Leaving debts outstanding with the ATO is now more expensive than ever. From 1 July 2025, general interest charge (GIC) and the shortfall interest charge (SIC) are no longer tax-deductible, regardless of whether the tax debt relates to past or future income years. With GIC currently at 11.17%, this is one of the most expensive forms of finance available, and if there is no deduction to offset the cost, it might be time to consider your other options.
Could refinancing help?
Businesses can sometimes refinance tax debts with a bank or other lender. Unlike GIC and SIC, interest on these loans might be deductible for tax purposes, provided the borrowing is connected to business activities. For example, interest could be deductible where money is borrowed to pay tax debts relating to the business such as GST, PAYG instalments, PAYG withholding for employees or FBT.
Specific things to consider based on your circumstances:
- Sole traders: If you are genuinely carrying on a business, interest on borrowings used to pay tax debts from that business is generally deductible.
- Employees or investors: If your tax debt relates to salary, wages, rental income, dividends, or other investment income, the interest is not deductible. Refinancing may still reduce overall interest costs depending on the interest rate on the new loan, but it won’t generate a tax deduction.
- Companies and trusts: If a company or trust borrows to pay its own tax debts (income tax, GST, PAYG withholding, FBT), the interest will usually be deductible but if a director or beneficiary borrows money personally to cover those debts, the interest would not normally be deductible to them.
- Partnerships: If the borrowing is at the partnership level and it relates to a tax debt that arose from a business carried on by the partnership then the interest should normally be deductible. For example, this could include interest on money borrowed to pay business tax obligations such as GST or PAYG withholding amounts. However, the ATO takes the view that if an individual who is a partner in a partnership borrows money personally to pay a tax debt relating to their share of the profits of the partnership, the interest isn’t deductible.
Key takeaway
The key is distinguishing between tax debts from business activities and other sources. For mixed situations, you may need to apportion the deduction. If you’re unsure how this applies to you, talk to us before arranging finance. With the right strategy, you can manage tax debts more effectively and avoid costly surprises.
