By John Pierre Saliba · April 2026 · OverdraftMe
When a BAS or tax bill comes in and cash is tight, most business owners do one of two things: set up an ATO payment plan, or put it on a credit card. Both cost money. But here's what most people don't realise - the interest the ATO charges you on a payment plan is not tax deductible.
The ATO's General Interest Charge (GIC) is classified as a penalty for late payment. It's not a business financing cost. You can't claim it as a deduction. Every dollar you pay in GIC is a dollar gone.
Since 1 July 2025, ATO General Interest Charge (GIC) is NO LONGER tax deductible - the law changed. Business overdraft interest remains fully deductible. Same cash flow problem, very different tax outcomes. Most Australian SMEs pay the 25% company tax rate (base rate entity - under $50M turnover). Larger companies pay 30%.
Interest and fees on a business overdraft used for business purposes - including paying a tax bill - are generally tax deductible under Section 8-1 of the Income Tax Assessment Act 1997. This hasn't changed.
What HAS changed is the GIC. Before 1 July 2025, ATO interest charges were at least deductible - you were paying a penalty but could claim it back. From 1 July 2025, the government removed that deduction entirely. GIC is now a pure cost with zero tax benefit. That makes the case for using an overdraft to pay tax bills even stronger than before.
So if you draw $50,000 from your overdraft to pay your BAS, the interest you pay on that $50,000 is a legitimate business deduction. If you set up a $50,000 ATO payment plan instead, the GIC you pay is not.
Let's say you owe the ATO $50,000 and plan to pay it off over 6 months.
| Factor | ATO Payment Plan | Business Overdraft |
|---|---|---|
| Interest rate | 10.96% p.a. (current GIC rate) | ~20.95% p.a. |
| Interest cost over 6 months (on avg $25K drawn) | ~$2,740 (compounding daily) | ~$2,250 (at 18% on avg balance) |
| Tax deductible? | NO | YES |
| After-tax cost (25% company tax rate (base rate entity)) | ~$2,740 | ~$2,812 - $3,750 |
| After-tax cost (30% company tax rate) | ~$2,740 | ~$2,625 - $3,500 |
| Flexibility | Fixed schedule, ATO controls | Repay on your terms |
| Credit impact | ATO debt visible on credit file | Standard business facility |
| Reusable | No - one-off arrangement | Yes - revolving facility |
At a 30% company tax rate, the after-tax cost of an overdraft at 20.95% is actually 14.67% effective - comparable to the GIC rate, but with the added benefit of flexibility, no ATO debt on your record, and a reusable facility.
From 1 July 2026, super must be paid every pay cycle. Miss a payment and the ATO's Superannuation Guarantee Charge (SGC) kicks in - which includes a non-deductible interest component plus an administration fee. Having an overdraft in place means you never miss a super payment, never trigger a penalty, and never accumulate non-deductible charges.
Talk to your accountant about this. The tax deductibility of overdraft interest used to pay tax bills is well established - but your specific situation may vary. This is general information, not tax advice.
Any business that regularly faces BAS or tax bills when cash is tight. This is especially relevant for businesses with seasonal revenue, businesses waiting on invoice payments, and businesses preparing for Payday SuperSuper CalculatorHow Much Can I Borrow? from July 2026.
If you're currently on an ATO payment plan, it may be worth discussing with your accountant whether refinancing that debt into a business overdraft makes sense for your tax position.
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