The Australian Taxation Office (ATO) has made a very clear policy change that affects self-employed people, contractors and business owners right across the country.

The message is clear: the ATO doesn’t want to be a lender any more.

The government is cracking down on businesses that regard unpaid tax as an easy source of funding as its outstanding tax debt grows to more than $105 billion.

Many businesses had previously viewed ATO debt as a cash flow management tool. Or you could pay late and pay interest and then deduct that interest on your taxes, which lowered the effective cost.

Then from 1 July 2025 that benefit comes to an end and the way ATO debt is to be managed changes dramatically.

What is changing from 1 July 2025?

So the biggest change is not the interest, but the elimination of deductibility.

Businesses will no longer be able to claim deductions on ATO interest charges under the Treasury Laws Amendment Act 2025 including:

• General Interest Charges (GICs)
• Shortfall interest charges (SIC)
• Interest on tax paid late or early

This applies to companies and trusts as well as self-employed taxpayers from the 2025–26 financial year onwards.

This change is further compounded by the current ATO rate of interest which is about 10.78% and is compounded on a daily basis.

This means the debt is increasing faster than many people realize, and now the entire cost is out of pocket with no tax relief at all.

The Importance of This Change for Small Businesses

Before this change, ATO debt was regarded as a “manageable inconvenience”. Businesses would postpone the tax and pay it later, after other expenses.

The financial logic is now completely different.

If not tax deductible:

• The cost of debt effectively rises sharply
• The pressure on cash flow becomes more immediate
• ATO debt becomes more expensive than most commercial borrowing options

This is especially important as many small businesses are already operating on razor-thin margins. A small increase in interest cost can cause long-term cash flow stress.

Put simply, ATO debt is no longer ‘cheap flexible funding’ — it is now one of the most expensive forms of debt.

What Mortgage Brokers Are Observing in the Market

Mortgage brokers are already seeing a shift in how self-employed borrowers are responding to these changes.

Senior mortgage broker Jonathan Preston said the removal of deductibility changes the way businesses should consider their debt structure.

The crucial insight is this:
If the interest is not deductible by the ATO, then its real cost is considerably higher than most lending options on the market.

He also points out a major limitation: ATO payment plans are not long-term solutions. Most typically have a maximum of 1–2 years, which doesn’t allow for enough flexibility for larger debts or continuing cash flow issues.

This is why many borrowers are now looking at whether it makes sense to refinance ATO debt into lower interest lending products instead.

Understanding the True Cost of ATO Debt

To make the effect clear, let’s break it down with a simple example.

$A = P(1 + r)^t$

The ATO interest can add up quickly if a business has a $30,000 tax debt, as it compounds daily.

At 10.78%, this annual cost is significant especially where no tax deduction applies.

In contrast, if this debt was refinanced with a mortgage or business loan structure, the interest rate could be lowered to approximately 6–7% depending on financial profile and lending conditions.

It’s not just the rate: it’s the structure. The difference:

• Normally you have to pay ATO debt back fast
• Refinanced debt can be amortized over a significantly longer term
• Monthly repayments are more predictable and manageable

The structural difference often has more impact on cash flow than the rate of interest alone.

Why Refinancing ATO Debt Is On The Table

More self-employed Australians are now looking to refinance to regain their financial control.

Some of the major benefits are:

• Lower interest expense — ATO debt is now one of the highest forms of unsecured debt
• More cash-flow stability — longer repayment periods ease monthly pressure
• Possible tax structuring advantages — if set up properly, interest may still be deductible (professional advice is essential)
• Debt consolidation opportunities — combine multiple debts into one repayment schedule

But remember, refinancing isn’t a shortcut, it’s a financial restructuring strategy, not a debt removal strategy.

Important Risks You Shouldn’t Ignore

There are long-term considerations to refinancing and it can be a good thing.

Rolling an ATO debt into a mortgage or extended loan structure could result in paying more interest overall, especially if repayments are not actively managed.

Another key risk is treating refinancing as a “fix” instead of a strategy. It can only shift debt from short-term pressure to long-term obligation without good planning.

This is the reason why you need professional guidance.

It is highly recommended that before making any decision:

• Talk to a mortgage broker
• Talk to your tax advisor
• Ensure structure aligns with tax and business requirements

Review Your Debt Now

The timing of the change is crucial.

We are entering a time in which:

• ATO interest is 100% non-deductible
• Business cash flow pressures are still high
• Lending markets remain competitive

That gives a narrow window when it might be more useful to restructure debt rather than wait.

If you have a tax debt already, the longer you wait to act on it the more you will owe in the long run due to compound interest.

Speak To An Expert About Your Options

If you’re self-employed or have an ATO debt on your business, it’s time to take a close look at your situation.

Our team can assist you:

• Evaluate your current tax debt situation
• Compare your refinance options
• Explore tax-efficient lending structures

Call +123 456 7891 or take a free online assessment to see what your options are. There’s no obligation and it might help take the edge off your financial pressure long-term.