Government Proposal: ATO interest charges to become non-deductible from 1 July 2025

Current Policy

Currently, tax owed to the Australian Taxation Office (ATO) attracts both the general interest charge (GIC) and the shortfall interest charge (SIC), both of which can be claimed as deductions.

GIC is payable when taxpayers fail to pay their taxes on time. It's calculated by adding 7% to the 90-day bank bill rate (the uplift factor). At present, this rate sits at 11.34%.

SIC applies when errors in tax returns lead to underpayment. It's calculated from the due date of the tax up to the time the corrected assessment is issued. GIC isn't applicable during this period but takes effect instead of SIC from the date of the corrected assessment. SIC is set at the 90-day bill rate plus 3%, currently at 7.34%.

The base rate reflects cost to the government due to delayed receipt of revenue, and the GIC uplift factor was introduced to prompt timely tax payment and discourage relying on tax debts for finance. Its effectiveness depends on the availability of alternative financing options for taxpayers.

While larger businesses often secure cheaper finance than the GIC, for most smaller businesses, the GIC aligns closely with the interest rate they would pay for an unsecured loan. Additionally, the ATO is often viewed as a convenient and hassle-free source of finance.

What has prompted the change?

Tax debt owed to the Australian Taxation Office (ATO) amounts to over $50 billion. Of this, 65% is owed by small businesses, with a significant 74% tied to activity statements such as GST, PAYG withholding, PAYG instalments, and FBT. Despite the ATO's efforts to improve debt collection procedures and accelerate tax debt recovery, levels of outstanding tax debt remain high.

The options in speeding up tax debt collection include either enhancing the ATO's collection mechanisms or increasing the cost of holding debt to make timely tax payment more attractive – with the government opting for the latter.

The policy is also projected to boost the ATO’s receipts by $500m per year.

What does this change mean for businesses?

Should this change be implemented, many small businesses will turn to their accountants for assistance with cash flow management, financial analysis, and strategies for business recovery. They'll be seeking to shift their financing to traditional financial institutions where interest charges are deductible, potentially making them cheaper than facing the GIC.

Not every business will manage to secure alternative tax-deductible finance. The government predicts an extra $500 million in revenue in the first year from this move. Many of the remaining tax debts with the ATO could be from businesses whose future viability is uncertain.

The policy change will also impact businesses differently depending on their legal structure and taxable income. For example, a company, depending upon its size may have a tax rate of 30% or 25%, a sole trader could have a tax rate of 0%, 16%, 30%, 37% or 45% – a confusing situation which results in a healthy business run by a sole trader facing a much higher cost for outstanding tax debt than a struggling business.

Taxpayers with outstanding debts or who are currently negotiating repayment plans need to consider the potential impact of these changes including:

• Voluntarily amending returns or a making a voluntary disclosure;
• Payment plans surpassing 1 July 2025 being denied a deduction on interest charges incurred after this date;
• Making late tax payments, including through payment arrangements; and
• Consider submitting a compelling submission for a Commissioner’s discretion for a remission of GIC and SIC in special circumstances.
  

Getting ahead of the curve

Taking proactive steps to address outstanding tax debt is crucial.

Kelly+Partners Accountants can offer guidance on whether using a loan to clear tax debt is suitable for your situation. Afterward, our skilled tax and accounting professionals can thoroughly examine your entity's structures to maximise tax effectiveness. Through careful planning and crafting a proactive tax strategy, our goal is to ensure ongoing compliance and support your long-term financial goals.

More information on the upcoming policy change can be found on the ATO website:
https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/deny-deductions-for-ato-interest-charges