Your ATO debt just became the most expensive money in your business

No. Interest the ATO charges you on an unpaid tax bill stopped being tax deductible for anything incurred on or after 1 July 2025, and the 2025-26 return on your accountant's desk right now is the first one where that shows up. Nothing about your payment plan changed. What changed is that the money you borrow from the ATO by not paying now costs you roughly a third more after tax than it did, which for a lot of owners makes it dearer than the bank. Here is the arithmetic on a real BAS debt, then the three ways out, cheapest first.

The law, in four lines

Schedule 2 of the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, which got assent on 27 March 2025, denies the deduction for ATO interest charges.

It covers both charges you are likely to meet. General interest charge (GIC) is what accrues when you owe tax and have not paid it. Shortfall interest charge (SIC) is what you get when an assessment is amended and it turns out you underpaid.

The ATO puts the rule plainly: 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. So an old 2023 BAS debt still sitting there is racking up interest you cannot claim.

The other side of it, and the only bit in your favour: if the ATO later remits interest you incurred after 1 July 2025, you do not have to declare the remission as income. You never got the deduction, so you do not pay it back.

What it costs on a $30,000 BAS debt

Say you are a cafe carrying $30,000 of GST and PAYG withholding from a bad quarter. The December 2026 quarter GIC rate is 11.51% a year, and the ATO publishes it as a daily rate of 0.03153425% that compounds daily.

Compounded across a full year, 11.51% works out at about 12.2%. On $30,000 that is roughly $3,659 of interest.

Now the part that changed:

• Before 1 July 2025, if you trade through a company at the 25% base rate, that $3,659 was deductible, so the deduction handed back about $915. Real cost to you: about $2,744.
• Now there is no deduction. Real cost: the full $3,659.
• Same debt, same rate, $915 a year worse.

Put as a rate, the ATO's money went from costing a 25% company about 9.1% after tax to costing 12.2%. If you trade as a sole trader or take the profit through a trust, the loss is bigger the higher your marginal rate, because you lost a bigger deduction.

One honest caveat before anyone quotes the $3,659 at their accountant: that assumes you carry the whole $30,000 for twelve months and pay nothing off, which nobody actually does. The point is not the dollar figure, it is the rate underneath it.

And the rate just went to its highest since 2012

The ATO reviews GIC every quarter. The last two:

• July to September 2026: 11.43%.
• October to December 2026: 11.51%.

You have to go back to the January to March 2012 quarter, when it was 11.62%, to find a quarterly GIC rate higher than 11.51%. The rate is set by section 8AAD of the Taxation Administration Act 1953 and tracks the 90-day bank bill rate plus 7 percentage points, so it moves with the market and is not a decision anyone makes about you.

SIC is the same base rate with a 3 point uplift instead of 7, which puts it at 7.51% for the December quarter. Cheaper, and also no longer deductible.

The ten-second sum that tells you if the bank is cheaper

This is the sum almost nobody does, and it is the whole game now.

Take whatever rate your bank quotes you on a business loan or overdraft. Multiply it by one minus your tax rate. For a company at 25%, multiply by 0.75.

• A business loan quoted at 12% costs a 25% company about 9% after tax, because the interest is deductible.
• The ATO's 11.51% costs you 11.51%, about 12.2% once it compounds.

Which means a bank can quote you a higher headline rate than the ATO and still be the cheaper lender. That was not true before 1 July 2025, and it is the single most useful consequence of this change.

The ATO itself points this way. Its small business guidance on the change tells owners to talk to their tax professional, and says the advice "may include a business loan, as some interest on loans connected with running a business may be eligible for a tax deduction". The long-standing ruling behind that, IT 2582, says interest on money a business borrows to pay its income tax is a normal incident of carrying on the business and is deductible.

Two things to be straight about. That ruling is written about income tax, and a BAS debt is GST and withholding, so get your accountant to confirm the position for your particular debt before you refinance anything. And refinancing does not resurrect a deduction for GIC you have already been charged. It only changes what the next twelve months cost.

The one plan where the interest actually stops

A standard ATO payment plan does not switch off GIC. It keeps accruing until the debt is gone, which is why the ATO's own advice is to run any plan over the shortest period you can stand.

There is one exception worth phoning about, and the thresholds fit a lot of cafes exactly. Small businesses may be eligible for an interest-free payment plan over 12 months for overdue activity statement amounts. The ATO's stated criteria are all of:

• annual turnover under $2 million
• recent activity statement amounts of $50,000 or less that have been overdue for up to 12 months
• a good payment and lodgment history, with no more than one payment plan default in the last 12 months and no outstanding activity statement lodgments
• you cannot get finance through normal business channels
• you can demonstrate ongoing viability.

You pay by direct debit over 12 months. GIC is still charged, but the ATO automatically remits it as it appears, as long as you keep the plan. If you already have an ordinary plan for activity statement debt and you meet the criteria, you can ask to switch, and the interest-free period starts from the new plan.

Read the third criterion honestly. If your bank will lend to you, this is not your path, and the bank is probably cheaper anyway after the sum above.

Lodge even if you cannot pay

These are two separate obligations and owners conflate them constantly, at real cost.

If you lodge your own return, the due date is 31 October. In 2026 that falls on a Saturday, so the ATO's rule pushes it to the next business day, Monday 2 November 2026. If you lodge between 1 July and 31 October and end up with a bill, payment is due 21 November.

If you want a tax agent's later lodgment schedule, you have to be engaged with them before 31 October. Ringing an agent in December is too late for that concession.

Miss it and the failure to lodge penalty runs at one penalty unit for every 28 days or part thereof, up to five. A penalty unit is $364 for infringements on or after 1 July 2026, so up to $1,820 at the base rate, and double that if you are a medium withholder. And as the ATO puts it in one flat sentence: you cannot claim a deduction for penalties. Interest has now joined penalties on that list.

So lodging on time when the money is not there costs you nothing extra. Not lodging costs you a penalty you cannot deduct, on top of interest you cannot deduct.

What the debt does on the day you sell

Here is the bit that surprises owners, and it cuts both ways.

GIC is interest, and when a buyer rebuilds your profit they usually add interest back to get to EBITDA or owner earnings. So the interest does not really dent your headline multiple. That is exactly why tax debt gets left to sit: it never shows up in the number everyone talks about.

What it does hit is what you walk away with. Almost every small business sale is priced for the business and then settles with your debts paid out of the proceeds. A $60,000 ATO debt is $60,000 less in your pocket on settlement day, whatever multiple you negotiated. The multiple is the headline; the debt is the invoice.

Then there is the credit file. The ATO may report a business tax debt to credit reporting bureaus where you have an ABN, are not an excluded entity, have at least $100,000 overdue by more than 90 days, and are not engaging with the ATO about it. You get a written notice first and 28 days to act. Engage, or get on a plan and keep it, and the debt is not reported even if it is over $100,000.

That threshold is where the exit risk actually lives. A reported debt sits on your business credit file where your buyer's lender will see it during due diligence, and a financing wobble at the wrong moment is how deals get repriced. Below $100,000, or engaged, it will not be on the file, but a competent buyer still finds it in your BAS history in the first week. Better they find a plan you are running than a hole you were hoping nobody would look in.

If you have never separated your tax money from your trading money, why a business with sales still has no cash is the right place to start, and clean books is what makes the rest of this arithmetic visible before it becomes a debt.