The Australian Tax Office charges two types of interest.

The first is known as General Interest Charge (GIC). It applies to any unpaid and overdue liability owing to the ATO, including on late lodged tax returns. The GIC rate is currently an eye-watering 11.17% p.a. and is calculated and incurred daily.

Then there’s the Shortfall Interest Charge (SIC) which is charged on a tax shortfall due to an amendment or an audit. It compounds daily from the time the tax should have been originally paid until the date the amended assessment is issued. It’s a lesser rate – currently 7.17% as taxpayers can’t pay something they didn’t know existed. 

These two rates are unashamedly high as a clear deterrent against late payment of taxes. The only positive about the GIC and SIC is that the ATO allows you a tax deduction for both in the year that the interest is incurred. Until 30 June 2025 that is.

Almost 18 months ago as part of a mid-year economic and fiscal outlook, the government quietly announced its intention to deny a tax deduction for GIC and SIC from July 2025. The justification is to incentivize taxpayers to correctly self-assess their liabilities and pay these on time. I would have thought the exorbitant rates were incentive enough.  

Despite spending some time in the senate, the legislation was recently passed, and so tax deductions will be denied from 1 July.

The year to which the interest relates is irrelevant as GIC and SIC are currently deductible when they are incurred. So interest on 2025 and earlier year debts that continue beyond the start date will become non-deductible. If you are currently fighting a losing battle with the ATO, you might prefer that they finalise the audit and issue the SIC notice in the next few weeks, so that it is tax deductible.

What about where a taxpayer funds a tax liability with bank debt? Well, if you’re an individual taxpayer, interest on such borrowings was never tax deductible, and this won’t change.

Business taxpayers however are treated differently. Despite the Tax Act specifically denying a deduction for interest on money borrowed to pay tax, that ATO has stated in Tax Ruling 2582 that such interest is a normal incident of conducting a business and thus is deductible. But finding a bank to finance your outstanding income tax debts might prove to be somewhat of a challenge.

If you are persuasive enough to negotiate a remission of previously incurred GIC or SIC, you will have to declare this as assessable income where you previously received a tax deduction for the expense.

by MARK DOUGLAS
FCPA
Managing Partner of Francis A Jones
www.faj.com.au