We want to bring to your attention a significant update that may impact your financial planning. As many of you are aware, maintaining outstanding debts with the Australian Taxation Office (ATO) has become increasingly costly for many taxpayers.

As outlined in our July newsletter, effective from 1 July 2025, the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) imposed by the ATO will no longer be deductible for tax purposes. This change applies universally, regardless of whether the tax debt pertains to past or future income years.

At an interest rate of 11.17%, the GIC has become one of the most expensive financing options available today. Unfortunately, unlike in the past, taxpayers can no longer rely on tax deductions to alleviate the financial burden of these charges. Consequently, relying on an ATO payment plan may not be the most financially viable strategy for many.

Refinancing Your ATO Debt: A Viable Option
One potential solution for businesses facing tax debts is the option to refinance these obligations with a financial institution. Unlike the GIC and SIC, the interest incurred on such loans may be tax-deductible, provided the borrowing is directly linked to business activities.

While tax debts often arise from income tax or Capital Gains Tax (CGT) liabilities, it is essential to recognise that interest may also be deductible if the funds are borrowed to cover other critical business-related tax obligations, including:

• Goods and Services Tax (GST).
• Pay As You Go (PAYG) instalments.
• PAYG withholding for employees.
• Fringe Benefits Tax (FBT).

However, before moving forward with any refinancing options, it is essential to determine whether the interest expenses will be deductible in your specific case.

Considerations for Individuals
Suppose you are an individual with tax debts. In that case, the deductibility of interest expenses on loans utilised to settle these obligations will largely depend on how the tax debt was incurred:

• Sole Traders: If you are actively engaged in a business, interest on loans taken to cover tax debts stemming from your business activities is generally deductible.
• Employees or Investors: In cases where tax debts arise from salary, wages, rental income, dividends, or other forms of investment income, the related interest is not deductible. Although refinancing may lower overall interest costs, it will not yield a tax deduction.

Illustrative Example: Meet Sam, a dedicated sole trader successfully running a café. When he borrows $30,000 to settle tax debts generated solely from his café profits, the interest is entirely deductible. However, if Sam also receives a salary from a part-time job and part of his tax debt results from this employment income, only a portion of the loan interest will be deductible. For instance, if $20,000 of the tax debt pertains to his business and $10,000 to his employment, then two-thirds of the interest on the loan will be deductible.

Implications for Companies and Trusts
In situations where a company or trust borrows to settle its tax debts (such as income tax, GST, PAYG withholding, or FBT), the interest is typically deductible if it can be directly attributed to obligations arising from business activities. However, it is essential to note that if a director or beneficiary personally borrows funds to cover these debts, the associated interest will generally not be deductible.

Navigating Partnerships
The treatment of tax debts within partnerships can be more intricate. When borrowing occurs at the partnership level and pertains to tax debts originating from the partnership’s business activities, interest is usually deductible. For example, this could cover interest related to business tax obligations such as GST or PAYG withholding.

Nevertheless, the ATO asserts that if an individual partner borrows personally to cover tax debts related to their share of partnership profits, the interest is deemed non-deductible. The ATO categorises this expense as personal, irrespective of the partnership’s operational status.

Key Takeaways for Your Financial Planning
It is essential to recognise that outstanding debts to the ATO are now more expensive than ever, given the non-deductibility of GIC and SIC. The possibility of refinancing your tax debt through an external lender could provide you with a valuable tax deduction, as well as access to lower interest rates.

The crux of the matter is to differentiate between tax obligations arising from business activities and those related to personal tax debts. In mixed scenarios, the necessity of apportioning the deduction may occur, which requires careful consideration.

Suppose you are uncertain about how these changes may affect your specific situation. In that case, we encourage you to contact us before arranging any financing options. With the right strategies in place, you can effectively manage your tax debts and steer clear of any unexpected financial challenges.

Thank you for your attention. We remain dedicated to supporting you throughout this period of change.