Now that we’re well into the 2025/2026 Financial Year, there are some key changes in tax, superannuation and compliance effective from 1 July, that are set to impact a range of individuals and business owners.
Interest deductions: risks and opportunities
This tax season, we’ve seen a surge in questions about whether interest on a loan can be claimed as a tax deduction. It’s a great question, as the way interest expenses are treated can significantly affect your overall tax position. However, the rules aren’t always straightforward. Here’s what you need to know.
The most important thing when looking at the tax treatment of interest expenses is to identify what the borrowed money has been used for. That is, why did you borrow the money?
For interest expenses to be deductible, you generally need to show that the borrowed funds have been used for business or other income-producing purposes. The security used for the loan isn’t relevant in determining the tax treatment.
Let’s take a very simple scenario where Harry borrows money to buy a new private residence. The loan is secured against an existing rental property. As the borrowed money is used to acquire a private asset, the interest won’t be deductible, even though the loan is secured against an income-producing asset.
It’s worth reaching out to us before entering into any new loan arrangements. In this area, mistakes are often difficult to fix after the fact, which can lead to poor tax outcomes.
Personal superannuation contributions
The annual concessional contribution cap will remain at $30,000 for the 2025/2026 financial year. The annual non-concessional contribution (NCC) cap is set at four times the concessional contribution cap, meaning it will also remain at $120,000.
Although the annual NCC cap has not changed, NCCs can now be made by individuals with a total super balance (TSB) of less than $2,000,000 on 30 June 2025 (assuming they have not reached age 75 and have considered any prior bring-forward contributions).
However, please seek relevant advice to ensure proper documentation is obtained to claim a personal deduction for superannuation contributions, including but not limited to providing a Notice of Intent to your superannuation fund and receiving an Acknowledgement of Deduction from the fund. It is extremely important that all documents are obtained if you are considering moving your superannuation to different accounts or funds before any such rollover, in order to claim the tax deduction for personal concessional contributions.
Denying deductions for ATO interest
The Australian Taxation Office (ATO) is implementing an important change that will affect how ATO interest on tax debts is treated.
From 1 July 2025, interest charges imposed by the ATO will no longer be tax deductible. This change applies to both the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC) on any ATO debt accruing from that date (i.e. the 2026 financial year onwards).
Interest incurred up to 30 June 2025 will remain deductible; however, if interest is later remitted by the ATO, it must be included as assessable income.
The ATO’s interest charges are significant and are updated quarterly:
- General Interest Charge (GIC): currently 11.17%, calculated daily, applying to most ATO debts (income tax, FBT, GST, PAYG).
- Shortfall Interest Charge (SIC): currently 7.17%, applying to tax shortfalls identified on amended returns.
Given these high rates, ATO debt is effectively one of the most expensive sources of finance. We recommend that clients explore alternative finance or refinancing arrangements where possible. Contact us to navigate financial decisions and identify strategies that reduce unnecessary financial pressure.
A deduction for interest on borrowings used to pay tax liabilities can only be claimed in specific circumstances. In most cases, this is limited to situations where the taxpayer is carrying on a business and the borrowing is used to pay tax debts that arise directly from that business activity (for example, income tax on business profits or GST liabilities). The reasoning is that the borrowing is treated as funding the working capital of the business, and therefore the interest has a connection to producing assessable income.
By contrast, individuals who borrow to pay personal tax liabilities, such as PAYG assessments on salary and wages, generally cannot claim a deduction for the related interest.
For more information, see the ATO’s website here.
To view the official ATO guidance on interest deductions, click here.
There’s a lot to take in. If we can help you with any of the content that’s been covered, please reach out.
For this and any of the matters raised above, please feel free to contact your team member at Seed Accounting on 03 9826 3933 or by email [email protected]
