The Australian Taxation Office (ATO) is taking significant steps to recover $45 billion in tax debt owed by small businesses, which has prompted a change in tax law.

Starting July 1, 2025, small businesses will no longer be able to deduct interest on unpaid tax bills from the ATO, which is currently set at 11.17% and compounded daily.

This change eliminates a previous relief mechanism that allowed businesses to deduct interest on tax debt, potentially leading to increased financial strain.

Approximately 2.6 million small businesses in Australia are being warned that this new policy will significantly raise the costs associated with falling behind on tax payments, particularly as many operate on tight margins.

ATO assistant commissioner Anita Challen stressed the importance of timely tax payments to avoid accruing costly interest charges, which will now be less manageable for many businesses.

Tax expert Susan Franks pointed out that small businesses currently hold the majority of the ATO's outstanding tax debt, making the new policy particularly burdensome for this sector.

The ATO is encouraging businesses that are struggling to meet their tax liabilities to reach out for assistance and explore alternative financing options to manage their debts.

Recent data from CreditorWatch indicates that over 30,000 businesses in Australia owe at least $100,000 to the ATO, with 15,635 of these being individuals or sole traders.