New ATO rule could cost you thousands — Here’s what you need to know before July 1

D-Day is looming for Starts at 60 readers who owe the ATO unpaid tax.

A change in the rules is likely to cost many individuals, small businesses and sole-traders, thousands of dollars in extra tax. The move is likely to bring in millions of dollars in tax revenue for the government, but it could also trigger a significant number of bankruptcies.

The very nature of a tax debt means that many people caught in the net, won’t be able to rearrange their affairs to minimise the damage.

From July 1, the interest charged on money owed to the ATO will no longer be tax deductible. With the current interest rate a whopping 11.17 percent per annum, a $100,000 debt will cost you a non tax deductible amount of $11,700 per annum.

The General Interest Charge known as the GIC is set on a quarterly basis.

The move was announced as part of the 2023–24 Mid-Year Economic and Fiscal Outlook. The government announced that tax law would be amended to deny income tax deductions for ATO interest charges, starting on or after 1 July 2025.

Many ‘Mum and Dad’ taxpayers can get caught up in the GIC if they owe personal tax and haven’t settled it by the due date, or they have entered into an ATO payment plan.

In most cases, they are accruing GIC daily.

It will also affect sole traders or property investors who missed their BAS or income tax payments.

One strategy may be to borrow funds to pay out the money owed to the ATO. Potentially, you could claim the interest from the loan as a tax deduction. But how the loan is established and documented. will determine whether the strategy works.

The law says the debt must be used for assessable income producing purposes for it to be tax deductible

You can’t simply borrow the money to pay out the tax debt and claim a deduction.

Any arrangements need to be properly structured and documented and both tax experts recommend seeking professional advice before employing the strategy

The other reality is that for many, they won’t be in a position to borrow the additional money to pay out the tax debt. The reason they owe the ATO money in the first place is because they’re already stretched to the maximum.

Starts at 60 readers who owe money to the ATO and are incurring either the General Interest Charge or Shortfall Interest Charge have been urged to seek professional advice in the lead up to the July 1 deadline.

While the tax deductibility rules won’t be changing, qualified tax agents may be able to provide strategies to reduce the impact.

Read more: How to maximise SAPTO, manage superannuation, and understand centrelink requirements in retirement

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.