Many businesses have, at some point, entered into a payment arrangement with the Australian Taxation Office (ATO). Whether due to cash flow pressures, seasonal fluctuations or unexpected expenses, payment arrangements can provide valuable flexibility while businesses work through short-term challenges. 

However, as businesses complete their 2025-26 tax returns, some may be seeing the impact of a key change for the first time. Interest charges applied to ATO tax debts are no longer tax deductible, meaning the cost of carrying an ATO balance is now higher than it was previously.  

Why some businesses are noticing the difference now 

While the legislative change took effect from 1 July 2025, many businesses are only now seeing its impact through their year-end financial results and tax returns.  

For businesses with ongoing payment arrangements or larger tax balances, this can affect overall profitability and forecasting. 

Previously, interest charges imposed by the ATO could generally be claimed as a tax deduction. Now, those costs are a direct expense of the business, increasing the after-tax cost of carrying an outstanding tax debt.  

Could business finance reduce the cost of tax debt? 

While interest charged by the ATO is no longer tax deductible, interest on funds borrowed to pay a business tax debt may still be deductible where the borrowing relates to business activities and the usual deductibility requirements are met. 

Depending on a business’s circumstances, commercial lending rates may also be lower than the current ATO General Interest Charge (GIC) rate of 11.51%. 

Is your current payment arrangement still the right fit? 

Payment arrangements remain an important option for many businesses and can help manage cash flow when required. 

However, given the change in deductibility, it’s worth taking the time to review whether your current arrangement continues to meet your needs. 

Some questions to consider include: 

• How much tax debt is currently outstanding? 
• What interest costs are being incurred each month? 
• Are there opportunities to reduce the balance more quickly? 
• Have cash flow forecasts been updated to reflect upcoming tax commitments? 
• Does the current arrangement still align with the business’s financial goals? 

Even where no changes are required, understanding the ongoing cost of the arrangement can support better decision-making. 

A good opportunity to review your tax position 

Regularly reviewing tax obligations is an important part of effective business planning. 

Understanding current liabilities, future commitments and the cost of carrying tax debt can help businesses make informed decisions about cash flow, budgeting and funding priorities. 

If your business has an ATO payment arrangement in place, now may be a good time to review your position and ensure you’re working with the most appropriate strategy for your circumstances. 

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The team at AFS can help you assess the impact of these changes, review your current arrangements and identify opportunities to strengthen your cash flow planning. 

This article contains general information only and should not be relied upon as taxation or financial advice. Professional advice should be sought for your specific circumstances.