For a company on the 25 per cent tax rate, $150,000 of ATO debt now costs around $17,400 a year in interest, and because that interest is no longer deductible, the business must earn roughly $23,200 of pre-tax profit just to service it. From 1 July 2025, the general interest charge and the shortfall interest charge stopped being tax deductible, and with that single change, ATO debt became the most expensive money most Australian businesses hold. This guide walks through how the charge is calculated, what the deductibility change really costs in worked numbers, and the decision framework for dealing with a tax debt now that the old maths no longer applies.
Published: July 2026
For decades, ATO interest carried a quiet subsidy. The general interest charge (GIC) on late payments and the shortfall interest charge (SIC) on amended assessments were both tax deductible, which meant the after-tax sting was always softer than the headline rate. A business paying GIC at 11 per cent, deducting it at a 30 per cent tax rate, wore an effective cost closer to 7.7 per cent. Plenty of owners, knowingly or not, ran the ATO as a flexible line of credit on exactly that logic.
That logic is gone. GIC and SIC amounts incurred on or after 1 July 2025 are not deductible. The rule attaches to when the interest is incurred, not when the underlying debt arose, so interest accruing today on a three-year-old debt is caught just the same. There is no grandfathering for existing balances, no phase-in, and no size threshold. Every entity that owes the ATO pays the full freight: companies, trusts, sole traders, partnerships, and SMSF trustees alike.
The change sits inside a wider collections hardening. The ATO is more willing to issue director penalty notices, more willing to disclose significant business tax debts to credit reporting bureaus once the $100,000 and 90-day tests are met, and less willing to let balances drift for years while lodgements fall behind. The ATO debt and small business tax gap context is the backdrop: unpaid tax is no longer treated as soft working capital. If you want a clean map of how your lodgement calendar interacts with payment risk, start with BAS due dates for 2026-27 and build payment capacity around those dates rather than around hope.
The GIC rate is not a number the ATO picks. It is set by a statutory formula: the 90-day bank bill rate plus an uplift of 7 percentage points, recalculated every quarter (see the ATO general interest charge rates). That uplift is the design feature worth understanding, because it guarantees ATO debt always prices well above ordinary commercial short-term rates, whatever the interest rate cycle is doing. The formula is also why this article stays useful after the current quarter ends: the rate moves, the structure does not.
For the April to June 2026 quarter, the GIC rate was 10.96 per cent. For the July to September 2026 quarter the published GIC annual rate is 11.43 per cent (daily rate about 0.03131507 per cent). GIC compounds daily, which lifts the effective annual cost above the headline: 10.96 per cent compounding daily works out to an effective annual rate of about 11.6 per cent. The worked examples below use that June 2026 quarter figure; at the July to September 2026 rate of 11.43 per cent the effective rate is about 12.1 per cent, which lifts each figure by roughly 4.5 per cent. The structure of the maths is unchanged as the rate resets. Interest is calculated on the running balance, including previously accrued GIC, from the day after the due date until the debt is cleared.
SIC, which applies to tax shortfalls between the original and amended assessment, runs on the same formula with a lower uplift of 3 percentage points. It is the gentler cousin, and it lost its deduction on the same day. In practice, businesses facing amended assessments often carry both SIC for the shortfall period and GIC once the amended amount becomes due and unpaid. Treat them as stacked, not alternative.
The grossed-up cost is where the change bites. Non-deductible interest has to be paid out of after-tax profit, so the pre-tax equivalent rate is the effective rate divided by one minus your tax rate.
At an effective GIC cost of roughly 11.6 per cent:
Scale the debt and the numbers get sobering quickly. A $400,000 balance, common after a couple of missed BAS cycles plus an income tax bill, accrues around $46,400 of interest in a year at current rates. For a 25 per cent company that is nearly $62,000 of pre-tax profit doing nothing but standing still. Left unattended for two years with compounding, the same debt grows past $498,000 before a single dollar of principal is repaid.
Take a hypothetical $3.2 million revenue services business with 18 staff. Two late activity statements plus a company tax balance leave $185,000 outstanding. At an effective 11.6 per cent, annual GIC is about $21,500. Grossed up at the 25 per cent company rate, the business needs roughly $28,600 of pre-tax profit just to fund the interest. That is more than many of these businesses spend on their entire outsourced finance function for a year. Put differently: the cost of not fixing the tax debt can exceed the cost of the team that would have prevented it.
Now layer a payment plan of 24 equal monthly instalments with no extra repayments. The balance declines, but GIC still compounds daily on the unpaid principal. Over two years the business can easily pay $18,000 to $22,000 of interest on top of the original $185,000, all non-deductible, before the debt is gone. Front-loading the first three months by even $20,000 saves thousands of that interest because every early dollar kills the daily compound.
Run the same comparison against commercial finance and the conclusion writes itself. Interest on a genuine business-purpose loan remains deductible, so even a facility with a headline rate close to GIC beats it decisively once tax is factored. A 12 per cent deductible facility costs a 25 per cent company an effective 9 per cent; non-deductible GIC at the same headline costs about 16 per cent in pre-tax terms. The ATO is not merely an expensive lender now. It is, in most capital stacks, the most expensive lender on the sheet.
The deductibility change did not happen in isolation. It landed alongside a broader hardening of ATO collections: firmer use of director penalty notices, disclosure of significant business tax debts to credit reporting bureaus, and a general unwinding of the pandemic-era patience that let balances drift. The policy intent is transparent. Using the tax office as working capital is meant to hurt, and now it does, at a rate designed to sit above anything a bank would charge a viable business.
For owners, the practical consequence is a re-ordering of the payment stack. Under the old settings, stretching the ATO to pay suppliers first was expensive but arguably rational. Under the new settings, the ATO generally belongs at or near the top of the stack, and any month it is not, the business is choosing its priciest possible funding by default. Directors with unpaid PAYG withholding or super guarantee components inside the balance should also read director penalties in Australia, because personal exposure can sit beside the company interest bill.
Cashflow visibility is the other half of the problem. Most tax debts form because GST and PAYG withholding looked like free cash in the trading account. A rolling view from the cash flow forecast calculator or a 1-month cash forecast turns the next two BAS cycles into planned outflows rather than surprises. Businesses that already feel the squeeze should also walk through a 90-day cash survival plan before they lock a multi-year plan they cannot service.
Two common approaches illustrate the fork.
Path A: hope and minimum contact. Lodge late when cash is tight, ignore statements, pay suppliers first, and reopen the ATO file only when a letter arrives. Outcomes stack: failure to lodge penalties on each document, GIC at the full non-deductible rate, weaker payment plan bargaining position, possible director penalty exposure, and, past $100,000 overdue more than 90 days without engagement, credit bureau disclosure risk. On a $185,000 file left for 18 months, interest alone can exceed $25,000, with penalties and commercial damage on top.
Path B: lodge, quantify, refinance or plan, provision. Lodge every document on time regardless of payment capacity. Quantify the true pre-tax GIC rate. Compare a deductible business facility against a payment plan. Ask for remission where grounds exist. Build a tax reserve so GST and withholding leave the trading account as they accrue. Outcomes: lower total interest, cleaner credit and director position, and a finance rhythm that stops the debt reforming. For many SMEs, the standing cost of that rhythm through outsourced finance services sits well below the annual GIC bill on a six-figure balance.
Is ATO interest tax deductible in Australia?
No. General interest charge and shortfall interest charge amounts incurred on or after 1 July 2025 are not deductible. Interest incurred before that date under the old rules remains deductible in the year it was incurred.
Does the change apply to tax debts from earlier years?
Yes. The test is when the interest is incurred, not when the debt arose. GIC accruing today on an old debt is non-deductible, even though interest on that same debt was deductible before 1 July 2025.
What is the current GIC rate and how is it set?
GIC is set quarterly at the 90-day bank bill rate plus a 7 percentage point uplift. For April to June 2026 it was 10.96 per cent; for July to September 2026 it is 11.43 per cent, and it compounds daily, giving an effective annual cost of around 11.6 per cent at the April to June rate. Check the ATO’s published rate for the current quarter before making decisions.
Does GIC compound?
Daily. Interest is calculated each day on the total outstanding balance including previously accrued interest, which is why balances left unattended grow faster than the headline rate suggests.
Is the shortfall interest charge also non-deductible?
Yes. SIC, which applies to shortfalls arising from amended assessments, lost its deductibility on the same date. Its rate uses a lower uplift of 3 percentage points over the 90-day bank bill rate.
Can I get GIC remitted?
The ATO can remit GIC where it considers it fair and reasonable, typically for circumstances beyond your control, serious hardship, or ATO-caused delay. Requests land best with lodgements current, a payment proposal attached, and a factual, specific explanation. Remission is discretionary, not automatic.
Is it better to get a bank loan to pay out the ATO?
Often, because interest on genuine business-purpose borrowing is generally deductible while GIC is not, so even a similar headline rate is far cheaper after tax. The right answer depends on your structure, security position and the facility’s true cost, so run the grossed-up comparison for your own numbers and confirm the deductibility of your specific arrangement.
Does a payment plan stop interest accruing?
No. A payment plan manages enforcement and demonstrates engagement, but GIC continues to accrue on the outstanding balance throughout. Pair any plan with a remission request where grounds exist, and repay as fast as cashflow allows.
How much pre-tax profit do I need to fund GIC?
Divide the effective GIC rate by one minus your tax rate, then apply that to the balance. At about 11.6 per cent effective, a 25 per cent company needs roughly 15.4 per cent pre-tax equivalent; on $150,000 that is about $23,200 of pre-tax profit a year to stand still on interest alone.
Does GIC apply if I have lodged but not paid?
Yes. Lodgement and payment are separate. Lodging on time avoids failure to lodge penalties, but unpaid amounts still attract GIC from the day after the due date until cleared.
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We review and check this guide periodically. At the time of writing (July 2026), all information was current. Scale Suite is a registered BAS Agent, not a licensed tax advisor or financial advisor. This content is general information only and does not constitute professional tax, financial, or legal advice. Some details may change over time.
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
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