Key takeaway: From 1 July 2025, interest charges on outstanding taxation liabilities will no longer be tax deductible, and the ATO is actively disclosing business tax debts to credit reporting bureaus, creating a double impact on businesses experiencing cashflow difficulties with outstanding tax debts.
Loss of Tax Deductibility
Businesses that fail to treat the ATO as their number 1 creditor and do not shift to paying their tax on time will find it difficult to operate in the future as the ATO continues its aggressive debt collection practices.
Income tax deductions for ATO interest charges incurred on or after 1 July 2025 will no longer be tax deductible. The change applies to General Interest Charge ("GIC") and Shortfall Interest Charges (SIC) for financial years starting on or after this date.
Important timing factors:
Interest charges imposed before 1 July 2025 can still be claimed as deductions in the 2024-25 and previous financial years.
Interest charges imposed from 1 July 2025 onwards cannot be deducted, even when they relate to earlier year tax debts.
Existing outstanding debts will lose deductibility for any interest that accumulates after 1 July 2025 – there are no transitional protections.
The effect of this change will see more businesses having their business tax debt disclosed to credit reporting bureaus.
ATO Debt Disclosure
The ATO will not disclose your tax debts to credit bureaus if you maintain active communication and demonstrate genuine efforts to resolve outstanding obligations, regardless of whether the debt exceeds $100,000. Maintaining good standing with the ATO requires timely responses to all ATO correspondence and requests as well as honouring agreed payment plans and commitments. Failing to do so will lead to the ATO proceeding to disclose when:
Outstanding tax obligations reach or exceed $100,000 and remain unpaid for over three months; and
The business has not established a meaningful dialogue with the ATO regarding debt management.
Upon receiving a disclosure warning letter, businesses have a four-week window to take corrective action before credit agencies are contacted. Available options include:
Full debt settlement - the most straightforward method to prevent credit reporting.
Establishing formal repayment terms - these arrangements must be finalised and approved by the ATO within the four-week timeframe.
Unintended Consequences
The disclosure can create unintended cash flow consequences for businesses, such as:
Financial Facilities Withdrawn: Banks and lenders may immediately cancel or modify existing lending arrangements, overdraft facilities, and corporate credit cards when ATO debt appears on credit assessments.
Trade Credit Restrictions: Commercial suppliers often reassess risk profiles and may:
Switch to cash-before-delivery payment terms
Request additional security or personal guarantees
Impose stricter credit limits or shortened payment cycles
Discontinue supply relationships in severe cases
To avoid the above consequences, businesses will need to develop new or update their existing strategies to manage their taxation debts.
Strategies to Manage Tax Debt
Cash Flow Management
It is becoming more critical than ever that businesses ensure funds are available for timely payment of taxation liabilities incurred. A separate bank account may be required to set aside GST, PAYG and superannuation contributions from business trading funds.
Alternative Financing
Business owners may need to seek alternative sources of finance where interest charges remain tax-deductible and potentially cheaper than incurring GIC and SIC.
Small Business Restructure ("SBR")
Where a business is unable to pay its outstanding taxation liabilities, an SBR may be a viable option to restructure ATO and other creditor debts and pause further interest being incurred.
The landscape for managing ATO debt has permanently changed. As the ATO increases its debt collection activities, it is important that you seek appropriate, trustworthy professional advice and act on that advice. Seeking this advice early may mean you have more options to deal with outstanding ATO and other debts. For further information or particular advice on your circumstances, contact the team at Worrells, who are here to help.
