Having a commercial tax debt as a business owner isn’t uncommon. According to the Commissioner of Taxation at the ATO, Rob Heferen, small business tax debts made up around 65% of all debt owed to the ATO, as of April 2024. This places them at well over $30 billion in the red. However, the way you’ll pay back your tax debt is changing (and becoming more expensive) as of the next financial year.
How has paying back tax debt changed for companies?
The big change made to how the ATO treats tax debts is that interest on these debts is no longer claimable as a business expense. This applies to both general interest charge (GIC) and shortfall interest charge (SIC) on outstanding tax debts and comes into effect on 1 July 2025. The good news is that any interest incurred on tax debt before the 2025-26 financial year is still tax-deductible.
Prior to this update in legislation, both GIC and SIC on tax debts were tax-deductible. This gave businesses a bit more leeway when it came to tackling their outstanding balance with the ATO.
What this ultimately means is that your tax debt is going to become more expensive from then on. While it does provide a greater incentive to clear your debt to the ATO, it’s bound to put some businesses who don’t have the cashflow to do so in a bind.
What is the current interest rate on ATO tax debt?
As of Q4 of the 2024-25 financial year, the GIC rate is 11.17%. This results in a daily rate of 0.03060274%. Figures from the UNSW Tax and Business Advisory Clinic showed that the average tax debt among their small and microbusiness clients in 2023 was around $80,000. However, this amount is likely to have grown in the years since as the ATO's total payable debt continues to swell.
The following table shows what impact the removal of deductions could have on the annual interest paid by businesses with tax debts of different sizes:
| Financial year | Tax debt | GIC rate | Annual interest payable | Claimable tax deduction* |
|---|---|---|---|---|
| 2024-25 | $60,000 | 11.17% | $7,104 | $1,776 |
| 2025-26 | $60,000 | 11.17% | $7,104 | $0 |
| 2024-25 | $80,000 | 11.17% | $9,472 | $2,368 |
| 2025-26 | $80,000 | 11.17% | $9,472 | $0 |
| 2024-25 | $100,000 | 11.17% | $11,840 | $2,960 |
| 2025-26 | $100,000 | 11.17% | $11,840 | $0 |
| *Tax deduction calculated based on the 25% company tax rate, which applies to businesses with an aggregated turnover of less than $50 million. | ||||
As you can see, a small business with a $60,000 tax debt would be $1,776 worse off per year with interest removed as an eligible deduction based on current rates. Those with tax debts of $80,000 or $100,000 would be worse off by approximately $600 and $1,200, respectively.
The good news is that, with recent cuts to the national cash rate by the Reserve Bank of Australia (RBA), the GIC rate is expected to fall in Q1 of the 2025-26 financial year.
What to do about your tax debt
The best way to deal with your tax debt depends on your business and circumstances specific to you. According to H&R Block Australia’s Director of Tax Communications, Mark Chapman, businesses who defer their tax debt further to avoid crystallising the GIC and SIC impact could face further issues down the track.
“For businesses that choose [to do this], they are leaving themselves open to an additional and increasing cost which could prove impossible to sustain,” Mr Chapman said.
One potential solution for tackling your debt is with a business loan. If your business is eligible for finance, a loan can partially or fully clear your debt with the ATO and allow you to pay it off at your own speed. You’re also able to claim up to 100% of the interest on your repayments, making it a potentially tax-friendly alternative to the non-claimable interest on your ATO debt.
If you’re looking for funds to clear your tax debt now or simply wish to know more about your business finance options, you can get a free quick quote through Savvy. Once you’ve done this, you’ll be able to speak to one of our experienced commercial finance brokers about the next steps available to your business.
Whatever the decision you make, though, getting on top of your debt is essential. CreditorWatch reported in December 2024 that 33.6% of private businesses with tax debt defaults above $100,000 had become insolvent or closed over the previous 12 months. If you’re unsure exactly what the best move is for your business, it’s worth speaking to a tax professional.
What other law changes do businesses need to be aware of?
Changes to FBT-exempt vehicles
As of 1 April 2025, plug-in hybrid electric vehicles (PHEVs) are no longer exempt from fringe benefits tax (FBT). This is relevant for businesses offering these cars to their employees for novated leasing.
However, if the vehicle was used (or was available for use) before 1 April 2025 and you have a binding commitment to continue to provide it for private use beyond 1 April 2025, the exemption can still be applied.
Potential changes to superannuation payments
The other big change that may be on the horizon for employers is the requirement to pay their employees’ super at the same time as their wages. This has been announced by the Australian Government but, as of June 2025, it has not yet been made law. It’s set to come into effect on 1 July 2026 if passed, which may add further cashflow challenges, especially for small businesses.
