Australian taxpayers face a significant shift in how tax debt is managed, with new legislation removing the ability to claim deductions for interest charges imposed by the Australian Taxation Office. This change, which takes effect from 1 July 2025, will impact how businesses and individuals approach their tax obligations and cash flow management.
What’s Changing?
From 1 July 2025, taxpayers will no longer be able to deduct the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) on their tax returns. This legislation, passed by Parliament on 26 March, represents a fundamental shift in tax policy aimed at creating greater equity between compliant taxpayers and those who fall behind on their obligations.
The change means that the financial penalty for late tax payments or incorrect assessments will be felt more acutely, as these charges can no longer be offset against taxable income.
Understanding GIC and SIC
General Interest Charge (GIC)
The GIC is imposed when taxpayers fail to pay their tax liabilities by the due date. Currently sitting at 11.42% for the January-March 2025 quarter, this charge accrues daily on a compounding basis until the outstanding amount is fully paid. The GIC applies across all tax types, including income tax, GST, and other statutory obligations.
Shortfall Interest Charge (SIC)
The SIC comes into play when tax assessments are amended due to incorrect self-assessment, resulting in additional tax liability. Running at 7.42% for the current quarter, the SIC applies from the original due date until the Commissioner issues the amended assessment. Once amended, any ongoing unpaid amounts then attract the higher GIC rate.
The key distinction is timing: GIC applies to late payments of known liabilities, while SIC applies to previously unknown liabilities discovered through amended assessments.
Why This Change Matters
This legislative change aims to level the playing field by ensuring that taxpayers who meet their obligations on time aren’t disadvantaged compared to those who delay payments and then claim deductions for the resulting interest charges. The government’s position is that tax compliance should be rewarded, not penalised, through the tax system.
However, the Commissioner retains discretion to remit interest charges where circumstances warrant it, particularly in cases where delays are due to factors beyond the taxpayer’s reasonable control.
Proactive Tax Debt Management
With interest charges no longer providing any tax benefit, the importance of maintaining good cash flow practices has never been greater. The ATO recommends several strategies to help businesses stay ahead of their tax obligations:
Digital Tools and Automation: Embrace technology that suits your business model to automate routine tasks like GST reporting and tax position tracking. Modern accounting software can provide real-time insights into your tax obligations.
Regular Set-Asides: Develop the discipline to regularly set aside funds for GST, PAYG withholding, and superannuation contributions. Consider establishing a separate bank account specifically for tax obligations to avoid the temptation to use these funds for other purposes.
Forward Planning: Implement robust cash flow forecasting to anticipate upcoming tax obligations. Understanding your income and expenditure patterns helps ensure you’re prepared when payment dates arrive.
Accurate Record-Keeping: Maintain current and accurate business records, ensuring they’re backed up regularly. Good records are essential for accurate tax reporting and can help avoid the penalties associated with incorrect assessments.
Professional Support: When in doubt, engage a registered tax agent or BAS agent. Professional guidance can help you navigate complex tax obligations and implement systems to maintain compliance.
The Bottom Line
The removal of deductibility for ATO interest charges represents more than just a technical tax change. It’s a clear signal that the government expects taxpayers to prioritise their tax obligations. For businesses and individuals alike, this change underscores the importance of proactive tax management and maintaining adequate cash reserves for tax payments.
Smart taxpayers will view this change as an opportunity to review and strengthen their tax compliance processes. By implementing robust cash flow management systems and seeking professional advice where needed, you can avoid interest charges altogether while maintaining a healthy relationship with the ATO.
The message is clear: prevention is better than cure, and with interest charges no longer offering any tax relief, there’s never been a better time to get your tax house in order.
For more information, see: Managing payments | Australian Taxation Office.
