Effective 1 July 2025, the Australian Taxation Office (ATO) will no longer allow tax deductions for General Interest Charges (GIC) incurred on late payments of tax. This includes interest charges applied to payment plans arranged with the ATO. These changes will apply to both business and individual taxpayers.
If you currently have outstanding tax liabilities, it may be more tax-effective to consider alternative funding options. Interest paid on loans used to fund business expenses—including cash flow financing—remains tax-deductible.
Clarification on Deductibility of Interest on Loans to Pay Tax
Generally, if a taxpayer is carrying on a business for the purpose of gaining or producing assessable income and borrows money to pay income tax liabilities arising from those business activities, the interest incurred on the loan is deductible. However, this deduction only applies to the portion of the loan used to pay business-related tax liabilities. If the same loan is also used to pay personal or non-business-related tax liabilities (such as tax on employment income or investment earnings), the interest portion relating to those components is non-deductible. Please refer to Taxation Ruling IT 2582 for more information.
A recent private binding ruling 1052265296362 | ATO Legal database supports this view.
In contrast, where the taxpayer is not carrying on a business, interest on funds borrowed to pay personal tax liabilities is generally not deductible. section 25-5(2)(c) of ITAA 1997, such expenses are excluded, even if the income tax debt relates to assessable income like salary and wages, investment income, or rental income. This position is reflected in ATO ID 2002/607, which concludes that interest on a loan taken out to pay an individual’s tax debt is not deductible under section 8-1 as the expense is private in nature and also specifically excluded under section 25-5.
If you or your business have significant tax debts under a payment arrangement with the ATO, and you maintain a good credit rating, we recommend contacting us. We can work with our financing partners at Intelligent Finance to explore funding solutions. Taking action early may help you avoid severe consequences such as Director Penalty Notices, particularly if your business operates through a company or a trust with a corporate trustee.
Please note: If you are an individual taxpayer with no business income (i.e., your income is solely from employment or other non-business sources), interest on an external loan taken to pay your income tax liability will not be tax-deductible under current tax law.
Disclaimer: This article is intended to provide general information only. It does not constitute tax, financial, or legal advice. You should seek professional advice tailored to your specific circumstances before making any decisions.
Need Advice?
Please reach out to our team to discuss your options. We can assess your individual or business circumstances and help you explore the most tax-effective strategies available under the new rules.