In 2024, we wrote about a legislative change regarding interest charged by the ATO on tax debt that was due to pass into law and come into effect in 2025. If you’re a small or medium-sized business owner preparing for EOFY in Australia, this is a crucial update that could affect your next tax return.
Tax update:
The Federal Government has legislated changes that will deny income tax deductions for interest charges imposed by the Australian Taxation Office (ATO), effective from 1 July 2025. This is a significant shift in ATO compliance rules and tax reporting requirements, and it’s essential for business owners and finance teams to understand what’s changing. |
What’s changing?
Previously, ATO interest charges, such as the General Interest Charge (GIC) and Shortfall Interest Charge (SIC), were deductible in your income tax return. These deductions helped many Australian businesses reduce their taxable income, especially during periods of cash flow strain.
Under the new legislation:
- From 1 July 2025, interest charges imposed by the ATO will no longer be tax deductible in your income tax return.
- This applies to all income years beginning on or after 1 July 2025, including businesses with substituted accounting periods (SAPs).
For EOFY tax planning, it means that any GIC or SIC incurred after this date will increase your overall tax liability without the benefit of a deduction.
What stays the same?
While this change is forward-looking, there are still some important points to note for your EOFY 2025 tax return:
- GIC and SIC incurred before 1 July 2025 will remain deductible for the 2024–25 and earlier income years.
- If the ATO later remits an amount that was previously deducted, that remission must be included as assessable income in the year it occurs.
This is why it’s so important to stay on top of your ATO interest charges and understand their impact on your financial reporting and tax obligations.
Why does this matter for small and medium businesses?
Many small business owners are unaware that ATO interest charges can quickly accumulate and impact cash flow, especially during the EOFY crunch. These charges commonly arise when:
- You have unpaid tax debts: GIC is applied daily until payment is made.
- The ATO discovers a tax shortfall during a review or audit: SIC is imposed as a result of an amended assessment.
Without the ability to claim a tax deduction, these costs will now hit harder on your bottom line. That’s why reviewing your accounting strategy and ensuring compliance before the cut-off is more important than ever.
What should Australian businesses do now?
To avoid unexpected tax impacts, here are some practical steps:
- Review outstanding ATO interest charges and consider resolving them before 1 July 2025, where feasible.
- For the 2024/25 income year, continue to track and report deductible GIC and SIC amounts according to current rules.
- If you operate under a substituted accounting period, check when your next financial year begins, as these changes apply to any SAP starting after 1 July 2025.
- Stay proactive with your tax compliance obligations and EOFY accounting practices.
Need help understanding the implications of these tax changes?
At LDB, we help small and medium businesses across Australia navigate the evolving tax landscape, maintain tax compliance, and optimise tax effectiveness, including for EOFY.
Our expert tax compliance and accounting team can assist with:
- EOFY tax reviews and strategy
- ATO compliance audits
- Accounting and financial advice tailored to SMEs
If you’d like personalised guidance or support with your tax position that takes into account your specific circumstances before the new rules take effect, don’t hesitate to contact LDB on (03) 9875 2900 and ask to speak with the tax team.
