack, with no relief at tax time.
Why is this happening?
The government says the change is about fairness. According to the ATO, taxpayers who pay on time have been ‘disadvantaged’ compared to those who delay and then claim a deduction for the interest.
The new rules are designed to level the playing field and encourage everyone to pay their tax on time.
There’s also a practical side: the ATO is sitting on a whopping $50 billion in collectable tax debt. By removing the deduction, the government expects to boost revenue by $500 million over the next two years.
That’s a tidy sum, and it’s clear the ATO is serious about cracking down on overdue tax bills.
How do the charges work?
Let’s break down the two main types of interest charges:
General Interest Charge (GIC): This is applied when you don’t pay your tax debt by the due date. It covers things like late lodgement of tax returns or overdue payments.
The current GIC rate is a hefty 11.17 per cent per annum, and it compounds daily—so the longer you leave it, the more you’ll owe.
Shortfall Interest Charge (SIC): This is applied when you make an incorrect self-assessment and end up underpaying your tax. The SIC rate is a bit lower, at 7.17 per cent per annum, but it also compounds daily.
Both charges can add up quickly, especially if you’re not on top of your tax obligations.
What should you do now?
If you’ve been putting off paying a tax debt, now’s the time to act. ATO Assistant Commissioner Anita Challen has some blunt advice: ‘If you have a tax debt you’ve been putting off paying—now is the time to pay.’
Here are some practical steps to consider:
- Pay off any outstanding tax debts before 1 July. If you’re charged interest before the deadline, you can still claim it as a deduction on this year’s tax return.
- Set aside money for tax obligations. If you run a business, consider keeping your GST, PAYG withholding, and superannuation contributions in a separate account so you’re not caught short when payment is due.
- Set up a payment plan if you can’t pay in full. The ATO is open to payment plans, and as long as you stick to the agreement, you’ll avoid debt recovery action. Just remember, interest will still accrue, but as you pay down the debt, the interest amount will decrease.
- Talk to your accountant or financial adviser. If you’re struggling to pay, there may be alternative financing options with lower interest rates than the ATO’s charges. But always check the tax implications before taking out a loan to pay your tax bill.
What about this year’s tax return?
If you’ve been charged ATO interest before 1 July, you can still claim it as a deduction when you lodge your 2023–24 tax return.
If you use myTax to lodge online, this information should be pre-filled for you, making the process a little easier.
What does this mean for retirees?
For many older Australians, especially those managing self-managed super funds, investment properties, or small businesses, this change could have a significant impact.
If you’re used to smoothing out cash flow by delaying tax payments and claiming the interest, you’ll need to rethink your strategy. The cost of carrying a tax debt is about to get a lot higher.
A final word: don’t get caught out
The ATO is making it clear: the days of using tax-deductible interest as a buffer are over. With interest rates on tax debts already high and compounding daily, the removal of the deduction makes it more important than ever to pay on time—or at least have a plan in place.
Have you ever relied on this deduction, or do you have a story about managing tax debts? Are you worried about how this change might affect you or your business?
We’d love to hear your thoughts and experiences—share them in the comments below!
And as always, if you’re unsure about how these changes might affect you, speak to your accountant or a registered tax agent. Staying informed and proactive is the best way to avoid any nasty surprises from the taxman.
Also read: Are you ready for a ‘deluge’ of tax scams? ATO warns ahead of June 30
The tax department are thieves like a lot of other government departments. When they charge nearly 12 percent interest on money owed to them. The cash rate it about 4% and you are lucky to get this amount on any investments.so why do these government departments rip of the people.