GIC is no longer deductible: rethinking how your business funds a tax debt

For years, many business owners treated an ATO payment plan as cheap finance. The general interest charge was significant, but it was tax deductible, which softened it. That changed on 1 July 2025. If your business carries a tax debt, or might in future, the way you compare your options needs to change too.

This guide explains what changed, what it means in practice, and how to compare a payment plan with alternatives such as a business-purpose second mortgage.

What exactly changed?

The ATO’s explanation is direct: taxpayers can no longer claim an income tax deduction for ATO interest charges incurred on or after 1 July 2025. The change covers:

• General interest charge (GIC), imposed on unpaid tax and other liabilities.
• Shortfall interest charge (SIC), imposed on shortfalls when an assessment is amended.

Importantly, the ATO says any GIC or SIC incurred on or after 1 July 2025 is not deductible regardless of whether the debt relates to an earlier income year. An old debt still accruing GIC today is caught.

Why does deductibility matter so much?

Because it changes the real cost. When a charge is deductible, part of it is effectively offset by a lower tax bill. When it isn’t, you bear all of it. Two businesses paying the same GIC now face the full cost, where previously the after-tax figure was lower.

At the same time, GIC hasn’t become gentler. The ATO notes that debts on payment plans continue to accrue GIC, which compounds daily. A long payment plan on a large debt can add up.

What did the ATO suggest?

In a June 2025 media release about the change, the ATO suggested that taxpayers unable to pay on time discuss their financial position with their accountant or finance provider to understand whether there are alternative methods of funding the payment of tax debts, and cautioned anyone considering third-party finance to discuss the tax implications with their registered tax agent or adviser.

That’s sensible advice, and it frames the comparison this guide is about.

How do you compare the options fairly?

There are usually three broad paths for a business with a meaningful tax debt:

1. An ATO payment plan. Instalments over time, with GIC accruing and no longer deductible. For debts of $200,000 or less, the ATO says a plan may be set up online or through its automated phone service.
2. Unsecured business finance. For trading businesses, typically $5,000 to $500,000, sized on turnover. No property involved.
3. A property-secured loan, such as a second mortgage. From $20,000 to $5,000,000, secured on property, with a planned exit.

To compare them properly, work through these with your accountant:

Step	What to establish
1	The real payoff figure today, including GIC to date
2	How long a payment plan would take at an instalment the business can genuinely afford
3	The likely GIC over that period, remembering it compounds daily and isn’t deductible
4	Real pricing for alternative finance, including all fees, for the realistic time you’d hold it
5	The tax treatment of interest on any alternative finance
6	What clearing the debt unlocks (a refinance, an end to enforcement, director penalty relief)
7	The risk each option carries, including to property

We don’t publish rates, because each loan is priced on its own circumstances, so step 4 needs a real conversation. You can ask a specialist for that without any credit check at the enquiry stage.

What does clearing the debt unlock?

The interest comparison is only part of the story. Clearing a tax debt can also:

• Make mainstream refinancing possible. Many lenders are cautious about borrowers with ATO debts. Clearing it can be the step that unlocks a cheaper long-term facility.
• Reduce director penalty exposure. The ATO’s director penalty regime covers unpaid PAYG withholding, GST and super guarantee charge. Where liabilities were reported more than three months late, the penalty can generally only be remitted by paying the company liability in full. Payments reduce both the company debt and the parallel director penalty.
• End escalation. Garnishee notices, disclosure of business tax debts and other firmer actions become less of a worry.

These benefits don’t show up in an interest comparison but can outweigh it.

When does a payment plan still make sense?

A payment plan remains a reasonable choice when:

• The debt is modest relative to the business’s monthly surplus.
• It can be cleared in a relatively short period.
• The business can keep up with new obligations at the same time, which the ATO requires.
• No refinance or other benefit depends on clearing the debt quickly.
• Nobody wants property involved.

When might a second mortgage make more sense?

• The debt is large and a payment plan would run for years.
• Clearing the debt unlocks a refinance with a mainstream lender, giving a clear exit.
• Director penalty exposure is significant.
• Payment plans have defaulted before and the cycle needs breaking.
• There’s comfortable equity in a property, and everyone on the title agrees.

Our ATO debt page walks through this decision with a worked example.

Don’t forget the exit

Borrowing to pay the ATO moves the debt from one creditor to another. That only makes sense if the new debt has a clear end. The most common exit is a refinance once the tax debt is cleared and returns are up to date. Others include an asset sale or, for smaller amounts, cash flow. Write it down with a date and a fallback. See planning the exit from day one.

Fix the cause, too

If the debt arose because GST and PAYG withholding were used as working capital, borrowing to clear it without changing that habit risks a repeat. Practical fixes include a separate tax account, weekly transfers of GST and withholding, and BAS lodged on time. Your accountant can help set this up.

An illustrative comparison

A company owes $180,000 to the ATO. At an instalment the business can comfortably afford, a payment plan would take around three years, accruing GIC throughout, none of it deductible. The company’s bank has said it will refinance existing facilities once the ATO debt is cleared and the overdue return is lodged.

Option one: the three-year payment plan. Option two: a second mortgage of $180,000 against an investment property with a comfortable cushion, repaid by the bank refinance in about eight months. With accountant input on the after-tax figures, option two may cost less overall and end the ATO pressure sooner, provided the refinance timeline holds. Illustrative only.

What questions should you take to your accountant?

To turn this into a decision rather than a general concern, ask your accountant:

1. What is our total ATO debt today, including GIC, and how much GIC is accruing each month?
2. If we used a payment plan at an instalment we can genuinely afford, how long would it take, and what would the total GIC be?
3. How would interest on alternative finance be treated for tax in our structure?
4. Is anything else, such as a refinance, a business sale or a director penalty notice, waiting on this debt being cleared?
5. What needs to change in our processes so a tax debt doesn’t build up again?

With those answers, the comparison becomes concrete. Our guide to questions to ask your accountant has more.

Compare your tax debt options properly

If your business carries a tax debt, this is a good time to re-run the comparison. Send a short enquiry with the amount owed, any payment plan in place, the property you could use and what clearing the debt would unlock. One specialist will look at it honestly, there’s no credit check to enquire, and your details won’t be passed around a group of lenders. Accurate ATO figures make all the difference.

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