ATO Tax Debt Interest No Longer Deductible (2025): What Property Owners and Business Owners Need to Know

With ATO enforcement activity rising and more people falling behind on BAS, PAYG instalments, and income tax obligations, the latest rule changes are impacting cash flow, tax planning, and financial stability. The most significant update?

A change to the deductibility of ATO interest on overdue tax debts.

Is ATO Interest on Tax Debts Deductible?

As of December 2025, the ATO has confirmed that:

❌ Interest charged on overdue ATO tax debts is no longer tax-deductible.

This applies to:

• Personal tax debts
• Business tax liabilities
• Overdue BAS, GST, PAYG and income tax
• Tax debts under ATO payment plans

This shift has created unexpected tax consequences for clients who rely on payment plans to manage cash flow or who carry escalating tax arrears.

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Can You Make ATO Tax Debt Interest Deductible? Yes — With the Right Loan Structure

While ATO interest itself is no longer deductible, there is a legitimate alternative strategy:

✅ If you refinance your ATO tax debt using a loan secured against property (such as your home or investment property), and those funds are used solely to repay the tax liability, the interest on that loan may be tax-deductible.

This is because tax deductibility follows the purpose of the borrowed funds, not the type of lender.

This is a key distinction most people are unaware of — and it can completely change the tax outcome.

Why Property-Backed Loans Can Improve ATO Tax Debt Outcomes

Using a property-secured loan to repay tax debt may offer several benefits:

1. Potential Access to Tax-Deductible Interest

Replacing non-deductible ATO interest with potentially deductible loan interest can significantly improve tax efficiency.

2. Lower Repayments & Better Cash Flow

Mortgage or property-secured loan rates are often lower than ATO penalty interest rates, creating more manageable repayments.

3. Less Pressure From the ATO

➡️ Clearing the tax debt may reduce the risk of:

➡️ Garnishee notices

➡️ Defaulted ATO payment plans

➡️ Director penalty notices

➡️ Collection escalation

4. Clearer, Predictable Financial Structure

Longer loan terms and fixed or variable rate options allow for better long-term planning.

Who Should Consider Refinancing ATO Tax Debt?

This approach may be suitable if you:

• Have equity in your home or investment property
• Are carrying large or growing ATO tax debts
• Want to convert non-deductible ATO charges into deductible interest
• Need lower monthly repayments
• Want to avoid ATO enforcement activity
• Prefer a single, predictable repayment structure

ATO Tax Debt and Property Loans: Understanding How Deductibility Works

The ATO’s rules focus on purpose. This means:

• Why you borrowed the money
• What the borrowed funds were used for

If the funds were used solely to repay a tax liability related to assessable income, the interest on that property-backed loan may be deductible.

This makes proper structuring critical — mixed-purpose loans can reduce or eliminate deductibility.

Key Takeaway: ATO Interest Isn’t Deductible — But the Right Loan Structure Can Be

With the ATO treating overdue tax debt interest as non-deductible, reviewing how your tax debt is managed has become essential.
For many clients, using property equity to refinance tax liabilities can:

• Improve tax outcomes
• Reduce interest costs
• Stabilise cash flow
• Relieve ATO pressure

Every situation is unique — and the benefits will depend on your equity, income, tax position, and loan options.

Need Help Understanding Your Options?

If you’re carrying tax debt or feeling overwhelmed by recent ATO changes, I can help you explore:

• Property-secured loan options
• Deductibility considerations
• Cash-flow restructuring
• Tax debt refinancing strategies

Feel free to reach out (mail@mymf.com.au) for a confidential discussion.