Is business loan interest tax deductible? What the ATO says

When business owners compare the cost of a short-term loan, they usually look at the pre-tax figure: fees plus interest, in dollars. That’s the right starting point. But the after-tax cost can be meaningfully lower, and since 1 July 2025 the comparison with leaving a debt on the ATO’s books has changed.

This guide sets out what the ATO says about deducting the costs of business borrowing, what’s no longer deductible, and how to think about after-tax cost when you’re deciding between options. It’s general information — your accountant is the person to apply it to your business.

What does the ATO say about interest on business loans?

The ATO’s page on deductions for business operating expenses lists “interest on money borrowed” among the operating expenses that are common in business. The listed purposes are:

• producing assessable income or purchasing income-producing assets;
• income tax obligations, employer super contributions, or late payment or lodgment of tax.

So interest on a short-term loan used to buy stock, fund a contract, cover wages or pay a business tax bill falls within what the ATO describes, provided the borrowing is genuinely for the business.

The key word is purpose. It’s how the borrowed money is used — not what secures the loan — that generally determines whether the interest relates to the business. A loan secured by your home but used entirely for business stock is business borrowing; a loan in the business’s name used to pay for a family holiday isn’t.

What about fees and other borrowing costs?

The same ATO list includes:

• bank fees and charges;
• legal expenses, including those incurred in borrowing money or discharging a mortgage.

In practice, a short-term loan can involve establishment fees, legal and documentation costs, valuation fees, registration costs and discharge fees. Some of these may be claimed in the year they’re incurred; some borrowing costs may be claimed over a period instead. The treatment depends on the type of cost and your circumstances, so hand your accountant the full fee breakdown from your loan documents rather than a single total. Our fees page lists what each fee typically covers.

Need a short-term option with every fee itemised for your accountant? Start a 60-second enquiry — there’s no credit check to ask.

What’s changed for ATO interest charges?

A lot. The ATO confirms that from 1 July 2025, general interest charge (GIC) and shortfall interest charge (SIC) are no longer deductible. In the ATO’s words, you can no longer deduct GIC and SIC incurred on or after 1 July 2025 in your income tax return for income years starting on or after that date — and any GIC or SIC incurred on or after that date isn’t deductible regardless of whether the debt relates to an earlier income year.

This matters for businesses carrying tax debt. Before the change, GIC on an overdue tax debt could be claimed, which softened its cost. Now it can’t. The ATO also notes that GIC continues to accrue daily on outstanding amounts, including while you’re on a payment plan.

Meanwhile, interest on money borrowed for income tax obligations remains on the ATO’s list of common business operating expenses. The result: the after-tax gap between leaving a debt with the ATO and refinancing it has shifted.

How does this change the loan-versus-ATO-plan comparison?

Consider the after-tax cost of each option:

	ATO payment plan	Short-term loan to pay the ATO
Ongoing cost	GIC on the unpaid balance	Interest and fees on the loan
Deductible?	GIC from 1 July 2025: no	Interest for tax obligations: on ATO’s list of common operating expenses
After-tax cost	Full face value	Face value less any tax benefit

That doesn’t mean a loan is always cheaper. Loans have upfront fees, and a plan has none. A plan may be perfectly sensible for a modest debt you can clear quickly. But the comparison should be done on an after-tax, total-dollar basis — ideally with your accountant. Our page on tax bill: loan or ATO payment plan goes through the other factors, including director risk.

How do you estimate after-tax cost?

A simple approach, for discussion with your accountant:

1. Work out the total pre-tax dollar cost of the loan for the months you’ll hold it — fees plus time-based cost. The total cost guide shows how.
2. Identify which parts are deductible, and when. Interest usually in the year incurred; some borrowing costs possibly over time.
3. Apply your business’s tax position. The benefit depends on the entity’s tax rate and whether it’s in a taxable position that year. A business with losses gets less immediate benefit.
4. Compare with the after-tax cost of the alternatives — including GIC, which from 1 July 2025 has no deduction.

Illustrative only: if a loan’s deductible costs total $10,000 and your business pays tax at a given rate, the after-tax cost is $10,000 less the tax saved at that rate. If the alternative is $8,000 of non-deductible GIC, the pre-tax comparison favours the ATO plan, but the after-tax comparison may not. Your accountant can put your real numbers in.

What about equipment and the instant asset write-off?

If the loan funds equipment, there’s a separate question about deducting the asset itself. The ATO has confirmed that from 1 July 2026 the $20,000 instant asset write-off is permanent, for eligible small businesses with an aggregated annual turnover of less than $10 million, and that the limit applies to each asset. That’s about the cost of the asset, not the cost of the loan — but the two often go together in planning. For long-life equipment, also consider whether a short-term loan is the right tool at all; see when short-term is the wrong tool.

What records should you keep?

The ATO’s guidance on operating expenses notes that you must keep records to substantiate your claims. For business borrowing, that means:

• the loan agreement and fee schedule;
• statements showing interest and fees charged;
• evidence of how the money was used — invoices, payments to suppliers, the ATO, employees;
• the payout statement and discharge costs when the loan ends.

If any of the money was used for private purposes, record the split clearly. Mixed-use borrowing is where deductions most often get complicated.

Common mistakes to avoid

• Assuming security decides deductibility. It’s the use of the money that matters.
• Claiming the ATO’s own interest charges. GIC and SIC incurred from 1 July 2025 aren’t deductible.
• Treating penalties as deductible. The ATO notes that penalties and fines imposed by statutory bodies for breaches of Australian law aren’t deductible, and that late payment fees are usually penalties.
• Mixing business and private spending from the same loan account.
• Forgetting the fee breakdown. A single “total cost” figure makes it harder for your accountant to treat each item correctly.

Where does this leave the cost of a short-term loan?

Tax doesn’t change which loan is structurally right for you — the life-of-need test still comes first. But it can change which option costs fewer dollars after tax, particularly when the alternative is an ATO debt accruing non-deductible GIC. When comparing, run both pre-tax and after-tax numbers. The short vs long term comparator handles the pre-tax side; your accountant can add the tax layer.

Questions to take to your accountant

Before you sign a short-term loan, a ten-minute conversation with your accountant can settle the tax side. Ask:

1. Given what the money will be used for, is the interest deductible, and in which year?
2. How should each fee on this loan be treated — immediately, or over time?
3. What’s our likely tax position this year, and how much benefit will a deduction actually give?
4. If we’re comparing this loan with an ATO payment plan, what’s the after-tax cost of each?
5. Are there records we should keep from day one?

Bring the fee schedule and loan offer with you. Specific documents get specific answers.

Talk it through with real numbers

If you’re weighing a short-term loan against another option, tell us what the money is for and a lending specialist will set out the fees and time-based cost in dollars — ready for your accountant to apply the tax treatment. There’s no credit check at the enquiry stage, and your details aren’t circulated to a list of lenders. Please describe the purpose accurately on the form; it matters for the loan and, as this guide shows, for the tax too.