Aussie Business Owners: ATO Interest Deductions Are Changing – Here’s What You Need to Know
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If you’re running a small business, there’s a significant tax change coming your way. Starting 1 July 2025, the Australian Taxation Office (ATO) will no longer allow you to claim tax deductions for interest charges on unpaid tax debts. This shift could impact your cash flow and tax planning, but don’t worry—we’ll break it down for you and explore how a business loan might be a smarter move.
What’s Changing?
Currently, if you have an outstanding tax debt with the ATO, you might incur interest charges like the General Interest Charge (GIC) or Shortfall Interest Charge (SIC). Up until now, these interest payments have been tax-deductible, providing some relief come tax time.
However, as of 1 July 2025, this is changing. The government has amended the tax law to deny income tax deductions for ATO interest charges incurred in income years starting on or after this date. This includes both GIC and SIC.
In simple terms: Interest on unpaid tax debts will no longer be tax-deductible from 1 July 2025.
How Does This Affect Small Businesses?
For many small businesses, cash flow is king. The ability to deduct ATO interest charges has been a helpful tool in managing finances. With this deduction gone, the cost of carrying a tax debt becomes more expensive.
Let’s say you have a $50,000 tax debt and the ATO charges you 10% interest annually. Previously, that $5,000 interest could be deducted from your taxable income, reducing your tax liability. Now, you’ll bear the full brunt of that cost without any tax relief.
This change means:
Higher after-tax costs for carrying ATO debt.
Reduced cash flow, as you can’t offset interest payments against your income.
Incentive to pay off tax debts sooner to avoid non-deductible interest charges.
A Smarter Move: Business Loans
Given the new landscape, it might be time to consider alternative financing options. One strategy is to take out a business loan to pay off your ATO debt.
Here’s why:
Interest on Business Loans Is Tax-Deductible: Unlike ATO interest charges, the interest you pay on a business loan remains tax-deductible, provided the loan is used for income-producing purposes.
Potentially Lower Interest Rates: Business loans often come with lower interest rates compared to the ATO’s GIC, which is calculated on a daily compounding basis.
Improved Cash Flow Management: With a structured loan repayment plan, you can better manage your cash flow, avoiding unexpected interest charges from the ATO.
Avoid Penalties: Paying off your tax debt promptly with a loan can help you avoid additional penalties and interest charges from the ATO.
You can also potentially increase the term of the ATO debt into a business loan that is longer dated, meaning your monthly repayments will also be reduced. Edging cash flow pressure on the business.
Real-World Example
Imagine you’re a café owner with a $30,000 tax debt. The ATO charges you 10% interest annually, amounting to $3,000 per year. Previously, you could deduct this $3,000, reducing your taxable income.
Post-1 July 2025, this deduction is gone. However, if you take out a business loan at 7% interest to pay off the ATO debt, you’ll pay $2,100 in interest annually. Plus, this $2,100 remains tax-deductible, saving you money in the long run.
What Should You Do Now?
Review Your Tax Debts: Take stock of any outstanding tax liabilities and assess the interest charges you’re incurring.
Consult a Finance Broker: Speak with a finance professional to explore loan options that suit your business needs.
Act Before 1 July 2025: If possible, settle your tax debts before the new rules kick in to take advantage of the current deductions.
Plan for the Future: Incorporate these changes into your financial planning to ensure your business remains on solid footing.
Final Thoughts
Change is never easy, but with proactive planning, you can navigate these new tax rules effectively. By considering a business loan to pay off ATO debts, you not only avoid non-deductible interest charges but also potentially benefit from lower interest rates and improved cash flow management.
Remember, every business is unique, so it’s essential to seek personalized advice to determine the best course of action for your situation.
Note: This article is intended for informational purposes only and does not constitute financial or tax advice. Please consult with a qualified professional for personalised guidance.
At Broker.com.au, we’re here to help you stay ahead of how shifting markets could affect your business finance. If you’re a business owner looking to secure the right loan structure in an evolving economy, we’re only a call away.
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