From 1 July 2025, the general interest charge (GIC) and shortfall interest charge (SIC) may become non-deductible if legislation currently before parliament is passed before the calling of an election. This would significantly increase the cost of tax debt and is expected to incentivise businesses to prioritise paying their taxes over using tax debts as a source of finance. Consequently, many smaller businesses will look to their accountant for help in refinancing their business to access cheaper finance.

The current situation

Tax owed to the ATO is subject to the GIC and the SIC, both of which are deductible.

GIC is payable when a taxpayer does not pay tax on time. It is calculated as the 90-day bank bill rate, plus 7% (the uplift factor). SIC is payable in relation to errors made in a tax return that result in the underpayment of tax. It is broadly calculated from the date the tax should have been paid, up to the time the amended assessment is made. GIC is not payable during this time but will apply instead of the SIC from the date of the amended assessment. SIC is equal to the 90-day bill rate, plus 3%.

Government announcement

In 2023, the government announced that from 1 July 2025, GIC and SIC payments will no longer be deductible. This policy aims to make the cost of tax debt so high that businesses will be more inclined to pay their taxes promptly. The government expects to raise an additional A$500 million in the first year from this initiative. It is part of a broader strategy to improve tax compliance and reduce reliance on tax debts as a form of financing.

At the time of writing, the legislation was just introduced into parliament. Should the legislation be enacted before the government announces the federal election, accountants will need to be ready for the change.

Impacts of this change

Many SMEs will ask their accountant to help them with cash flow, financial analysis and business turnaround ideas, as they try to pivot their financing to traditional financial institutions whose interest charges will be deductible and thus potentially cheaper than incurring GIC.

Small businesses that are incurring GIC may also ask their accountant to apply to the ATO to request a remission of GIC to reduce the amount they need to pay to the ATO. However, the ATO has been taking a harder stance on remitting GIC, making it more challenging for businesses to obtain relief. Furthermore, there is no avenue for a taxpayer to object to a GIC remission decision if the ATO decides not to remit the GIC. They can only have the decision reviewed in the federal court.

This means businesses will need to present strong justifications, show any steps they’ve taken to alleviate payment delays and provide evidence of their efforts to comply with tax obligations.

Accountants will need to consider the ATO’s practice statement on the administration of GIC imposed for late payment or under-estimation of liability, be well prepared to support their clients in these applications, and ensure necessary documentation and arguments are in place.

Final word

Not all businesses will be able to find alternative, tax-deductible finance. Many of the tax debts that the ATO will be left with, will be for businesses whose viability is questionable.