ATO Debt on a Payment Plan in Australia? The Interest Is No Longer Tax-Deductible

You put a $20,000 BAS debt on an ATO payment plan, and the year’s interest of about $1,275 is no longer deductible. A business loan or the ATO’s interest-free plan may cost you less, and here’s how they compare.

Say you’re a sparky trading through a small Pty Ltd, with turnover of $900,000 and a clean lodgment history. The debt came from a slow winter quarter. That $1,275 is the general interest charge on a standard ATO payment plan: $1,274.74 over the year, and the company claims none of it back.

If the bank offers a business loan at 10% with no fee, the after-tax interest is $824.86, about $450 less. That holds only if the interest is deductible for your company, so have your accountant confirm it first. If the bank turns you down, the business may qualify for the ATO’s interest-free plan instead. It would then pay $1,666.67 a month by direct debit and nothing in interest, as long as every new BAS is also lodged and paid on time.

What changed on 1 July 2025

Until 30 June 2025, that interest was a deduction. The general interest charge (GIC) is what the ATO charges, by law, on tax left unpaid after its due date. That covers BAS amounts such as GST and PAYG withholding as well as income tax. GIC is worked out daily and compounds daily, under Part IIA of the Taxation Administration Act 1953. Nobody opts in: the charge starts the day after a debt falls due. Its smaller sibling, the shortfall interest charge (SIC), applies when the ATO amends your return and you owe extra income tax.

The Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025 added section 26-5(1A) to the Income Tax Assessment Act 1997. It says you cannot deduct GIC or SIC. The ATO’s explanation of the change puts it plainly: interest charges incurred on or after 1 July 2025 are not deductible, “regardless of whether the debt relates to an earlier income year.”

GIC on a BAS debt is incurred day by day, so every day after 1 July 2025 counts, even on an old quarter. A BAS lodged late after that date makes its back-dated GIC non-deductible as well. The one small upside: if the ATO later remits GIC you incurred after 1 July 2025, you don’t have to count the remitted amount as income.

The interest rate on an ATO payment plan right now

For October to December 2026, the ATO’s published GIC rate is 11.51% a year. SIC is 7.51%. Both are the 90-day bank bill yield plus a fixed margin, seven points for GIC and three for SIC. The ATO resets them every quarter. Because GIC compounds daily, 11.51% works out to about 12.2% over a full year.

Before the change, a company paying 25% tax effectively got a quarter of that interest back at tax time. A sole trader on a 30% rate plus the 2% Medicare levy got back nearly a third. That refund is gone, so the same debt now costs more than it did a year ago.

Three ways to clear the debt

The standard ATO payment plan

ATO payment plans split the debt into weekly, fortnightly or monthly instalments. If you owe $200,000 or less, you can usually set one up yourself in online services, or through your tax or BAS agent. GIC keeps accruing on the balance for as long as the plan runs. You must also lodge and pay every new BAS in full and on time. Miss one and the plan can default, which makes the whole balance due at once.

Income tax and activity statement debts need separate plans. You can pay extra or clear the balance early with no penalty, and every early dollar cuts the interest.

A business loan

Borrowing to clear the ATO is the route the ATO itself mentions, in its June 2025 small-business article on the cost of carrying a tax debt. Some interest on loans connected with running a business may be deductible, it says. Its fact sheet on the new rule gives the condition. A business may deduct interest on money borrowed to pay a tax debt only where the interest is “necessarily incurred in carrying on the business.” That claim sits under the general deduction rule in section 8-1.

So the deduction is possible, not automatic. It does not cover an individual who isn’t in business. Nor does it cover a partner borrowing to pay their personal tax on a partnership share. Take the loan in the business’s own name, use it for the business’s debt, and ask your accountant to confirm the deduction for your structure before you sign.

The interest-free ATO payment plan

The ATO also offers an interest-free payment plan for overdue activity statement amounts. It is narrower than it sounds. The business needs turnover under $2 million and a recent BAS debt of $50,000 or less, overdue for up to 12 months. It also needs a good payment and lodgment history, with no outstanding BAS lodgments. It has to be able to show it is still viable. And it must be unable to get finance, such as a loan, through normal business channels.

The debt is then paid by direct debit within 12 months. GIC still appears on your account, but the ATO remits it automatically while you keep to the plan. You ask for this by phoning the ATO’s business line, and you can switch an existing BAS plan across. It covers activity statement debts only, not income tax.

What each route costs over 12 months

The figures take the same $20,000 overdue BAS debt, cleared in 12 equal monthly payments. GIC is held at 11.51% all year, although the rate changes each quarter. The loans have no fees, and their interest is treated as deductible. The tax rates are examples: 25% for a small company, and 30% plus the 2% Medicare levy for a sole trader. It is an illustration, not a quote for your business.

The monthly payment on the ATO payment plan is $1,772.89. At 12%, the loan charges more interest than the ATO before tax, yet still costs less once the deduction comes back. On these numbers, the loan stays cheaper until its rate passes about 15.3% for the company, or 16.9% for a sole trader on 32%. Above that, the ATO plan is the cheaper debt, deduction or not.

The tax saving arrives when your return is assessed, though, not month by month. Fees change the picture quickly too. A $400 establishment fee wipes out most of the gap at 12%.

Directors, credit reports and the rest of the decision

If you trade through a Pty Ltd company, the director penalty regime can make you personally liable for the company’s unpaid PAYG withholding, GST and super guarantee charge. If those amounts are not reported within three months of their due date, you can only clear the penalty by paying the debt in full. So lodge every BAS on time, even in a quarter when you can’t pay it. A sole trader has no company, so director penalties don’t apply. The debt is already yours personally.

Larger debts can also reach your suppliers and lenders. The ATO can report a business tax debt to credit reporting bureaus once at least $100,000 is more than 90 days overdue and the business is not engaging with it. Keeping to an ATO payment plan counts as engaging. A $20,000 debt is nowhere near that line, but a growing one can get there.

The cheapest debt is the next one you don’t run up. Our article on PAYG instalments for sole traders covers the instalment side. If you employ, Payday Super changes when super is due. And firmer deposit and payment terms on your quotes bring cash in before GST on the job falls due.