In a significant move that could reshape tax debt management, the Australian government has announced draft legislation that could see General Interest Charge (GIC) and Shortfall Interest Charge (SIC) payments become non-deductible from 1 July 2025. This policy, if passed, will have implications for businesses, particularly small and medium enterprises (SMEs), as the cost of tax debt will rise.

Deductible interest charges

At present, tax debts owed to the Australian Taxation Office (ATO) attract two types of interest charges:

Both of these charges are currently deductible, which helps to soften the financial blow for businesses that incur them. However, with the proposed legislation, this will no longer be the case.

Interest charges become non-deductible from 1 July 2025

Should the government’s proposal pass into law, GIC and SIC payments incurred on or after 1 July 2025 will no longer be tax-deductible. This change will affect the 2025-2026 income year onwards, increasing the financial burden of tax debt for businesses across Australia.

For many small businesses, GIC currently mirrors the cost of an unsecured loan, and the ATO has often been seen as a “soft” option for financing due to the application-free nature of accruing tax debt. However, with the removal of deductibility, tax debts will become a far less attractive financing option.

What this means for businesses

Businesses, especially SMEs, will need to reassess their strategies for managing tax debts. With the cost of tax debt set to rise, there will be a greater incentive to secure external finance from banks or other financial institutions, which may offer more favourable terms than the ATO’s GIC rate.

Small businesses are advised to turn to accountants and financial advisors for assistance with cash flow management, financial analysis and business recovery strategies.

The impact on the ATO and tax debt collection

With more than $50 billion in collectable tax debt, 65% of which is owed by small businesses, the ATO has been grappling with high debt levels. The majority of this debt relates to activity statements, including GST, PAYG withholding, and FBT. The government’s move to make GIC and SIC non-deductible may be part of a broader strategy to accelerate the recovery of these debts.

The policy could increase the ATO’s tax debt holdings, as businesses with high debt may struggle to pay the now higher cost of their outstanding liabilities. This could place further strain on businesses already facing economic challenges.

Steps to take before 1 July 2025

For businesses currently managing tax debts or negotiating repayment plans, it is essential to take proactive steps before the new legislation comes into effect. Consider the following actions:

1. Voluntarily amend tax returns or make a voluntary disclosure to address any outstanding liabilities before the deductibility is removed. 

2. Reevaluate payment plans if your payment plan extends beyond 1 July 2025, interest charges incurred after this date will no longer be deductible. Consider renegotiating or expediting payments to minimise costs. 

3. Late tax payments will become more costly: Businesses should aim to clear outstanding debts before the new rules take effect. 

4. Request GIC and SIC remissions, the ATO may exercise discretion to remit GIC or SIC, particularly in cases of financial hardship. Businesses should consider making a compelling submission to the ATO if applicable. 

The upcoming changes to GIC and SIC deductibility represent a significant shift in how tax debts will be managed in Australia. By acting now, businesses can minimise the impact of these changes and avoid the increased costs associated with non-deductible tax debt.  

Consultation is open until 16 October 2024, we will provide updates as they are announced. 

If you have any concerns about how this legislation could affect your business, speak to our business services team to explore your options.