Alex Molloy is the founder of business lending platform Valiant Finance. In this piece, he explains why ATO debt needs to be your top priority — especially with a key legislative change on the horizon.
Small-business owners carrying ATO debt have just shy of nine weeks before the General Interest Charge (GIC) on tax debt will no longer be tax deductible. This change eliminates the tax benefit that effectively reduced the real cost of the interest by 25 per cent for most businesses.
I’ve seen firsthand how tax debt can silently erode a business’s financial foundation. Now, with this legislative change on the horizon, addressing ATO debt becomes even more urgent.
The real cost of the GIC deductibility change
Currently, the ATO’s General Interest Charge sits at 11.17 per cent and compounds daily. While this rate can sometimes exceed business loan options, it has been somewhat offset by tax deductibility. For a business on a 25 per cent tax rate, the effective cost has been around 8.38 per cent after tax deductions.
From 1 July 2025, that disappears. The full 11.17 per cent (or whatever the rate is by then) will hit your bottom line with no tax relief which could mean thousands in additional costs annually.
Even before this legislative change, ATO debt has always been problematic from a financial management perspective. The compounding daily interest means your debt grows more rapidly than most people realise. A $50,000 tax debt accrues over $15 in interest every day – that’s more than $5,500 annually.
The financeability factor
ATO debt also impacts a business’ broader “financeability.” When assessing loan applications, lenders can view significant or long-standing tax debt as a signal of financial management issues. The big banks often see ATO debt as a huge red flag for lending to a small business, and even much more lenient non-bank lenders see it as a negative indicator, especially if your ATO debt exceeds 8-10 per cent of your annual turnover.
The compounding effect of both higher costs and reduced financing options makes addressing tax debt before July 2025 even more critical.
Strategic options for clearing tax debt
If you’re carrying ATO debt and are concerned about the upcoming changes, or you’ve got a tax bill that you simply can’t pay, reach out to a financial professional to discuss your specific situation.
Additionally, businesses should consider:
- Working with the ATO – Contact them proactively to establish a payment plan. While this won’t avoid the interest entirely, it demonstrates good faith and offers a structured approach.
- Prioritising tax debt in your cashflow – With costs set to increase, allocating available funds to reduce tax debt makes more financial sense than ever. You will also be demonstrating a track record of proactively meeting tax obligations.
- Considering refinancing options – Refinancing tax debt can:
- Lock in a fixed interest rate that may be lower than the GIC
- Provide a structured repayment schedule aligned with your cash flow
- Convert a problematic debt into a standard business expense (business loan interest is tax-deductible, unlike the GIC after 1 July)
- Improve your overall creditworthiness and set yourself up for cheaper debt over time
Also, depending on the business, there are other solutions that can unlock capital from elsewhere in the business to help pay off ATO debt and improve the cashflow position long term. These include invoice financing to access the value from unpaid invoices or unlocking equity in business assets like vehicles or equipment.
Businesses should pay close attention to the impact of the repayment term of their ATO debt compared to a replacement business loan. ATO repayment plans are often structured to repay the outstanding debt over 18 to 24 months. Many non-bank loan options can be structured for 36 months (or even longer), significantly reducing monthly repayments for businesses that are cash-strapped. Even if the business loan’s interest rate ends up being higher (after tax deductibility) than the GIC on ATO debt, it still may be worthwhile to refinance if the business loan significantly reduces month-to-month cash stress on the business (and its owners!)
Getting ahead of the deadline
With 1 July 2025 approaching, businesses should:
- Calculate the true impact – Determine exactly how much more your current ATO debt will cost after the deductibility changes. Remember that removal of the deduction will impact tax paid on your highest marginal rate not your average tax rate! Work with your tax agent to be as accurate as possible.
- Review cashflow projections – Assess whether your current payment arrangements will clear the debt before the deadline and if not, start adding as much as reasonably possible
- Explore all available options – From accelerated payment plans to refinancing, find what approach makes the most financial sense for your situation
The clock is ticking on tax debt deductibility. By addressing this issue now, you not only avoid the coming price increase but also position your business for stronger financial health and better financing options in the future.
