Starting from 1 July 2025, taxpayers will no longer be able to claim tax deductions for general interest charges (GIC) and shortfall interest charges (SIC) imposed by the Australian Taxation Office (ATO). This change was announced as part of the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO) and the bill for this change has been introduced into Parliament on 28 November 2024.
What Are GIC and SIC?
General interest charges (GIC) are imposed by the ATO for late payment of tax liabilities, while shortfall interest charges (SIC) are applied when an incorrect self-assessment leads to a shortfall in tax paid. Currently, taxpayers can claim deductions for these interest charges in the year they are incurred. However, with the new rule coming into effect, these deductions will no longer be available for income years starting on or after 1 July 2025.
Rates for October to December 2024 are 11.38% for GIC and 7.38% for SIC.
Impact on Different Taxpayers
The tax impact of this new rule will vary depending on the taxpayer’s tax rate:
- Individuals: For individual taxpayers who have large outstanding tax debts and have been claiming the interest as a deduction, going forward the inability to deduct GIC and SIC will result in a higher taxable income, potentially pushing them into a higher tax bracket. This could lead to an increase in their overall tax liability, which could be as high as 47%;
- Companies (Base Rate Entities): Base rate entities, which are companies with an aggregated turnover of less than $50 million and that derive no more than 80% of their income from passive sources, currently benefit from a lower tax rate of 25%. The denial of deductions for GIC and SIC will mean that these entities will lose out on a 25% tax saving on the interest cost;
- Companies (Non-Base Rate Entities): Non-base rate entities, which are companies that do not qualify as base rate entities, are subject to the standard corporate tax rate of 30%. These companies will experience a more significant impact from the denial of deductions for GIC and SIC, as the increase in taxable income will be taxed at 30%.
While the tax effect of the interest is important, the main moral to the story with all of the above taxpayers, is that the after tax cost of paying the ATO interest after 1 July 2025 will be significantly more. With no tax deduction for the interest, and with the interest rates being very high it will mean you have to think very carefully how you fund tax payments from 1 July 2025 onwards.
Previously, some individual taxpayers were happier to pay the interest charges levied by the ATO and claim the tax deduction, rather than obtain their own bank finance and then not be able to claim the tax deduction. This is because, as an individual, obtaining a loan from the bank to pay tax, will not give rise to a tax deduction. From 1 July 2025 the ATO interest will be on the same basis as bank interest – it will not be tax deductible. On that basis it will be very important to fund outstanding tax with the cheapest interest rates – in most cases that will not be by way of using the ATO as a bank.
Preparing for the Change
Clients should start preparing for this change by reviewing their current tax strategies and considering the potential impact on their cash flow. Look at how you might be financing the tax payments (if you don’t have cash ready to pay the tax), and ensure you are utilising the most effective facility. You do not want to have too much in outstanding tax debts with the ATO at the higher interest rates, especially if the tax deductibility of the interest will be exactly the same whether funded by the bank or the ATO.
If you need to discuss this matter further, please do not hesitate to contact your client relationship manager.
AUTHOR – Quang Tat
*Correct as of 19 December 2024
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
