Starting 1 July 2025, the Australian Government plans to eliminate tax deductions for interest charges from the Australian Taxation Office (ATO), a move that could significantly impact taxpayers with outstanding debts.
With rising interest rates making General Interest Charges (GIC) and Shortfall Interest Charges (SIC) increasingly costly, businesses and individuals alike will face higher financial burdens—up to 47% for high-income earners. This change aims to encourage timely tax payments and discourage the use of ATO debts as short-term financing solutions. As taxpayers navigate this shifting landscape, it’s crucial to explore alternative debt options and understand the implications of these upcoming changes.
Denying Deductions for ATO Interest Charges
As of 1 July 2025, taxpayers will no longer be allowed to claim deductions for interest charges from the ATO.
Update as of 26 September 2024
In the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO) on 13 December 2023, the Government announced plans to change tax laws to eliminate deductions for ATO interest charges. This proposal has not yet been enacted.
Under this new measure, taxpayers will not be able to claim deductions for General Interest Charges (GIC) and Shortfall Interest Charges (SIC) for any income years beginning on or after 1 July 2025.
Since deductions will be disallowed, any GIC or SIC that is subsequently remitted won’t need to be reported as assessable income.
Ideally, all taxpayers would meet their obligations for tax, GST, and other responsibilities to the Australian Taxation Office (ATO) promptly. However, cash flow challenges can prevent timely payments. While it may have been manageable for businesses to rely on the ATO for temporary funding during low-interest periods, it is not advisable.
Recent developments have significantly changed this landscape:
- Interest rates have increased, making ATO debts, such as General Interest Charges (GIC) and Shortfall Interest Charges (SIC), a costly form of financing.
- On 13 December 2023, the Australian Government announced in the 2023-24 Mid-Year Economic and Fiscal Outlook that it would remove tax deductions for ATO interest charges.
Here’s what this means in practical terms:
- For base rate entities (generally trading companies with turnover under $50 million), the additional cost of ATO debt interest will be 25%.
- For non-base rate entities (including companies earning passive income or trading companies with turnover over $50 million), the extra cost will be 30%.
- For individuals in the highest tax bracket (including the Medicare Levy), the additional cost will be 47%.
This change will negatively impact any taxpayer with outstanding ATO debts accumulating interest.
To provide context, the ATO applies GIC on overdue tax liabilities and SIC for incorrect self-assessments. With GIC at an annual rate of 11.38% and SIC at 7.38%, interest can escalate quickly, compounding daily. Taxpayers should note that interest charges begin accruing from the due date of the underlying debt.
Importantly, GIC accrues even on tax liabilities under a payment arrangement. Taxpayers in such arrangements should carefully evaluate these proposed changes and consider alternative debt solutions if cash flow prevents full payment by deadlines. Given the current interest rate environment and the impending removal of interest deductions, relying on the ATO as a short-term financing option may no longer be feasible.
Currently, both GIC and SIC are tax-deductible for the financial year in which the interest is incurred, which effectively reduces the interest rate based on the taxpayer’s marginal tax rate.
As of 30 June 2023, the total collectable ATO debt reached $50.2 billion, and the government’s intention in removing these deductions is to encourage timely self-assessment and payment of tax liabilities, preventing taxpayers from using the ATO as a loan source.
While this measure has not yet become law, it is expected to take effect from 1 July 2025. Interest charges accrued before this date will not be tax-deductible, and taxpayers with payment plans that extend beyond this date will not be able to deduct interest charges incurred thereafter.
Remission of ATO Interest Charges
The ATO has the discretion to remit GIC and SIC under certain circumstances, including:
- Delays in payment due to unforeseen events (e.g., natural disasters, industrial actions, the sudden collapse of a major debtor, or unexpected health issues of key personnel) where the taxpayer took reasonable steps to mitigate the delay.
- Delays caused by the taxpayer, provided they acted reasonably to address the situation.
- Situations where paying the full amount of GIC or SIC would cause significant financial hardship for the taxpayer.
The ATO will continue to review remission requests as appropriate. Furthermore, since deductions will be denied, any GIC or SIC remitted after 1 July 2025 will not need to be reported as assessable income, according to guidance on the ATO’s website.
In conclusion, the upcoming removal of tax deductions for ATO interest charges, set to take effect from 1 July 2025, marks a significant shift in the landscape for taxpayers managing ATO debts. With rising interest rates and the additional financial burden of non-deductible charges, individuals and businesses must reassess their approaches to tax obligations and cash flow management. The government’s intent behind this measure is clear: to encourage timely compliance and discourage reliance on the ATO for short-term financing. As taxpayers navigate these changes, it is crucial to explore alternative solutions and remain proactive in managing any outstanding liabilities, especially given the potential for rapidly accumulating interest.
Contact us on 07 4639 1011 to find out more. We are committed to helping Australian businesses thrive by providing tailored finance solutions that meet your unique needs.
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DISCLAIMER: The above content is to provide general information and does not constitute financial, legal or other advice. This means that duties and requirements imposed on people who give financial advice do not apply to this content. For advice contact your accountant or legal advisor.