ATO debt to become more expensive for SMEs from 1 July 2025
Australian small businesses carrying ATO debt have less than seven weeks before the General Interest Charge (GIC) on tax debt becomes significantly more expensive due to the removal of tax deductibility from 1 July 2025.
The legislative change will eliminate the tax benefit that has effectively reduced the real cost of ATO interest charges by a quarter for most businesses, according to business finance experts Valiant Finance.
“This represents a significant cost increase that many small businesses simply haven’t factored into their financial planning,” said Alex Molloy, CEO and Co-Founder of Valiant Finance. “With the current GIC rate at 11.17% compounding daily, the removal of tax deductibility means businesses will feel the full impact of that rate from July onwards.”
The timing is particularly challenging given that unpaid tax debts from small businesses have surged to $35.2 billion by the end of 2024, partly due to more lenient ATO enforcement during the pandemic period.
“Many business owners have been using the ATO as their default line of credit, prioritising other payments while letting tax obligations slide,” Molloy explained. “That strategy becomes significantly more expensive after 30 June.”
“For a business with $50,000 in ATO debt, the change means paying over $5,500 annually in non-deductible interest charges, equivalent to more than $15 per day in interest alone.”
Valiant Finance, which has facilitated over $2.5 billion in loans to more than 20,000 Australian SMEs, is urging businesses to take immediate action ahead of the EOFY deadline.
“We’re advising businesses to consider three main options,” said Molloy. “First, contacting the ATO proactively to establish a payment plan, or even better, through a registered tax agent as they tend to have a stronger relationship with the tax office. Second, prioritising tax debt in their immediate cash flow allocations. And third, exploring refinancing options to convert this increasingly problematic debt into a standard business loan with fixed repayments and ongoing tax deductibility.”
“Refinancing can sound counterintuitive; however, the opposite is true. This is because business loan interest remains tax-deductible after 1 July, unlike the ATO’s GIC. Additionally, business loans can often be structured over longer terms (36 months or more) compared to typical ATO payment plans (18-24 months), significantly reducing monthly repayment pressure.”
With approximately seven weeks until the deadline, Valiant recommends businesses:
- Calculate the precise impact of the deductibility change on their specific tax circumstances
- Review cash flow projections to determine whether current payment arrangements will clear the debt before the deadline
- Explore all available options from accelerated payment plans to refinancing, some of which we explore in more detail in our recent guide to ATO debt
“This isn’t just about avoiding additional costs, it’s about positioning your business for stronger financial health and better financing options in the future,” concludes Molloy.
