Key Takeaways
- From 1 July 2025, the ATO's GIC and SIC will no longer be tax-deductible, increasing the effective cost of tax debt for both individuals and businesses.
- General Interest Charge (GIC) is applied when taxpayers fail to pay their taxes on time. Meanwhile, Shortfall Interest Charge (SIC) is applied when there's an audit or incorrect self-assessment leading to underpayment of tax.
- Without the ability to claim deductions, taxpayers will have to bear the full interest burden, which could impact cash flow and make tax debt even harder to pay down.
- The ATO has stated that the change in deductibility is designed to encourage prompt tax payment and ensure fairness for all taxpayers.
- While challenging, it is possible to negotiate ATO interest charges under specific circumstances, such as extreme financial hardship, reasons outside of your control, or significant errors.
- The impact of these interest changes varies depending on your tax rate. Individuals, non-base rate companies, and base rate companies will all be affected differently.
- Small businesses will likely feel the greatest impact from the interest rate changes, as the increased cost of tax debt can strain cash flow and profitability.
- Tax debt loans offer a viable alternative for managing ATO liabilities, providing lower interest rates and more flexible terms compared to ATO payment plans.
- Contact a lending expert like Dark Horse Financial to get access to the best tax debt loan solutions in Australia and secure favourable rates and terms.
Starting 1 July 2025, the ATO will implement significant changes regarding the interest rates on tax debt. Specifically, the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) will no longer be tax-deductible. This policy shift is part of the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2025, aiming to encourage timely tax payments and accurate self-assessment.
For businesses and individuals managing tax debts, this change could have great financial implications. It’s important to understand these changes for effective tax planning and financial management.
What Are GIC and SIC?
The ATO charges daily accruing interest on unpaid taxes. Here’s the difference between ATO GIC and SIC (Shortfall Interest Charge):
General Interest Charge (GIC)
The GIC is applied when taxpayers fail to pay their tax liabilities on time. It’s calculated daily, based on the annual rate set by the ATO, the amount of tax debt you owe, and how many days you’ve missed the due date.
Shortfall Interest Charge (SIC)
The SIC applies when there’s an underpayment of tax due to an incorrect self-assessment or an audit. It replaces the GIC for the period before an amended assessment is issued. The due date of SIC is 21 days after the ATO issues the notice of amended assessment. If the SIC remains unpaid after 21 days, GIC will apply automatically.
What You Need to Know About ATO Interest Changes
What are the latest ATO interest changes? From 1 July 2025, the ATO’s GIC and SIC will no longer be tax-deductible. This means that businesses and individuals will have to bear the full financial cost of these interest charges when they pay tax late or underreport tax obligations.
Currently, GIC and SIC can be claimed as a tax deduction, reducing their real financial impact. But after the changes take effect, taxpayers will no longer be able to offset these charges against their taxable income, effectively making ATO interest more expensive.
This will particularly affect those who regularly carry tax debt, including small businesses. The increased cost of tax debt may prompt a shift toward alternative funding options, like tax debt loans, to manage tax repayments.
Why Remove Deductibility? ATO Interest Rate Changes Explained
According to the ATO, these are some of the reasons why this change in tax debt interest was implemented:
1. Encouraging Timely Payment of Tax Debts
By removing the tax deductibility of interest on unpaid or underpaid tax, the government is effectively increasing the cost of non-compliance. This is meant to discourage businesses and individuals from delaying or missing payments.
2. Aligning With the Purpose of Penalty Interest
GIC and SIC are not meant to be regular business expenses—they are penalty-style interest rates designed to incentivise prompt payment and accurate self-assessment. Making them tax-deductible undermines that purpose by reducing their financial impact. Removing the deductibility reinforces their function as a deterrent rather than a manageable cost.
3. Targeting Integrity in the Tax System
The bill targets tax minimisation behaviours that exploit the rules. This particular measure also aims to enforce fairness for taxpayers who already pay their taxes correctly. This levels the playing field and appropriately penalises non-compliance.
4. Improving Budget Revenue
The Treasury expects to raise additional revenue through this measure by:
- Increasing the tax paid by companies and individuals who previously deducted interest on late or short-paid tax.
- Reducing the attractiveness of delaying tax payments, leading to more timely remittances and better cash flow for the government.
This additional revenue aims to reduce the outstanding tax obligations the ATO is chasing after, which amount to over $50 billion.
How ATO Interest Increases Affect Tax Debt Repayments
How do ATO interest rate increases affect me? This is how the changes will affect taxpayers, depending on the tax rate:
Individuals: Individuals who pay GIC or SIC can currently claim these charges as a tax deduction if the interest relates to income-earning activities. For income earners paying the top marginal tax rate of 47%, this meant almost half of the ATO interest charge could be offset through a tax deduction.
- After 1 July 2025: ATO interest will become fully non-deductible, meaning individuals will bear the full cost of any GIC or SIC. This is a significant increase in the effective interest burden for those with unpaid tax debts.
Companies (Non–Base Rate Entities): These are companies with an aggregated turnover over $50 million, or companies that earn more than 80% of their income from passive sources. They are taxed at the full corporate tax rate of 30%. A company paying GIC or SIC can deduct it as a normal business expense, reducing the effective cost of ATO interest from, say, 11% to around 8% after tax.
- After 1 July 2025: The full GIC/SIC rate will apply without tax relief, meaning non-base rate companies will lose the ability to deduct what was previously a sizeable expense. This can result in significantly higher costs for carrying tax debt, especially for large businesses that have historically factored in deductibility in their cash flow management.
Companies (Base Rate Entities): These are companies with an aggregated turnover of less than $50 million and with no more than 80% of their income from passive sources. These companies are taxed at the base corporate tax rate of 25%. Base rate entities can currently deduct ATO interest charges, reducing the cost of GIC by 25%.
- After 1 July 2025: These smaller companies will also lose the deduction, and the full GIC or SIC rate will apply, increasing the cost of tax debt and further stressing cash flow, particularly for businesses already operating on tight margins or seasonal revenue.
Impact of ATO Rate Rises on Small Businesses
Small businesses, often operating with tight cash flows, are particularly vulnerable to these changes. The ATO has been seen as a more lenient creditor since the pandemic, but with the increased cost of tax debt, businesses may need to seek alternative financing options, such as tax debt loans in Australia, which could offer more favourable terms.
When Can You Negotiate ATO Interest Charges?
The ATO has a remission policy, which means it has the discretion to reduce or cancel interest charges in certain circumstances. However, this is not an automatic process, and you’ll need to present a compelling case. The most common grounds for remission requests include:
- Extreme Financial Hardship: If paying the interest would cause significant financial strain.
- Exceptional Circumstances: In cases of natural disasters, serious illness, or other issues that directly affect your business. Economic downturns are not included since other taxpayers experience them too, but still pay their taxes on time.
- Mistakes or delays outside your control: If there was an error on the part of the ATO or other external factors that led to the late payment.
- Good compliance history: If you have a good track record of paying your taxes on time, and the late payment is an isolated incident.
Managing Tax Debt with Rising ATO Interest
Proactive Tax Planning
To mitigate the impact of these changes, taxpayers should engage in proactive tax planning. This includes staying on top of tax obligations, ensuring accurate self-assessments, and avoiding late payments.
Exploring Financing Options
Given the increased cost of tax debt, businesses might consider exploring tax debt loans in Australia. These loans can provide immediate funds to settle tax liabilities, potentially at lower interest rates than the ATO’s GIC. Consulting with lending experts like Dark Horse Financial can help you find the right solution.
Negotiating Payment Plans
For businesses struggling with tax debt, negotiating a payment plan with the ATO can be beneficial. However, it’s important to note that the ATO has become stricter in remitting interest charges, and late payments can lead to the cancellation of payment plans. GIC also still applies throughout the term of your payment plan.
How Can I Avoid Paying High ATO Interest on Tax Debt?
To avoid high interest charges, ensure timely payment of taxes, accurate self-assessment, and consider exploring alternative financing options, such as tax debt loans.
What Are Tax Debt Loans?
Tax debt loans in Australia are specialised finance products designed to help taxpayers pay off their outstanding tax obligations to the ATO. These loans are typically provided by non-bank lenders or specialist lenders. If you want to know more about this type of financing, check out our tax debt loans guide.
Why Consider a Tax Debt Loan?
- Lower Interest Rates Than ATO GIC
Many tax debt loan products offer interest rates that are lower than the current ATO GIC, and importantly, unlike GIC, the interest paid on business finance can remain tax-deductible. This makes tax debt loans a more financially efficient way to manage cash flow while resolving outstanding tax issues. - Avoid Costly Penalties
Failing to deal with ATO debts promptly can lead to compounding interest charges, penalty notices, garnishee actions, and potential legal proceedings. Using a tax debt loan to immediately pay the ATO in full can help you avoid these enforcement actions entirely. - Preserve Your Business Cash Flow
Businesses often run into tax debt issues due to short-term cash flow challenges. A tax debt loan gives you the breathing room to manage tax repayments without draining your working capital, ensuring you can meet other obligations like wages, rent, and supplier payments. - Flexible Repayment Terms
Many tax debt loans come with flexible repayment structures, allowing you to structure repayments in a way that suits your cash flow cycle. - Protect Your Credit and Reputation
A prolonged tax debt can negatively impact your credit profile and your standing with business partners and suppliers. Clearing your ATO debt through a tax loan helps protect your financial reputation and keep your business standing strong.
When Should You Apply?
If you’re already incurring GIC or you’ve received a notice from the ATO, the time to act is now. The longer your debt remains unpaid, the more interest you’ll accrue—and from 1 July 2025, the entire GIC amount will be non-deductible. Securing a tax debt loan sooner rather than later can minimise your interest exposure and give you immediate relief.
Final Thoughts
The upcoming changes to ATO interest rates represent a significant shift in tax policy. With the removal of deductions for GIC and SIC, taxpayers will face higher costs associated with tax debt. It’s essential to stay informed about these changes and take proactive steps to manage tax obligations effectively. Engaging with financial experts and exploring alternative financing options like tax debt loans can help mitigate the impact of these changes.
Get a Tax Debt Loan to Deal With Tax Obligations
Remain in good standing with the ATO by paying off your tax debts in one go. Avoid costly charges and potential legal action through financing. With tax debt loans, you can get potentially better rates than the GIC and more flexible terms than ATO payment plans. Get a tax debt loan today through our expert help. Reach out today to learn more.
Disclaimer: The information provided on this page is general in nature and does not constitute financial, taxation, or legal advice. It does not take into account your personal circumstances, objectives, or needs and should not be relied upon for any reason. Before making any decisions, you should seek independent professional advice tailored to your specific situation.
