ATO confirms interest deductibility rules from 1 July 2025

Earlier this year, we released guidance on how changes to the deduction of ATO interest charge rules would apply from 1 July 2025 (see Dentons - ATO interest will no longer be tax deductible from 1 July 2025 - Protect yourself).

These new rules are important as they prevent taxpayers from claiming deductions on General Interest Change (GIC) and Shortfall Interest Charge (SIC) liabilities in a wide variety of circumstances.

Last week, the ATO published a factsheet which confirms our interpretation of the new rules and provides helpful guidance to taxpayers navigating this change.

The main takeaways from the guidance are:

1. Crystallisation date is key 

The interest deductibility rules are structured around the date of assessment by the ATO, being the date on which the liability crystallises.

If a notice of assessment is dated on or after 1 July 2025, any interest (GIC or SIC) incurred on the unpaid liability will not be deductible.

2. Amended assessments will follow same rules 

The new rules will also apply to amended assessments delivered in the 2025/26 financial year.

For example: if a taxpayer receives an amended notice of assessment dated 10 July 2025 any interest that accrues from this date will not be deductible as the assessment occurred after 1 July 2025.

3. External finance to repay interest available to businesses

The ATO has confirmed that businesses may still claim a deduction under s 8-1 for interest incurred on external finance used to repay tax interest. This deduction is not available to non-business taxpayers.

4. Unique treatment for Substituted Accounting Period (SAP) entities

For entities with an approved SAP date, the changes will be shifted to their SAP balance day.

For example, if an overseas company maintains a 31 December balance date:

• For early balancers: interest will remain deductible until 31 Dec 2025 for the 2025/26 SAP year.
• For late balancers: interest will remain deductible until 31 Dec 2025 for the 2024/25 SAP year.

5. Remission of interest

If the ATO remits interest after 1 July 2025 for interest incurred in the 2024/25 year, it must be reported as an assessable recoupment in the 2025/26 return.

What Should You Do Now?

Although the 1 July 2025 deadline has passed, there are still steps taxpayers can take to manage their exposure:

• Pay liabilities as soon as possible: taxpayers with unpaid liabilities are now facing a double whammy of GIC (10.78%) and / or SIC (6.78%) without the ability to claim deductions. Ensure that you are managing your tax liabilities proactively to avoid the increased burdens of the ATO’s charges.
• Review external financing options: consider if it would be advantageous to engage in external financing for any interest charges.
• Plan for future liabilities: If you expect a tax debt to arise in the coming months, act now to understand the implications and explore mitigation strategies.

How we can help

Dentons tax practice has deep experience in tax controversy and can assist taxpayers with ATO engagements including:

• Advising on external financing options in line with ATO deductibility requirements.
• Considering circumstances and applying to the ATO for remission of interest.
• Advising on voluntary disclosures.
• Understanding current and future obligations to help strategic planning going forward.
• Providing broader advice on structuring in order to maximise business and tax efficiency.