The rule change that quietly made ATO debt a third more expensive to carry

The Enforcement Era, Part 2 of 4

In Part 1, I wrote about the surge in Director Penalty Notices and the review now examining it – the sharp end of the ATO's shift from patience to pursuit. This week I want to look at something quieter, which is doing more damage to more businesses precisely because almost nobody has stopped to do the arithmetic.

On 1 July 2025, the interest the ATO charges on unpaid tax stopped being tax-deductible.

That's the whole change, in one sentence. It sounds like a footnote. It isn't. For any business carrying a tax debt, it altered the real cost of that debt overnight, and it did so without a rate rise, a new penalty, or a letter in the mail. Most owners I speak to didn't register it happening.

What actually changed

The General Interest Charge – GIC – is what the ATO applies to a tax liability that isn't paid by its due date. It runs on income tax, on your quarterly BAS, on PAYG, on superannuation guarantee amounts. It compounds daily. For the July to September 2026 quarter the rate is 11.43%, which because it compounds works out to an effective annual cost of around 12%.

Until last year, there was a small mercy built into that. Because GIC was tax-deductible, a profitable business got some of it back at tax time. If you were paying company tax at 25%, roughly a quarter of your interest cost came back as a deduction. The headline rate stung, but the after-tax cost was meaningfully lower.

That mercy is gone. Under the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, any GIC incurred on or after 1 July 2025 is no longer deductible – and it doesn't matter whether the debt itself relates to an earlier year. The test is when the interest is charged, not when the debt arose. So the interest ticking over today on a debt from two years ago is non-deductible too.

The number that matters

Take a business carrying $100,000 of ATO debt across a year at the current rate.

The interest is roughly $12,000. Under the old rules, a company paying 25% tax recovered about $3,000 of that as a deduction, so the real cost was closer to $9,000. Today it recovers nothing. The real cost is the full $12,000.

Same debt. Same rate. Roughly a third more expensive to carry, because of a change most businesses never adjusted for. Scale that to $300,000 or $500,000 of debt – which is not unusual in the files I see – and the gap between what owners think they're paying and what they're actually paying runs to tens of thousands of dollars a year.

Two things people get wrong

The first is the payment plan. There's a widespread belief that once you've agreed a payment arrangement with the ATO, the interest eases off. It doesn't. The ATO is explicit: GIC keeps accruing at the full rate, compounding daily, for the entire life of the plan. A long, comfortable-looking payment plan on a large debt can quietly cost more in non-deductible interest than the breathing room is worth. I'm not saying don't use them. I'm saying do the sum before you sign, because the plan that feels like relief can be the more expensive option.

The second is remission. The ATO can still reduce or remit GIC in the right circumstances, and that hasn't changed. But remission requests are assessed strictly, and the tax office is open that it protects the businesses who paid on time by keeping the bar high. Remission is worth pursuing where the grounds are genuine. It is not a strategy you can rely on.

Why this belongs in a series about enforcement

A Director Penalty Notice is the ATO reaching for you directly. This is subtler, and in a way more revealing. By removing the deduction, the government made carrying a tax debt more expensive without touching the rate – a deliberate nudge to pay tax before anything else. Read alongside the DPN surge, it's the same message delivered two ways: the era of the ATO as a cheap, patient lender is over.

The businesses that will feel this most are the ones carrying debt on an old payment plan they set up when the maths was different, who haven't recalculated since. If that's you, the number worth knowing this week is what that debt is truly costing you now – not what it cost when you agreed to it.

This is Part 2 of The Enforcement Era. Next Thursday, Part 3, in Anthony Percy's words: the personal-liability myths that catch good directors off guard – starting with the belief that resigning makes the problem go away. It doesn't, and the reason why matters.

If you're carrying ATO debt and haven't run the numbers since the rules changed, I'm happy to work through it with you directly. Better to know the real figure early.

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