Proposed changes to the deductibility of general interest and shortfall interest charges – are you ready?

As part of the 2023-24 Mid-year Economic and Fiscal Outlook, the Federal Government announced that general interest charges (GIC) and shortfall interest charges (SIC) incurred on or after 1 July 2025 will no longer be deductible. The argument for removing the SIC/GIC deductions is that with an increase to the cost of tax debt, this change will incentive taxpayers to correctly self-assess their tax liabilities and pay on time. The proposed measure, contained in Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024, if enacted without amendments, will have significant implications for taxpayers.

Whilst the coming Federal Election may delay or even prevent this change from becoming law, advisers should consider the likely impact of this measure upon their clients.

Current landscape

A taxpayer’s liability for SIC arises when the Commissioner issues an original assessment for a taxpayer who has lodged after their due date, or he amends their original tax assessment, resulting in an additional tax payable. SIC accrues daily for the period during which there is a tax shortfall and is typically levied from the date that the primary tax under the original assessment was or should have been due (or would have been due if there had been a tax payable) until the day before the Commissioner issued a notice of amended assessment.

Similarly, GIC applies to unpaid tax debt and tax shortfalls, accruing from the day the primary tax under the original assessment was due for payment, continuing until the debt is fully paid.

When SIC and GIC were introduced, the rate was set to a rate above commercially available rates to give taxpayers an incentive to pay their tax debts on time (source: Australian Treasury, at Para 5.1).

Both SIC and GIC apply on a daily compounding basis and are based on the 90-day Bank Bill rate plus an uplift factor.  For SIC the uplift factor is 3% and GIC is 7%, with these rates been deemed at the time SIC and GIC were introduced to meet the objective of discouraging late payment of tax liabilities.  These uplift amounts are not being reduced as part of the proposed change, so the incentive to pay tax debts on time will become both a high interest rate and the interest becoming non-deductible. Both rates are updated quarterly to reflect the Commonwealth’s borrowing costs and for the January – March 2025 quarter the SIC rate is 7.42% and the GIC rate is 11.42%.

Possible ramifications and solutions

Whilst SIC/GIC accrues daily from when the primary tax is due for payment, they are deductible only when incurred. There is no statutory definition of the term “incurred’. As a broad rule, expenditure is treated as incurred when there is a presently existing obligation to pay a certain sum at a future date. The earliest time at which a GIC/SIC crystallises into a presently existing liability is after a taxpayer is served with a notice of assessment or amended assessment which increases the amount of primary tax payable and which shows that the Commissioner has imposed a SIC or GIC liability as well. If the proposed measure is enacted without any changes taxpayers could potentially be faced with higher tax liabilities as a result of the retrospective application of these changes.

For example, taxpayers with outstanding tax debts or tax debts currently under ATO payment plans will continue to accrue GIC. To the extent that the outstanding tax liability/payment plan extends beyond 1 July 2025, any GIC accrued after this date will no longer be deductible. This is so notwithstanding that the primary tax debt relates to income years prior to 1 July 2025. Taxpayers may wish to consider whether it would be beneficial to repay any outstanding tax debts in full or in large part to minimise the adverse financial impact of the removal of SIC/GIC deductibility.

An amended assessment may be issued for many reasons including as a result of an ATO review that escalates to an audit. Taxpayers currently undergoing a tax review or audit could be impacted by the proposed measure where any amendment and interest imposition occurs after 1 July 2025 for the amendment of prior year assessments. Additionally, given the two- or four-year statutory amendment period, taxpayers will also be exposed to the risk of an ATO review/audit that commenced on or after 1 July 2025 but relates to income years before this start date. If the outcome of the review/audit is unfavorable, any SIC/GIC accrued will not be deductible. For those currently subject to an ATO review/audit, it may be worth considering whether to negotiate and expediate the matter to cause any interest cost to be raised before 30 June 2025. To help lessen the burden of higher tax liabilities under the new measure, it may also be necessary for taxpayers to take a proactive approach for example where there is uncertainty to the tax position adopted by engaging early with the ATO through voluntary disclosure. Staying vigilant with tax lodgement obligations, including where applicable the ensuring timely submission of overdue returns (e.g., income tax/FBT/BAS) is also a viable option.

The ATO has stated in Taxation Ruling IT 2582 that interest incurred by a business taxpayer on moneys borrowed to pay income tax is a normal incident of conducting a business and thus is deductible. However, s.25-5(2)(c) ITAA 1997 specifically denies a tax deduction for expenses related to borrowing money (including payment of interest) to pay income tax, PAYGW or PAYGI amounts. Additionally, the interest deductibility on borrowings to pay other tax debts such as GST, FBT and other indirect taxes also remains uncertain. Thus if business taxpayers are intending to seek alternative financing options with more favourable rates than the GIC/SIC to settle their tax debts, this decision should be considered carefully. For non-business taxpayers, interest on loans taken to meet their income tax obligations is non-deductible.

Whilst taxpayers can apply to the Commissioner to request for a remission of GIC/SIC, the process can be challenging as remission is not granted automatically and depends on the taxpayer’s circumstances. Further if the ATO denies a GIC remission request the decision is not subject to review. The only recourse available to taxpayers is to appeal to the Federal Court and this is a costly and time-consuming exercise.

Conclusion

The proposed changes to the deductibility of SIC/GIC charges are set to take effect from 1 July 2025, but the retrospective application of these changes could have far-reaching consequences for taxpayers. It is essential for taxpayers to take proactive steps now, consider their tax positions and where necessary take action to manage the financial impact of these changes.

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