And what smart business owners are doing about it….
If you’ve got an ATO payment plan here are important interest changes in 2025 that could make your payment plan much more expensive than you think. Here’s what you need to know – and what smart business owners are doing about it.
Here’s the headline: ATO interest is no longer tax-deductible.
I know, I know – tax changes aren’t exactly exciting dinner conversation. But this one matters, and it matters big time for any business carrying ATO debt.
What’s Actually Changed?
From July 1st, 2025, the interest charged by the ATO on payment plans (called the General Interest Charge) is no longer considered a deductible business expense. The current rate sitting at 11.17% – and rising.
Previously, you could at least claim that interest back at tax time. Now? Every dollar of ATO payment plan interest comes straight off your bottom line, and you’ll still need to pay tax on the money you earn to cover that interest payment.
Let me put this in perspective with some real-world examples.
The Real Cost: What This Means for Different Businesses
Example 1: Sarah’s Plumbing Business
Sarah runs a successful plumbing business but got behind on her quarterly BAS payments during a rough patch. She owes the ATO $50,000 and is on a payment plan.
Under the old rules:
- ATO interest: $5,585 per year (at 11.17%)
- Tax deduction at 30% rate: $1,676 back at tax time
- Real cost: $3,909 per year
Under the new rules:
- ATO interest: $5,585 per year (still 11.17%)
- Tax deduction: $0 (no longer deductible)
- Plus she needs to earn $7,979 (before tax) to pay the $5,585 interest
- Real cost: $7,979 per year
That’s an extra $4,070 per year straight off her bottom line.
Example 2: Mike’s Construction Company
Mike’s construction business has been growing fast, but cash flow has been tight with several big projects. He owes the ATO $150,000 on a payment plan.
Under the old rules:
- ATO interest: $16,755 per year
- Tax deduction at 30% rate: $5,027 back at tax time
- Real cost: $11,728 per year
Under the new rules:
- ATO interest: $16,755 per year
- Tax deduction: $0
- Plus he needs to earn $23,936 (before tax) to pay the interest
- Real cost: $23,936 per year
Mike’s real cost has more than doubled – that’s an extra $12,208 per year.
Example 3: Jenny’s Café
Jenny owns a popular café but struggled during some tough months. She owes the ATO $25,000 on a payment plan.
Under the old rules:
- ATO interest: $2,793 per year
- Tax deduction at 30% rate: $838 back at tax time
- Real cost: $1,955 per year
Under the new rules:
- ATO interest: $2,793 per year
- Tax deduction: $0
- Plus she needs to earn $3,990 (before tax) to pay the interest
- Real cost: $3,990 per year
Even for Jenny’s smaller debt, that’s an extra $2,035 per year – money that could have gone toward growing her business or building up cash reserves.
Why This Change Happened
The ATO’s reasoning is that interest charges are now treated more like penalties or fines – and you can’t claim tax deductions for penalties. While I understand the logic, the practical impact on struggling businesses is significant.
The Compounding Problem
Here’s what makes this even more challenging: if you can’t keep up with the higher real cost, the debt keeps growing with compounding interest. I’ve seen businesses get trapped in a cycle where they’re paying interest on interest, and now that interest isn’t even deductible.
What Are Your Options?
The good news is you’re not stuck. After 18+ years helping businesses with finance solutions, I’ve seen plenty of situations where alternative funding can provide a better path forward.
Alternative business finance options typically offer:
- Lower interest rates than the ATO’s 11.17%
- Tax-deductible interest (unlike ATO payment plans now)
- Longer repayment terms to ease cash flow pressure
- Fixed rates so you know exactly what you’re paying
Types of solutions that might help:
- Business loans to pay out ATO debt completely
- Invoice finance to improve cash flow
- Asset-backed lending using business equipment or property
- Restructured payment plans that work with your business cycle
Smart business owners are already exploring alternatives like business loans and equipment finance that do keep the interest tax-deductible and protect cash flow.
Real Talk: Don’t Wait
I’ve seen too many businesses wait too long to address ATO debt, hoping things will just improve on their own. With the new tax treatment making ATO payment plans even more expensive, waiting isn’t a strategy – it’s a gamble you probably can’t afford.
The businesses that thrive are the ones that face financial challenges head-on and explore all their options before the situation gets worse.
What Should You Do Next?
If you’re currently on an ATO payment plan or you’re considering one, it’s worth having a conversation about alternatives. Even if you think your situation is too complicated or your debt is too large, there are often options available that you might not have considered.
Here’s what I recommend:
- Calculate your real cost – Work out what your ATO debt is actually costing you under the new rules
- Explore alternatives – Get quotes for business finance options that could pay out your ATO debt
- Compare the numbers – Look at total cost, cash flow impact, and tax benefits
- Make an informed decision – Don’t just stick with the ATO plan because it’s what you’ve always done
The Bottom Line
The ATO payment plan interest changes mean that payment plans have become one of the most expensive forms of business debt you can carry. With rates over 11% and no tax deductibility, the real cost can exceed 15% when you factor in the tax you need to pay on money to cover that interest.
But you don’t have to accept that as your only option. There are alternatives out there, and the right financing solution could save you thousands of dollars per year while giving you more breathing room to grow your business.
Don’t let expensive ATO debt drain your business when there might be better options available. Give me a call for an obligation-free chat about your situation. Let’s see if we can find a solution that works better for your business.
Remember, this information is general in nature and based on current tax legislation. Always consult with your accountant or tax advisor about your specific circumstances and to confirm how these changes affect your particular situation.
If upgrading your tools, vehicles, or tech is also on your radar this financial year, check out: New Financial Year, New Equipment: A Tradie’s Guide to Smart Financing. It’s packed with ideas to help you invest in your business the smart way.
