ATO Tax Deductions Scrapped! What this means for you in 2025

If you've ever owed money to the tax office and claimed a deduction on the interest charges, those days are officially over. From July 1, 2025, the ATO has removed the ability to claim deductions for interest charges on unpaid taxes, marking a significant shift in how tax debt is managed. This change affects both the general interest charge (GIC) for unpaid taxes and the shortfall interest charge (SIC) for underpaid tax after amended returns. While all taxpayers with ATO debt will feel the impact, small business owners and individuals juggling multiple income sources are set to be hit hardest by this policy change.

Treasury Laws Amendment Removes Interest Deduction Benefits

The Treasury Laws Amendment Act 2025 represents a fundamental shift in the ATO's approach to tax debt collection. Previously, taxpayers could claim deductions on interest charges imposed by the tax office, often saving thousands of dollars annually. This arrangement essentially allowed the ATO to function as an alternative lender, with taxpayers able to offset some of the cost through tax deductions.

"The ATO is basically saying, 'we don't want to be your bank anymore. We're not going to let you claim a deduction on [your debt]. Pay off the debt and get finance elsewhere,'" explains Belinda Raso, director and registered tax agent at Queensland-based accounting firm Tax Invest Accounting.

The change targets the ATO's estimated $105 billion in outstanding debt, with half considered collectable by the government agency. According to the ATO, this policy ensures taxpayers who pay on time aren't disadvantaged compared to those who delay payments.

Small Businesses Face the Biggest Financial Hit

With approximately 2 million small business owners across the nation, according to World Bank data, this demographic faces the most significant impact from the deduction removal. Small businesses typically carry higher debt levels and are already struggling with rising operational costs, staff shortages, and economic uncertainty.

Cash Flow Pressures Mount for Business Owners

The timing couldn't be worse for small businesses already dealing with multiple financial pressures. Rising property costs, global economic uncertainty, and domestic housing challenges have created a perfect storm of financial stress. When combined with the removal of tax deduction benefits, many small businesses could find themselves in precarious positions.

"It's a really, really bad time for them to make this happen," Raso notes. "You take into consideration everything — tariffs, with the economy the way it is, everything like that — and it's going to hit small businesses very hard. There's a lot of small businesses that are struggling at the moment; there's a lot of instability in the economy."

Individual Taxpayers Also at Risk

While small businesses face the largest impact, individual taxpayers aren't immune to these changes. Tax debts are becoming increasingly common among everyday individuals, particularly those with multiple income streams or side businesses.

"Tax debts are becoming a lot more common to the everyday individual," Raso explains. "It's actually more common than we think — especially when they've got more than one job, or a side hustle."

For individuals carrying ATO debt, the removal of interest deductions means exploring alternative financing becomes crucial. Those with mortgage commitments may find themselves squeezed between home loan repayments and tax obligations without the previous deduction benefits.

Understanding the Real Cost of ATO Interest Charges

The ATO compounds interest daily and charges it monthly, creating a significant financial burden for those carrying tax debt. On a $10,000 debt, interest charges add up to roughly $1,100 extra annually, though taxpayers typically don't feel this impact until the following financial year.

Without the ability to claim deductions on these charges, the effective cost of carrying ATO debt increases substantially. This reality makes alternative financing options more attractive, as banks and non-bank lenders often offer interest rates lower than ATO fees.

Rob Heferen, commissioner of taxation, emphasized during an April address that the ATO's debt "is the largest it's ever been, and it is money that could be benefitting all Australians." The policy change aims to create what the ATO calls a "level playing field" by encouraging timely tax payments.

Exploring Alternative Financing Options After July 2025

With deduction benefits removed, taxpayers need to reassess their approach to managing tax debt. Refinancing options through banks or non-bank lenders often provide more favorable terms than carrying ATO debt, especially without deduction benefits.

"What's really going to be important is that small businesses are going to have to start looking at their cash flow," Raso advises. "What they need to do is to look at their costs, look at their business, how it's running? And just manage their cash flow better, possibly even speak to their broker, refinance all of their debts, and then start clean and ensure that they put in the money aside for tax purposes."

For those considering refinancing options, speaking with a mortgage broker or financial advisor becomes essential. They can help structure financing solutions that accommodate both existing debt obligations and future tax liabilities. Personal loans or business loans might offer better terms than carrying high-interest ATO debt without deduction benefits.

Preparing for the New Tax Debt Reality

The removal of interest charge deductions fundamentally changes how taxpayers should approach tax debt management. Rather than treating the ATO as a lender of last resort, individuals and businesses need proactive strategies for meeting tax obligations.

This might involve setting aside funds throughout the year, improving cash flow management, or establishing credit facilities to handle tax payments when due. For those already carrying ATO debt, exploring refinancing options before the changes take full effect could provide significant savings.

As these changes reshape the tax debt landscape, comparing financing options becomes more critical than ever. Whether you're a small business owner managing cash flow or an individual dealing with multiple income sources, understanding your options helps navigate this new reality. Tools like MoneyMart's comparison services can help you find the right bank accounts and loans that work the best for you in this changing environment.