ATO taxpayers in Australia are facing a significant shift in the way they handle their tax obligations, with a new regulation set to take effect on July 1. The upcoming changes will affect how individuals and businesses manage tax debts and interest charges, potentially adding financial pressure for those who are late with payments.
Under the new policy, which is part of the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, taxpayers will no longer be able to claim tax deductions for interest charged by the Australian Taxation Office (ATO) on overdue tax debts.
The change is expected to have far-reaching implications, as it will increase the overall cost of carrying a tax debt and could lead to more strain on those already struggling with late payments.
New Rules Set to Remove Interest Deductions
Until now, Australian taxpayers could reduce their taxable income by claiming deductions for the interest charged by the ATO when payments were delayed. The General Interest Charge (GIC) and Shortfall Interest Charge (SIC) were the two main types of interest charges that taxpayers could previously deduct. However, starting July 1, this perk will be removed, significantly altering how taxpayers approach their financial obligations.
The GIC is applied when a tax debt is not paid by its due date, including instances when a tax return is lodged late. The SIC, on the other hand, comes into play when an incorrect self-assessment results in a tax shortfall. While the GIC rate currently stands at 11.17% per annum, the SIC is lower at 7.17% per annum, and both charges are compounded daily. Removing the ability to claim these interest charges as tax deductions will mean higher costs for taxpayers who are not on top of their payments.
Major ATO change just weeks away as taxpayers warned over new rules: 'Will cost more' https://t.co/GEnpwwSsNL
— Yahoo Finance Australia (@YahooFinanceAU) June 11, 2025
Impact on Taxpayers and the ATO’s Revenue Goals
The ATO’s Assistant Commissioner, Anita Challen, explained that the changes will place more responsibility on taxpayers to stay current with their obligations. While the policy will not immediately impact the upcoming tax return period, it is expected to increase costs for those who carry a tax debt into the new financial year. The ATO has emphasized that taxpayers must be proactive in managing their tax obligations to avoid the additional financial burden that will come with these changes.
One of the key reasons behind the change is to create a fairer tax system, where those who meet their obligations are not disadvantaged by the actions of those who delay their payments. The ATO has long faced the challenge of managing a significant tax debt, currently estimated at $50 billion. This change is expected to not only encourage more timely payments but also to help the ATO collect more revenue, with projections suggesting an additional $500 million in revenue for 2026-2027.
What Taxpayers Need to Know About the July 1 Change
For taxpayers who have already been charged interest before July 1, there is still an opportunity to claim deductions for that interest in the upcoming tax return. This will be automatically pre-filled in tax returns filed online through the ATO’s myTax system. However, any interest charged by the ATO after July 1 will not be eligible for deductions, and taxpayers will need to factor this into their future financial planning.
While the immediate effect of the change may not be felt until the next tax time, the ATO has urged taxpayers to act swiftly to stay on top of their financial responsibilities. Challen has stressed the importance of understanding the new rules, warning that taxpayers who fail to adjust to the changes could face higher costs and penalties.
A Step Towards Reducing the $50 Billion Tax Debt
The policy shift is also seen as part of the ATO’s broader strategy to address the growing tax debt in the country. As of now, the ATO is working to collect approximately $50 billion in overdue taxes, and this change is expected to put more pressure on taxpayers to settle their debts in a timely manner. This move is designed to level the playing field, ensuring that those who pay on time are not unfairly burdened by the actions of others who delay their payments.
Industry experts, including Hripsime Demirdjian, founder of Hive Wise, have noted that the change is part of a concerted effort to reduce the nation’s tax debt and ensure more fair treatment of compliant taxpayers. By removing the ability to claim interest deductions, the ATO hopes to motivate more individuals and businesses to stay current with their tax obligations and reduce the overall level of unpaid tax.
