The Australian Taxation Office (ATO) imposes two types of interest charges, being General Interest Charge (GIC) and Shortfall Interest Charge (SIC).
- GIC applies to outstanding tax debts generally, such as income tax, GST, withholding and other activity statement items. The current GIC rate is 11.38 per cent.
- SIC applies to tax debts arising from an amended assessment, imposed on the period up to the amendment. The current SIC rate is 7.38 per cent.
Presently, these interest charges are tax-deductible for all entities. However, in conjunction with the release of the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO) last December, the Government announced its intention to repeal the deductibility for GIC and SIC from 1 July 2025. The draft legislation to enact the change has now been released.
Repealing deductibility will remove any income tax savings when incurring GIC or SIC on ATO debts. As a result, the cost of ATO interest on outstanding tax debts will rise effectively by up to 89 per cent.
Example
You have incurred GIC of $100 on an outstanding tax debt owed to the ATO. You are entitled to a deduction, and you are on the highest marginal tax rate of 47 per cent, including the Medicare levy.
Your entitlement to a $100 deduction reduces your overall income tax liability by $47, and so the net cost to you is $53.
However, if your entitlement to a deduction is repealed there will no longer be any income tax reduction. Consequently, your cost will now be the full $100, which represents an 89 per cent increase on $53.
This change will increase the cost of paying a tax liability late or rectifying a shortfall in your self-assessed tax liability. Accordingly, there will be an added incentive to correctly self-assess tax liabilities and pay on time.
There will also be greater motivation to draw upon other sources of credit to finance the payment of tax liabilities. You might also like to consider reviewing your cashflow management to facilitate paying your income tax and activity statement liabilities on time or at least sooner.
Talk to your trusted Nexia Advisor about how we can help you navigate your tax obligations and cashflow, or if you have any questions about the matters discussed in this article.
