Traditional finance a smarter choice as SMEs lose ATO debt benefit
Starting 1 July 2025, Australian businesses will no longer be able to claim tax deductions for interest charges imposed by the Australian Taxation Office (ATO), specifically the general interest charge (GIC) and shortfall interest charge (SIC).
This is likely to affect small to medium enterprises (SMEs) who have been known to use ATO tax debt and the resultant payment plans as a form of short-term financing. The appeal for SMEs lay in the ability to defer tax payments and claim deductions on the associated interest charges, effectively reducing the after-tax cost of borrowing.
However, with the new changes, any GIC or SIC incurred on or after 1 July will no longer be tax deductible, regardless of when the underlying tax debt arose.
This eliminates the financial advantage that had previously existed with ATO payment plans, now making them a more expensive option for managing cash flow.
Why traditional finance is now more appealing
The impending changes mean that the perceived convenience of relying on ATO repayment arrangements may come at a higher real cost than securing traditional business finance, like a loan.
There are several benefits to this:
1. Potential for tax-deductible interest: Unlike the ATO’s interest charges after 1 July, interest paid on many traditional business loans remains tax-deductible. This can significantly reduce the after-tax cost of borrowing.
2. Predictable costs: Unlike potentially escalating ATO debt, traditional loans come with fixed repayment schedules, allowing for better financial forecasting.
3. Structured financial solutions: Traditional finance offers tailored solutions designed to meet specific business needs, whether it’s funding an acquisition, a development project or providing working capital.
4. More options: Traditional lending gives businesses the ability to shop around among multiple lenders. This competition can lead to more suitable deals, more flexibility and even access to specialised loan products tailored to the needs of SMEs.
5. Guidance from a broker: Unlike dealing with ATO debt directly, where you’re on your own, working with a broker means having a specialist on your side. Using a broker can streamline the process of finding the right finance option. Brokers have access to a wide range of lenders and can help negotiate terms, identify suitable loan products and ensure the financing aligns with your business goals.
Transitioning from ATO debt to traditional finance
If you are one of those SMEs who previously relied on ATO tax debt deductions as a form of financial management, we recommend taking proactive steps to transition to a more sustainable financing strategy. Here’s how you can get started:
1. Review your current ATO debt: Begin by assessing your existing tax obligations. Calculate the total amount owed and identify any interest charges that will no longer be tax-deductible after 1 July 2025. Aim to clear as much of this debt as possible before the cutoff date to retain the tax benefits on current interest.
2. Evaluate your cash flow: Understand your business’s cash flow patterns and identify any gaps or pressure points that may have led you to rely on ATO debt in the past. This will help you plan for more predictable financial management.
3. Consult with a broker: Reach out to a finance broker who can help you explore alternative funding options. A broker can present you with competitive loan products that suit your needs, whether for working capital, refinancing existing debt or funding new projects.
4. Compare financing options: Consider various traditional finance products, such as business loans. Unlike ATO debt, these loans typically offer tax-deductible interest and can have more favourable terms.
5. Restructure debt strategically: If you have significant ATO debt, ask your broker about consolidating it into a traditional business loan. This can help you spread repayments over a longer period at a potentially lower interest rate, which remains tax-deductible.
Ready to explore how traditional finance can benefit your business in light of these ATO changes? Finance Advisory Co can help you secure the right finance. Contact us by filling in this online form, calling 0426 236 007 or emailing info@finad.com.au
Credit Representative 541104 is authorised under Australian Credit Licence 389328. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
