Key Takeaways
- ATO interest ban begins 1 July 2025. From this date, GIC and SIC on tax debts will no longer be tax-deductible, increasing the effective cost of ATO debt and payment plans
- Without the deductibility of GIC and SIC, ATO payment plans could be seen as less of an option compared to a tax debt loan.
- With traditional ATO arrangements less appealing, lenders will fill the gap in tax debt financing.
- Tax debt loans can offer a cost-effective solution. These loans help businesses preserve interest deductibility.
- Replacing ATO debt with tax-deductible business loans can often reduce overall interest costs and improve cash flow.
- Businesses must proactively manage tax debts and assess loan options to avoid higher future costs.
- It’s important to act before the deadline. Applying for tax debt loans and repaying tax debts before 1 July 2025 allows businesses to fully deduct interest under current tax rules.
The Australian Taxation Office (ATO) has announced significant changes to the deductibility of interest charges on tax-related debts, set to take effect on 1 July 2025. This policy shift is poised to have far-reaching implications for businesses across Australia. In this article, we’ll go over the details of these GIC and SIC changes, their impact on the loan market, and the strategies businesses can employ to navigate this new tax landscape.
Understanding the ATO Interest Ban on Deductibility
Currently, businesses can deduct the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) from their taxable income. These charges are applied when businesses fail to meet their tax obligations on time or understate their tax liabilities. The GIC is charged when a taxpayer fails to pay on time, while the SIC applies to shortfalls resulting from incorrect self-assessments.
However, under the new legislation, which amends section 25.5 of the Income Tax Assessment Act (ITAA) 1997, these interest charges will no longer be tax-deductible from 1 July 2025. This means that businesses will bear the full financial burden of these charges without the relief previously provided through tax deductions
Loan Market Impact: A Shift in Financial Strategies
1. Increased Cost of ATO Payment Plans
With the removal of interest deductibility, ATO payment plans become a less attractive option for businesses. With payment plans, the GIC still applies, which can add up significantly. Without the buffer of deductibility, the effective cost of GIC and SIC will rise.
2. Surge in Demand for Alternative Financing
As the cost of ATO payment plans escalates, businesses are likely to seek alternative financing solutions. Non-bank lenders, in particular, are expected to see increased demand for products such as tax debt loans in the form of secured and unsecured loans, business lines of credit, asset-based lending, and more. These options can potentially offer more competitive interest rates and the interest paid is tax-deductible, providing businesses with the financial relief they need.
3. Refinancing Opportunities
Businesses with existing ATO debts may consider refinancing their obligations through non-bank lenders. Refinancing can convert non-deductible ATO debt into deductible business loan interest, potentially reducing overall tax liabilities. Additionally, refinancing may offer more favourable repayment terms, improving cash flow management
How ATO GIC and SIC Changes Affect Lending and Refinancing
1. Impact on Business Loan Demand
Will loan demand rise after ATO interest is no longer deductible? The ATO interest deductibility ban is expected to drive increased demand for business loans. Lenders may respond by adjusting their offerings to cater to this demand, potentially introducing new products or modifying existing ones to provide more attractive terms for businesses seeking to refinance ATO debts.
2. Adjustments in Loan Terms
Will lenders change terms after GIC and SIC are no longer deductible? In response to the changing landscape, lenders may revise their loan terms. This could include offering longer repayment periods to ease cash flow pressures or adjusting interest rates to remain competitive. However, businesses should be cautious and thoroughly assess the total cost of borrowing, including any fees and charges, to ensure that refinancing ATO debt through a tax debt loan remains a financially viable option.
Will the End of GIC Deductibility Affect Non-Bank Lenders in Australia?
The Australian government’s decision to disallow deductions for GIC and SIC on tax debts could have consequences for non-bank lenders. While the change primarily targets businesses and individuals with tax liabilities, non-bank lenders, who often cater to higher-risk borrowers or those with complex financial situations, may face a ripple effect.
It is likely there may be an influx of applications for tax debt loans as many business owners with tax debts aim to refinance their ATO obligations before the deadline.
Strategic Considerations for Businesses
1. Proactive Debt Management
Businesses should prioritise settling existing ATO debts before 1 July 2025 to avoid the increased costs associated with non-deductible interest charges. Engaging with the ATO early to negotiate payment plans or explore remission options can provide temporary relief, but businesses should be prepared for the eventual impact of the policy change.
2. Exploring Refinancing Options
Refinancing ATO debts through non-bank lenders can offer several advantages, including tax-deductible interest, more favourable repayment terms, and improved cash flow management. Businesses should consult with lending experts like Dark Horse Financial to identify the most suitable refinancing options based on their specific circumstances.
3. Enhancing Financial Management
Implementing robust financial management practices is essential to deal with the changes effectively. This includes maintaining accurate financial records, forecasting cash flow needs, and regularly reviewing tax obligations. By staying informed and prepared, businesses can mitigate the impact of the ATO interest deductibility ban and maintain financial stability.
How Tax Debt Loans Will Help Businesses During This Time
As the ATO interest deductibility ban comes into effect from 1 July 2025, many Australian businesses will face a higher effective cost for carrying ATO debt. This change is expected to disproportionately impact small and medium-sized enterprises, which often rely on ATO payment plans as a flexible way to manage cash flow during tough periods. In this changing landscape, tax debt loans emerge as a critical financial tool that can help businesses face the increased cost and complexity of managing tax liabilities.
What Are Tax Debt Loans?
Tax debt loans are specialised financing solutions offered by non-bank lenders that allow businesses to refinance or pay off outstanding tax debts. These loans convert ATO debt (about to be subject to non-deductible GIC and SIC charges) into regular business loans with tax-deductible interest. This simple shift can provide substantial financial relief and improve a company’s overall tax position.
Key Benefits of Tax Debt Loans Post-July 2025
Preservation of Interest Deductibility
While GIC and SIC will no longer be deductible, interest on a standard business loan remains tax-deductible. By refinancing ATO debt through a tax debt loan, businesses can continue to offset interest costs against taxable income.
Possible Lower Effective Interest Rates
ATO interest charges (especially the GIC, which currently sits around 11.17% as of early 2025) can be significantly higher than interest rates available through traditional or alternative lenders. As a result, businesses not only regain deductibility but also reduce their cost of borrowing.
Enhanced Access to Capital
Tax liabilities can damage a business’s creditworthiness, limiting its access to financing. By refinancing tax debt into a formal loan arrangement, businesses demonstrate proactive financial management, which can improve their standing with lenders. This opens the door to additional financing for operations, growth, or working capital needs.
Strategic Timing: Why Businesses Should Act Before 1 July 2025
Should businesses refinance ATO tax debt before July 2025? Businesses considering tax debt loans should act decisively before the deductibility rules change. Refinancing now means the business can deduct all related interest expenses incurred before the new rules take effect. Even if the loan term extends beyond July 2025, the deductibility of the loan interest, unlike GIC and SIC, remains unaffected under current tax laws.
In Summary
The ATO interest deductibility ban represents a significant shift in Australia’s tax policy, with profound implications for businesses and the loan market. While the policy aims to encourage timely tax compliance, it also introduces new financial challenges for businesses, particularly small and medium-sized enterprises. By proactively managing tax obligations, exploring refinancing options, and enhancing financial planning, businesses can navigate this new landscape and continue to thrive in a changing economic environment.
Deal With Tax Debts Ahead of The Interest Deductibility Ban
Clear your obligations to the ATO before the deadline by applying for tax debt loans. Our team at Dark Horse Financial can help you secure the best rates and terms based on your situation. Avoid the rising costs of ATO interest and get your business back on track financially.
Important Disclaimer: This article is intended for informational purposes only and does not constitute financial or tax advice. Businesses should consult with qualified financial advisors or tax professionals to assess the specific implications of the ATO interest deductibility ban on their operations.
