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Taxpayers will not be able to claim tax deductions for ATO interest charges from next month, with brokers being urged to help SME clients prepare for the change.
With less than a month until the new financial year, brokers are being urged to ensure their business clients are aware of upcoming changes to tax deductions for Australian Taxation Office (ATO) debt and help them put in place appropriate measures.
From 1 July 2025, income tax deductions for ATO interest charges will no longer be allowed.
First announced in 2023, the Albanese government said it would amend the tax law to deny income tax deductions for ATO interest charges incurred in income years starting on or after 1 July 2025.
This means that taxpayers will not be able to deduct the general interest charge (GIC) and the shortfall interest charge (SIC) from the beginning of the 2026 tax year.
The move aims to “enhance incentives for all entities to correctly self-assess their tax liabilities and pay on time, and level the playing field for individuals and businesses who already do so”.
Given that the majority of the $52 billion in outstanding ATO debt is owed by small and medium-sized enterprises (SMEs), brokers have long been urged by lenders (including non-banks Pepper Money and Banjo Loans) to work with SMEs and their accountants to “get on the front foot” of these changes.
With only three weeks of the tax year left, brokers are being advised that time is now of the essence to help SMEs understand whether paying off ATO tax debt, for example, whether in a full or through a business loan, may be a more cost-effective measure.
For example, it has been flagged that while ATO interest charges will no longer be tax-deductible from 1 July, interest paid on business loans will generally continue to be so, dependent on circumstances (SMEs are urged to seek professional tax advice from a qualified tax adviser).
GIC is also currently 11.38 per cent an annum, an amount that is higher than typical commercial interest rates available through lenders that offer finance for clearing ATO debt.
Speaking to The Adviser, Tony Greco, senior tax adviser at the Institute of Public Accountants, said: “Business taxpayers who may be able to obtain a general deduction for interest expenses to fund business tax debts should consider seeking finance to pay their tax debts to replace non-deductible GIC with deductible interest expense.”
However, he said: “In contrast, interest on money borrowed to pay personal tax debts (non-business taxpayers or partners of a partnership who borrow to pay their personal tax arising from their partnership income) will not be eligible for a tax deduction, increasing the cost of using the ATO as a funding option.
“Taxpayers should consider whether it is preferable to pay their tax liabilities as early as possible to mitigate the impact of non-deductible GIC and whether these tax payments can be financed in a deductible manner.”
Brokers positioned to lead
David Gandolfo OAM, Quantum Business Finance director and chair of advocacy at the Commercial & Asset Finance Brokers Association of Australia (CAFBA), said the change presents a major opportunity for brokers.
“The billions of dollars owed to the ATO by businesses should be on lenders’s respective balance sheets and not on the ATO’s,” he told The Adviser.
“They want the money back, which is why they’re making it unfavourable to put an arrangement in place with the ATO.”
However, the finance broker said that there was “very little understanding” about how ATO debt can be refinanced, even though there are “a whole range of products”, both secured and unsecured, which are available to refinance tax debt.
He said: “This creates an opportunity for brokers to migrate this debt from the ATO to a lender... Even a higher interest rate with a non-bank lender can be more tax effective than having an arrangement with the ATO.
“Even if the cost of capital is greater at a non-bank lender, if it’s tax deductible, it becomes less.
“If, for whatever reason, a business has accumulated a tax debt over the last two or three years, then it makes more sense to amortise that loan over the next two or three years and alleviate cash flow so they can actually move forward.”
However, Gandolfo said many banks remain reluctant to lend to clients with ATO debt, urging a more supportive stance from the broader lending community.
“The banking sector has a very risk-averse approach to tax debt, which doesn’t reflect the reality of businesses with ATO arrangements,” he said.
“The banks have a collective obligation to step up and actually assist in this space, rather than stepping back and regarding the ATO as some kind of vexatious litigant.”
Many SME advisers, tax professionals, and professional accounting bodies have said that the introduction of these changes comes at a time when many businesses are already facing a wide range of financial challenges and could accelerate more insolvencies.
Speaking to our sister brand Accountants Daily, some tax professionals believe that making the interest costs on tax debts non-deductible would accelerate the accumulation of tax liabilities of small businesses to unsustainable levels, “potentially threatening the viability of many small businesses”.
Indeed, it has reportedly led to thousands of SMEs closing their doors.
As such, SMEs are being urged to prioritise clearing ATO debts over other creditors.
You can find out more about how brokers can support SMEs at the end of financial year in the May edition of The Adviser magazine, here.
[Related: Brokers urged to proactively support SMEs with tax changes]
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