Key Takeaways
- From 1 July 2025, ATO interest charges (GIC and SIC) will no longer be tax-deductible. This change affects all businesses and individuals who have pending obligations to the ATO.
- The reform was announced as part of broader efforts to enhance tax compliance. The government aims to increase revenue and reduce tax debts by tightening deductibility rules.
- Removing deductibility increases the real cost of tax debt. Previously, businesses could reduce taxable income by claiming the GIC and SIC as an expense. That benefit will now be removed.
- The change aims to encourage timely tax payments and accurate reporting. By making tax interest fully non-deductible, the government is increasing the incentive to meet tax obligations on time.
- Small businesses may feel the impact more severely. Many small business owners already face cash flow challenges, and higher costs for tax interest could increase financial stress.
- The government wants to level the playing field for compliant taxpayers. The policy removes what was seen as an unfair advantage for those who pay late.
- Taxpayers will need to improve cash flow and reporting systems. Avoiding interest charges will now require better forecasting and on-time lodgements.
- Professional advice and financial planning are more important than ever. Accountants and tax advisors will play a key role in helping businesses adapt to the new rules.
- External financing may become a more attractive option. Borrowing to pay tax on time could be more cost-effective than incurring non-deductible ATO interest.
- The policy reflects a shift toward stronger enforcement and fiscal responsibility. It supports a broader move in Australian tax reform to discourage debt accumulation and improve system integrity.
In a significant shift in Australian tax policy, the government announced that, effective from 1 July 2025, taxpayers will no longer be able to claim deductions for General Interest Charges (GIC) and Shortfall Interest Charges (SIC) imposed by the Australian Taxation Office (ATO). This move has stirred considerable debate among tax professionals, business owners, and policymakers alike. Let’s discuss the government’s rationale for removing GIC/SIC tax deductions and how these changes will affect the taxation landscape in Australia.
Understanding GIC and SIC
Before going into the reasons behind this policy change, it’s essential to understand what GIC and SIC are:
- General Interest Charge (GIC): Levied on overdue tax liabilities, the GIC is calculated daily and compounded. It serves as a deterrent against late payments and encourages the timely settlement of tax debts.
- Shortfall Interest Charge (SIC): Applied when a taxpayer underestimates their tax liability, leading to an amended assessment. Like the GIC, the SIC is calculated daily and compounded, aiming to penalise inaccuracies in self-assessment.
Historically, both GIC and SIC have been tax-deductible, allowing businesses and individuals to reduce their taxable income by the amount of interest paid.
Explaining the GIC/SIC Deduction Reform in Australia
The government’s decision to remove the deductibility of GIC and SIC was announced in the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO) and is set to commence on 1 July 2025. This change means that businesses and individuals will bear the full cost of these interest charges without the benefit of reducing their taxable income.
Let’s consider a hypothetical scenario for a clearer understanding:
- Old Policy (Pre-1 July 2025): ABC Pty Ltd incurs a GIC of $10,000 on late payment of income tax. With a corporate tax rate of 30%, the company could claim a $3,000 tax deduction, effectively reducing the out-of-pocket cost of the interest to $7,000.
- New Policy (Post-1 July 2025): The same GIC of $10,000 is now fully non-deductible. The full $10,000 must be paid without any reduction in taxable income, increasing the cost of non-compliance.
Over time, for businesses that regularly incur such charges, the financial impact can be significant.
Why is ATO Interest No Longer Tax-Deductible After 1 July 2025?
According to the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2025, here are some of the government’s reasons for ending GIC and SIC tax deductibility:
1. Encouraging Timely Tax Compliance
One of the primary reasons cited for this policy change is to incentivise taxpayers to meet their tax obligations promptly. By removing the tax deductibility of interest charges, the government aims to increase the cost of late payments and underestimations, encouraging timely and accurate tax filings.
2. Reducing the ATO’s Collectable Debt
At the time of the announcement, the ATO had over $50 billion in collectable tax debt, with a significant portion owed by small businesses. By making interest charges non-deductible, the government intends to accelerate the repayment of these debts, improving the overall efficiency of the tax system.
3. Levelling the Playing Field
The government believes that allowing deductions for interest charges effectively grants a financial advantage to those who fail to meet their tax obligations. By removing this benefit, the policy aims to create a fairer environment for taxpayers who comply with their obligations on time.
What’s the Benefit to the Government of Banning ATO Interest Deductions?
1. Increased Tax Revenue
The most immediate and measurable benefit is higher tax revenue. By removing the ability for taxpayers to deduct GIC and SIC from their taxable income, the government reduces allowable deductions and increases the overall tax collected from businesses and individuals.
2. Creating a Fairer Tax System
From a policy perspective, the government sees this reform as a fairness measure. Allowing deductions for GIC and SIC arguably created a situation where taxpayers who delayed their obligations were financially advantaged over those who complied on time. By removing the deduction, the government rewards businesses that manage their taxes responsibly.
3. Supporting Broader Tax Reform Goals
This measure fits within a broader pattern of tax reform in Australia, where governments are closing loopholes, improving system integrity, and aligning the tax system with modern economic behaviours. The goal is not just to collect more revenue but to shape taxpayer behaviour in a way that supports long-term compliance and fairness.
Implications of the Policy Change Behind ATO Interest Deduction Ban
- Increased Financial Burden on Taxpayers: Without the ability to deduct interest charges, businesses and individuals will face higher effective costs for overdue tax liabilities.
- Disproportionate Impact on Small Businesses: Small businesses, which account for a substantial portion of the ATO’s collectable debt, are expected to be disproportionately affected by this policy change.
- Potential Deterrent to Voluntary Compliance: The increased financial burden associated with non-compliance may deter individuals and businesses from coming forward to rectify mistakes, potentially leading to increased penalties and a less cooperative tax environment.
Tax Planning and Compliance in Light of GIC SIC Deductibility Removal
For business owners, accountants, and financial advisors, the new ATO interest policy means that strategic tax planning becomes even more important.
1. Prioritise Timely Lodgement and Payment
Businesses will need to tighten their internal systems to ensure tax payments are made on time. This includes GST, PAYG withholding, income tax instalments, and superannuation contributions. Any delay in payment post-1 July 2025 will carry non-deductible interest.
2. Proactive Debt Management
With the removal of GIC/SIC deductibility, businesses should look at proactively managing their tax debt. This could involve negotiating payment arrangements with the ATO earlier, or even considering alternative finance solutions to settle tax debts promptly.
3. Engage Qualified Advisors
The role of accountants becomes even more crucial under this new policy. A proactive advisor can help navigate the changes, improve compliance, and plan for any financial implications of late tax payments. For small businesses with tight margins, professional advice may help avoid unexpected interest burdens that are now fully non-deductible.
Tax Debt Loans: A Strategic Response to ATO Interest Policy Changes
With the upcoming removal of tax deductibility for ATO interest charges from 1 July 2025, businesses facing cash flow pressure may need to rethink how they manage and finance their tax obligations. One increasingly important strategy is the use of alternative business finance options, such as tax debt loans.
Why Consider Tax Debt Loans?
Tax debt loans can provide a more cost-effective solution compared to incurring GIC or SIC. While both involve paying interest, loans from private or non-bank lenders may still allow businesses to claim interest as a tax deduction, unlike GIC/SIC charges post-reform.
This means that:
- Borrowing to pay tax on time could cost less overall than paying the ATO late
- Managing tax debt through structured loan repayments can reduce pressure on day-to-day cash flow
- Businesses retain control over repayment terms, rather than being locked into strict ATO payment arrangements
- Businesses can immediately pay off ATO debts before GIC/SIC begin accruing
- Tax debt loans can also help businesses avoid or exit costly ATO payment plans
Timing Is Everything
With the deductibility change taking effect from 1 July 2025, now is the time for businesses to review their financial position and ensure they won’t be caught out. Taking proactive steps can protect your bottom line and keep your business moving forward.
More Questions
What is the government’s reason for removing GIC/SIC deductions?
The government argues that allowing tax deductions for ATO interest charges sends the wrong message by offering a financial benefit to those who are late in meeting their tax obligations. By removing the deductibility, the aim is to make non-compliance more costly and reduce the incentives to delay payment or underreport income. It’s seen as part of a broader strategy to bolster the integrity of Australia’s taxation system.
What budget policy removed tax deductibility of ATO interest?
This policy was introduced in the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO) and was approved in the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2025. It is part of a broader fiscal strategy to improve tax compliance, reduce budget deficits, and reinforce the government’s commitment to sustainable public finances.
Is the ATO interest deductibility change part of a broader tax reform?
Yes. While the change appears to be targeted, it fits into a wider context of business tax changes in Australia and broader tax reform efforts. The government has indicated that it is focused on increasing compliance, reducing loopholes, and ensuring a fairer tax system where non-compliance is discouraged and timely compliance is rewarded.
Final Thoughts
The government’s decision to make ATO interest charges non-deductible represents a significant shift in Australian tax policy. While the intention is to promote timely tax compliance and reduce the ATO’s collectable debt, the policy change raises concerns about its impact on small businesses and the potential deterrent effect on voluntary compliance. As the implementation date approaches, it is important for taxpayers to understand the implications of this change and to seek professional advice to understand the evolving tax landscape better.
Avoid Increasing Costs of Tax Debt with the Right Financing
Tax debt loans are a strategic solution to potential costs brought by the upcoming policy changes. If you have pending obligations to the ATO, now is the time to deal with them before deductibility changes are applied. Get a tax debt loan through Dark Horse Financial today.
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.
