Owing Money to the ATO: What It Really Costs You
A tax debt doesn’t just sit there, it grows. And from 1 July 2025, it got even more expensive to carry one. Here’s what you need to know about ATO interest charges and how to get on top of them.
How the ATO charges interest on unpaid tax
When you pay your tax late or there’s a shortfall in what you’ve paid, the ATO doesn’t just wait patiently — it applies interest charges that compound daily. There are two types:
These rates are reviewed quarterly, so they can move. But they’re consistently higher than most commercial lending rates — which means carrying ATO debt is rarely a smart financial choice.
The deduction is gone, it now costs you more
Until recently, GIC and SIC could be claimed as a tax deduction, which softened the blow somewhat. From 1 July 2025, that deduction has been scrapped entirely. Even if your debt predates that date, any interest that accrued from 1 July 2025 onwards is no longer deductible.
What this means in practice: the full cost of the interest charge now hits your pocket. For taxpayers on the highest marginal rate, that’s a meaningful increase in the real after-tax cost of carrying a debt.
Important: A payment plan with the ATO does not stop GIC from accruing. Interest continues to compound on the outstanding balance even while you’re making regular repayments.
What you can do about it
The most effective action is simply to pay down the debt as quickly as possible. Given the daily compounding and the loss of the deduction, the cost of delay adds up fast. If you don’t have the cash on hand, it’s worth exploring whether a commercial loan at a lower interest rate might actually work out cheaper in the long run.
Looking ahead, the best protection is planning. Setting aside funds regularly for: GST, PAYG withholding, super, and income tax instalments — means you’re not scrambling when an ATO bill arrives. A separate bank account earmarked for tax can make this simple and automatic.
Already on a payment plan?
It’s worth reviewing whether it’s still the right arrangement for your situation. In some cases, refinancing the debt elsewhere and clearing the ATO entirely can work out to be the better option.
We can help you understand the true cost of your debt and explore the best options for clearing it. Contact us at STS Accounting to get started.
