ATO Interest Charges No Longer Deductible from 1 July 2025

We would like to bring to your attention a recent legislative change that may impact your future tax deductions.

As part of the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO), the Australian Government announced a change to tax law which has now been passed into legislation. From 1 July 2025, General Interest Charges (GIC) and Shortfall Interest Charges (SIC) imposed by the Australian Taxation Office (ATO) will no longer be tax-deductible.

What’s Changing?

Currently, businesses and individuals can claim a tax deduction for ATO interest charges (such as GIC and SIC) incurred on unpaid or underpaid tax debts. However, from 1 July 2025 onwards, this will no longer be allowed.

Key Details of the Change

• Effective Date: The change applies to income years starting on or after 1 July 2025.

• What This Means: Any GIC or SIC incurred on or after 1 July 2025 cannot be claimed as a deduction in your income tax return.

• Applies Regardless of the Related Income Year: Even if the interest relates to an earlier income year, it will not be deductible if it is incurred on or after 1 July 2025.

What Is GIC and SIC?

• General Interest Charge (GIC): This is interest imposed daily on unpaid tax liabilities.

• Shortfall Interest Charge (SIC): This applies when there is a shortfall in tax paid due to a later amendment of your tax assessment.

What Remains Deductible?

• Interest incurred before 1 July 2025 remains deductible for the 2024–25 and earlier income years.

• If you claim a deduction for GIC or SIC for these years and the interest is later remitted by the ATO, the remitted amount must be included in your assessable income in the year it is remitted.

What Happens After 1 July 2025?

• Any ATO interest charges incurred from 1 July 2025 onwards will not be deductible, regardless of the tax year the debt relates to.

• If these interest charges are later remitted by the ATO, you do not need to include the remitted amount as assessable income, since it was never deducted.

What You Should Do

• Review your current and anticipated ATO liabilities to determine whether any interest charges may be incurred before or after 1 July 2025.

• Consider paying any known tax debts earlier to avoid non-deductible interest charges in the future.

• Ensure that your tax planning strategies account for this upcoming change.

If you have any questions about how this change may affect your business or personal tax position, please don’t hesitate to contact us.

Trusts are back in the ATO spotlight

With more than 947,000 trusts operating across Australia, it’s no surprise the ATO continues to keep a close eye on how these structures are managed. Trusts remain central to many wealth and succession plans, but their complexity means they also attract compliance scrutiny.ⁱ

Closer attention to how trust structures are now being used is part of the ATO’s focus on ensuring taxpayers pay the required tax and do not inappropriately use structures to reduce their tax liabilities.

What’s attracting attention

The ATO’s latest data analysis has pinpointed a few emerging behaviours it’s concerned about:

• Overclaiming tax deductions: Some trusts are reducing their net income by claiming deductions that don’t stack up – often without the documentation to support GST refunds.

• Loss trafficking: This refers to the creation and use of artificial losses to offset income, giving the appearance of reduced profitability.

• Misuse of tax-exempt vehicles: Ancillary funds and other exempt structures are sometimes used to access concessions or private benefits where there’s no real entitlement.

If these practices sound familiar, it might be time to get back on track.

Family trust elections missteps

Family trust elections (FTEs) and interposed entity elections (IEEs) are meant to define clear tax relationships. But when recordkeeping falls short or elections aren’t properly understood, issues arise – particularly with Family Trust Distribution Tax (FTDT).ⁱⁱ

Trustees are also being encouraged to check the FTEs and any IEEs the group has in place and to clearly identify members of the family group.

Trustees should ensure they understand the tax implications of making these elections and how they affect distributions and tax responsibilities for both the trust and its beneficiaries. In fact, the ATO is seeing instances where individual beneficiaries are incorrectly returning amounts on which FTDT has been paid.

Trusts in succession planning

Using a trust to transfer wealth is common in succession planning – but it needs to be done correctly.

Trouble often arises when capital gains tax events are overlooked, the tax consequences of transactions are misunderstood and Division 7A issues are ignored when loans, payments or debt forgiveness are involved.ⁱⁱⁱ

These oversights can lead to unexpected tax bills at a time when stability and clarity matter the most.

Amendments to a trust deed (such as changes to the trustee, adding or removing beneficiaries, or amending the vesting date) can also create tax risks for trustees.

The same applies if the trust has a family trust election in place but makes distributions outside the family group.

Trusts with an IEE in place to include the interposed entity in its family group may also find the ATO asking questions.

Don’t forget the franking account

Another area of focus right now is discrepancies in trust franking account balances and situations where a trustee fails to apply the franking credit integrity rules when making or receiving franked distributions.

Trustees need to ensure they are complying with the 45-day holding rule if they wish to avoid scrutiny. This rule requires shares to be held ‘at risk’ for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.

It is also important to check you have family trust elections in place if you wish to access franking credits for the trust’s share holdings.

If your trust touches any of these areas – from family elections to succession plans – now is a good time to review your setup. Good governance and clear records don’t just help you comply with ATO rules; they protect your beneficiaries, your finances, and your legacy.

The ATO has a checklist that is designed to help avoid basic trust errors if you don’t fully understand your obligations or take reasonable care to get things right.

The checklist states you should:

• Understand how income is defined for the trust estate.

• Identify the trust’s beneficiaries.

• Understand resolutions and present entitlement.

• Identify any family trust elections (FTE) or interposed entity elections (IEE).

• Maintain clear and accurate records.

Want help reviewing your trust structure or clearing up a few grey areas? Get in touch with our office today.

i Trust statistics | Australian Taxation Office

ii Areas of focus 2024–25 | Australian Taxation Office

iii Areas of focus 2024–25 | Australian Taxation Office

Separating business and personal expenses

When you’ve poured your energy into building a business from the ground up – celebrating milestones, weathering challenges, and investing personal time and money – it’s easy to feel like the company is an extension of yourself. After all, it probably reflects your values, your efforts, and your long-term goals.

That’s why moments of overlap can seem harmless. Maybe you use the business card to cover a personal bill, thinking you’ll sort it out later, or you take the company vehicle for a weekend getaway.

But the tax office sees your business quite differently: as its own legal entity, with its own rules and responsibilities. And crossing the line, even unintentionally, can lead to complications that are better avoided.

Imagine someone who runs a thriving small business. They’re the sole director in the company that owns the business. After years of hard work, the business owner books a long overdue personal holiday and charges it to the business credit card. They plan to reimburse the company but with tight deadlines and tax time approaching, the repayment slips their mind.

When the business owner lodges the company’s tax return, that innocent transaction hasn’t been dealt with properly. According to Division 7A of the tax law, the payment could be treated as personal income and taxed at the business owner’s individual marginal rate. It’s known as an unfranked dividend.ⁱ

Division 7A exists to ensure that shareholders (and their associates, like family members or business partners) don’t use company funds in ways that sidestep formal dividend payments. If money is withdrawn or business assets are used privately without the correct documentation – such as loan agreements or reimbursement records – the ATO may step in and reclassify those transactions as income. The result? Unexpected tax bills and a lot of stress.ⁱⁱ

What counts as private use?

It’s not just about major purchases. Even small , recurring habits can raise red flags. For example:

• Paying for groceries or rent from your business bank account

• Using company tools, vehicles or property for personal reasons

• Lending money to a relative from the company’s reserves

• Failing to create a loan agreement when borrowing from your business

If the money isn’t repaid or formalised before lodgement day, these amounts may be treated as Division 7A dividends, even if the spending was accidental.

Borrowing money without a complying loan agreement, or simply taking the money and failing to declare it, can also lead to major tax headaches.

Fringe benefits and private use of assets

Let’s say you occasionally drive the company car to drop the kids at sport or to pop down to the local hardware store on weekends. It seems harmless but unless it’s documented correctly, it could attract Fringe Benefits Tax (FBT).ⁱⁱⁱ

Businesses must:

• declare private usage in their annual FBT return

• keep records of reimbursements and expenses

• ensure that any benefits are correctly valued and disclosed

FBT might feel like one more thing to worry about, but it can also work in your favour. Businesses may claim GST credits and tax deductions related to fringe benefits, provided everything is above board.

Practical tips to stay on track

If you do use business money or assets for personal purposes, recordkeeping becomes your best ally. Here’s what that might look like:

• Create clear loan agreements between the right entities

• Avoid journal entries that falsely suggest repayments

• Don’t borrow company funds to repay previous Division 7A loans

• Ensure loan repayments meet the benchmark interest rate set by the ATO

• Declare all interest earned by the company as part of its assessable income

• Include relevant transactions in the tax returns of both the company and the person receiving any benefit.

Resources to help

While the rules are firm, the ATO does offer resources to make them more manageable. The ATO has a number of webinars explaining common issues surrounding the Division 7A rules, plus a Division 7A repayment calculator and decision tool.

Small business owners can also take a short online education courseoutlining the rules for using business money and assets.

If you’re unsure whether a past transaction needs correcting, or you want to make sure your systems are set up properly for the future, we’re here to help. An early conversation now could prevent a last-minute panic when tax time rolls around.

i Managing Division 7A risks, and corrective action | Australian Taxation Office

ii Tax treatment of Division 7A dividends | Australian Taxation Office

iii Fringe benefits tax (FBT) | Australian Taxation Office