The Australian Taxation Office's (ATO) crackdown on debt and interest deductions kicks off with the new financial year. Under the The Treasury Laws Amendment Act 2025, effective Tuesday, 1 July, taxpayers will no longer be able to claim deductions on interest charges imposed by the tax office.
"The ATO is basically saying, 'we don't want to be your bank anymore. We're not going to let you claim a deduction on [your debt]. Pay off the debt and get finance elsewhere,'" Belinda Raso, director and registered tax agent at Queensland-based accounting firm Tax Invest Accounting, told Australian Broker.
The changes zero in on the general interest charge (GIC) for unpaid taxes, and the shortfall interest charge (SIC), for underpaid tax after an amended return. Until now, taxpayers could deduct interest on outstanding tax debts, a benefit that often saved taxpayers thousands of dollars each year.
The changes will affect all taxpayers with ATO debt, but small businesses are set to feel it most, with an estimated 2 million small business owners across the nation, according to the World Bank, many of whom are struggling with rising costs and staff shortages. Add in global uncertainty – from Trump-era tariffs to Middle East unrest – plus rising prices, surging property costs and a housing crunch at home, and the hit to small businesses could be brutal. But homeowners, many of whom are grappling with mortgage repayments, won't be spared either.
"It's a really, really bad time for them to make this happen," Raso said. "You take into consideration everything – tariffs, with the economy the way it is, everything like that – and it's going to hit small businesses very hard. There's a lot of small businesses that are struggling at the moment; there's a lot of instability in the economy."
Though small businesses will feel the biggest hit due to higher debt levels, Raso pointed out that individual taxpayers with debt won’t escape unscathed.
"Tax debts are becoming a lot more common to the everyday individual," she said. "It's actually more common than we think – especially when they've got more than one job, or a side hustle."
The ATO announced the amendments earlier this year in an attempt to collect the estimated $105 billion in debt, half of which the government agency said was collectable debt.
"The change is designed to ensure that taxpayers who do the right thing and pay their tax in full and on time are not disadvantaged relative to those who do delay payment," according to the ATO website.
Rob Heferen, commissioner of taxation, said during an address in April that the ATO's debt "is the largest it’s ever been, and it is money that could be benefitting all Australians."
Raso explained: "What they're trying to do – in their words – is to have a level playing field, where they're encouraging taxpayers to pay their tax bills on time. People are then being forced to look at other ways to actually pay off their tax bill.
"At the end of the day, the ATO is hoping that people will actually not have a tax bill; that they'll just pay their debt on time," she said.
Mortgage holders already struggling to pay back their loans are especially vulnerable to the changes.
The current GIC sits at a hefty 11.17%, which Raso calls “an incredibly high rate.”
The ATO compounds interest daily and charges it monthly. On a $10,000 debt, that adds up to roughly $1,100 extra annually – although taxpayers won't feel it until the following financial year. Individuals and small businesses owing the ATO can refinance with a bank or non-bank lender, often securing a loan with interest rates lower than the ATO’s fees.
"What's really going to be important is that small businesses are going to have to start looking at their cash flow," Raso said. "What they need to do is to look at their costs, look at their business, how it's running? And just manage their cash flow better, possibly even speak to their broker, refinance all of their debts, and then start clean and ensure that they put in the money aside for tax purposes."
