ATO interest is no longer tax deductible

ATO interest is not tax deductible if it is incurred in an income year starting on or after 1 July 2025. That covers both the general interest charge (GIC) on overdue tax and the shortfall interest charge (SIC) on amended assessments, whichever year the underlying debt relates to (Income Tax Assessment Act 1997 (ITAA 1997) s 26-5(1A)).

For most people and businesses, with a 30 June year end, that means interest incurred from the 2025–26 income year. Interest incurred in earlier years generally remains deductible, but if the ATO later remits it, the remitted amount is usually taxable. Because ATO interest is now a full after-tax cost, GIC remission and paying earlier are both worth more than they used to be.

Is ATO interest tax deductible after 1 July 2025?

Generally no. Schedule 2 to the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025 made two main changes to the ITAA 1997:

• it repealed the specific deduction for these charges in s 25-5(1)(c), which had treated them as a tax-related expense (along with the related rule in s 25-5(7) about GIC on running balance accounts), and
• it inserted s 26-5(1A), which says you cannot deduct GIC or SIC under the Act.

The Act received Royal Assent on 27 March 2025, but the amendments apply to assessments for income years starting on or after 1 July 2025 (Sch 2 item 4). They don't depend on when the tax debt arose.

How far the rule reaches:

• It covers GIC on every kind of tax debt. GIC is the charge worked out under Part IIA of the Taxation Administration Act 1953 (TAA) (ITAA 1997 s 995-1). The rule applies whether the interest is on income tax, GST, PAYG withholding, PAYG instalments or fringe benefits tax.
• It applies to individuals as well as businesses. Individuals used to claim GIC as a cost of managing their tax affairs (PS LA 2011/12 para 87). That claim isn't available for interest incurred from 2025–26.
• It can't be claimed as an ordinary business expense instead. Section 26-5(1A) denies a deduction "under this Act", which includes the general deduction provision in s 8-1.

When is ATO interest incurred?

The test is the income year in which you incur the interest, not the year the tax relates to or the year you pay the interest to the ATO. The ATO sets out its view in the appendix to Practice Statement PS LA 2011/12, updated on 25 June 2026. GIC accrues daily (TAA s 8AAC), but you incur it only when you actually become liable for it (para 62).

Situation	When the interest is incurred (PS LA 2011/12)
GIC on an assessed debt left unpaid	Daily, as it accrues (paras 68–69)
GIC backdated on a late-lodged income tax return	On the day the assessment is given (para 69)
GIC on GST	Only once the GST is assessed, which generally happens when the activity statement is lodged (paras 71–72)
GIC on unpaid fringe benefits tax	As it accrues (para 70)
SIC on an amended assessment	When the notice of amended assessment is served (para 67)

This timing rule means an old debt can produce new, non-deductible interest.

• Late returns. For example, suppose a company with a 30 June year end lodges its 2023–24 return late, in 2026. GIC is backdated to the original due date for payment, but all of the backdated GIC is incurred on the day the assessment is given, in an income year that started on or after 1 July 2025, and GIC after that is incurred daily. None of it is deductible. The ATO gives a similar example involving a late 2025–26 return (PS LA 2011/12 paras 81–83).
• Late activity statements. For a business with a 30 June year end, interest on GST for a 2024 quarter, where the BAS isn't lodged until 2026, is generally incurred when the BAS is lodged and so isn't deductible.
• Audits and amendments. SIC runs from the original due date to the day before the ATO gives notice of the amended assessment (TAA Sch 1 s 280-100). If the notice is given in an income year starting on or after 1 July 2025 (2025–26 or later for most taxpayers), the whole of the SIC is non-deductible, even the part calculated over earlier years. GIC on any extra tax left unpaid after its due date isn't deductible either.

If your business has a substituted accounting period, that period is itself the income year (ITAA 1997 s 4-10(2)(b); PS LA 2011/12 footnote 15). So a company whose income year runs from 1 January to 31 December can generally still deduct interest incurred up to 31 December 2025, because that income year started before 1 July 2025.

Can you still claim ATO interest from earlier years?

Generally yes. GIC and SIC incurred in an income year that began before 1 July 2025 can still be deducted for that year under the former s 25-5(1)(c), because the 2025 amendments don't apply to those years (Sch 2 item 4; PS LA 2011/12 para 60). The deduction is available even if the interest hasn't been paid, whether you account on a cash or accruals basis (para 63).

If interest incurred in 2024–25 or an earlier year wasn't claimed, you may be able to ask the ATO to amend that year's assessment to claim it, provided the amendment period hasn't ended. That period generally runs from the day the ATO gave notice of the assessment, and is usually two or four years depending on the kind of taxpayer (Income Tax Assessment Act 1936 (ITAA 1936) s 170). Your accountant can check which years are still open.

Is remitted GIC assessable income?

When the ATO remits GIC or SIC, the law treats the remitted amount as a recoupment of the interest (ITAA 1997 s 20-25(2A)). Whether the recoupment is taxable depends on whether the interest was deductible.

The remitted interest was incurred in...	Tax treatment of the remitted amount
An income year starting before 1 July 2025	Generally assessable in the income year the ATO remits it, because the interest was deductible (ITAA 1997 ss 20-20(3) and 20-35; PS LA 2011/12 paras 73–75)
An income year starting on or after 1 July 2025	Generally not assessable, because the interest was never deductible (ITAA 1997 s 20-20(3))

Two points to watch:

• Old interest remitted now is still taxable. The ATO's view is that a remission of interest incurred in an income year that started before 1 July 2025 is assessable in the year of remission, even if you never claimed the deduction, so long as you can still claim it (paras 74 and 91). The ATO's own example says a remission doesn't need to be declared where the deduction was never claimed and the amendment period for that year has ended, provided you don't pursue an out-of-time objection to claim the deduction (ATO, "Calculate and report ATO interest", last updated 20 July 2026, Example 2).
• A recalculation can count as a recoupment. If an amended assessment reduces your tax and the GIC is recalculated downwards, the reduction can also be an assessable recoupment of interest that was deductible (para 76).

Where a debt has been running since before 1 July 2025, one remission may cover interest from both sides of the line. The ATO's guidance is to use the effective date of each remission or adjustment on your statement of account to work out whether it relates to interest imposed in 2024–25 or an earlier year, and the processed date to work out when it was remitted. In its example, only the part of a reduction that relates to the earlier, deductible interest is reported as income (ATO, "Calculate and report ATO interest", last updated 20 July 2026, Example 1). Keep the ATO's remission letter and account statements so your accountant can do that split.

What does non-deductible GIC cost on a payment plan?

A payment plan doesn't change the date the debt was due, so GIC keeps accruing on the unpaid balance while you pay it off (TAA Sch 1 s 255-15(2)). GIC compounds daily (TAA s 8AAC) at the base interest rate plus 7 percentage points (TAA s 8AAD). See how the general interest charge works for the current rate.

For example, suppose a company that pays tax at 25% incurs $20,000 of GIC over the life of a payment plan.

	Before the change	Interest incurred from 2025–26
GIC incurred	$20,000	$20,000
Tax saved by the deduction	$5,000	Nil
After-tax cost	$15,000	$20,000
Pre-tax profit needed to cover it	$20,000	about $26,700

The cost of the same interest rises by a third, and by more for an individual on a higher marginal rate. Our guide to interest on ATO payment plans explains how the interest builds up, and our page on ATO payment arrangements covers getting a plan in place.

Why do remission and early payment matter more now?

With no deduction for the interest, three things matter more.

1. Remission. When the ATO remits interest that was never deductible, the saving is generally dollar for dollar, with no tax to pay on the remitted amount. Before the change, remitting deductible interest saved only the after-tax cost. The legal tests for remission haven't changed (TAA s 8AAG for GIC, Sch 1 s 280-160 for SIC). See how to ask the ATO to remit interest.
2. Paying earlier. GIC compounds daily, so reducing the balance sooner cuts the interest that builds up.
3. Lodging on time. Lodging late doesn't put off the interest. GIC generally runs from the date the tax was due to be paid, and the backdated GIC on a late return or BAS is all incurred, and so non-deductible, when the assessment is made. Lodging on time lets you pay the debt, or arrange a plan, sooner.

Interest keeps running while a debt is unpaid, including under a payment plan. If you intend to ask for remission, raise it early, ideally when the plan is negotiated, and keep the evidence of why the debt fell behind.

Some businesses borrow to clear an ATO debt. Interest on money borrowed to pay income tax, PAYG withholding or PAYG instalments can't be deducted as a tax-related expense (ITAA 1997 s 25-5(2)(c)), and whether it is deductible under s 8-1 depends on the facts. Get advice before refinancing on the assumption that the loan interest will be deductible.

If an audit is under way, SIC is usually part of the cost. See shortfall interest charge and how to get it remitted.

Are ATO penalties tax deductible?

Generally no. You can't deduct an amount payable by way of penalty under an Australian law (ITAA 1997 s 26-5(1)(a)), apart from a narrow exception for a penalty relating to GST instalments (s 26-5(2) and s 25-5(1)(ca)). That has long covered ATO administrative penalties, such as penalties for failing to lodge on time and shortfall penalties. The 2025 change extends the same treatment to GIC and SIC. Penalty remission is a separate request under a different power: see ATO penalties and penalty remission.

The rule doesn't run both ways. Interest the ATO pays you on overpayments or early payments of tax is still assessable income when it is paid to you or applied against a debt you owe the Commonwealth (ITAA 1997 s 15-35).

How we help

• Work out the tax treatment. We go through the ATO account statements, lodgement dates and any amended assessments to identify which interest falls in which income year.
• Prepare remission requests. We draft GIC and SIC remission requests against the legal grounds and the ATO's practice statements, with supporting evidence, and explain the likely tax treatment of any remission.
• Negotiate payment plans. We deal with the ATO on payment arrangements and raise remission at the same time.
• Work with accountants. Where your accountant handles the returns, we work alongside them. See For accountants.

Next step

Send us the ATO statements of account showing the interest, the dates your recent returns and activity statements were lodged, any amended assessment or SIC notice and, if you are on a payment plan, its terms. Add a short note on why the debt fell behind. In a first call we'll explain how the interest is treated for tax and whether a remission request is worth making.