New legislation stopping the deductibility of General Interest and Shortfall Interest Charge in Australia

They say death and taxes are inevitable, but at least historically you used to be able to claim a deduction on the latter’s interest charges. In this regard, the Federal Government has decided to tighten the rules.

General Interest Charge (GIC) and Shortfall Interest Charge (SIC) incurred after 1 July 2025 will no longer be deductible for taxpayers, and therefore taxpayers will need to rethink how tax debts are managed.

GIC and SIC

It is often confusing to understand when the Australian Taxation Office (ATO) applies GIC or SIC. To put it simply, GIC is a penalty for late tax payments, whilst SIC applies to underpayments due to errors in tax returns (i.e. as a result of an amendment).

At the time of this article, the GIC annual rate is 11.17% and the SIC annual rate is 7.17%, compounding daily, with both rates updated on a quarterly basis.

These are not small amounts, with the GIC rate in particular typically being higher than what most taxpayers would consider regular commercial interest rates, making tax debt an expensive liability to carry with the ATO.

Historical deductibility of GIC and SIC

Previously, pursuant to the Australian tax legislation both GIC and SIC have been deductible expenses, allowing taxpayers to claim these charges as deductions in the income year they were incurred. This treatment provided some welcome relief to taxpayers facing additional charges due to late payments or understatements, however, was also considered a primary reason for why taxpayers were less concerned about late payment of tax liabilities to the ATO.

Legislative changes effective 1 July 2025

On 13 December 2023, the Australian government announced that it would take steps to remove the tax deductibility of GIC and SIC. While it has been some time since the announcement, this measure was finally legislated on 27 March 2025.

Accordingly, taxpayers will no longer be able to claim deductions for GIC and SIC incurred after 1 July 2025, regardless of whether the underlying tax liability relates to periods before or after this date. The government asserts that this change aims to encourage timely and accurate tax payments, ensuring fairness among taxpayers.

ATO debt and payment arrangements post-COVID

Since the COVID-19 pandemic, the Australian community has significantly increased its tax debts owed to the ATO. In response, the ATO has adopted a more aggressive approach in pursuing these outstanding liabilities. One of the most commonly utilised methods for resolving tax debt has been payment arrangements, which allow taxpayers to settle their obligations over time. However, payment arrangements typically give rise to GIC. With the impending denial of GIC and SIC deductibility, taxpayers may need to reconsider their debt management strategies. In some cases, sourcing funding from third-party providers to satisfy ATO debts may be a more cost-effective alternative than relying on new or existing payment arrangements with the ATO.

Furthermore, it is worth noting that the ATO has become significantly more stringent in remitting interest charges compared to previous years. While interest remission was historically seen as a realistic option, the ATO is now scrutinizing remission requests more aggressively and denying these as a matter of course. This means taxpayers should not rely on interest remission as a fallback and should instead focus on strategies to prevent these charges from arising in the first place

Implications for taxpayers

The removal of deductibility for GIC and SIC means that taxpayers will bear the full financial burden of these interest charges without offsetting tax benefits. This change is expected to have a significant impact on businesses, which often face cash flow challenges and may have previously relied on the deductibility of these interest charges to mitigate financial strain.

Strategies for managing tax obligations

Given the impending changes, taxpayers should consider the following strategies:

1. Timely tax payments and accurate self-assessment: Prioritise paying tax liabilities by their due dates to avoid incurring GIC and ensure tax returns are accurate and complete to prevent SIC from arising.
2. Proactive communication with the ATO: If facing financial difficulties, engage with the ATO early to discuss payment options. In some instances, the ATO may automatically remit interest charges in the first place, or upon application, entertain the remission of interest charges that have been applied. Consideration should be given to the relevant ATO practice statements when seeking remission requests, as the ATO now scrutinises applications more rigorously.
3. Review existing payment arrangements: Taxpayers with existing ATO payment plans should reassess whether continuing under these arrangements remains financially viable. If GIC is substantial, exploring alternative financing options, such as bank loans or other credit facilities, may reduce overall costs.
4. Consultation with tax professionals: Seek advice from tax professionals to navigate the complexities of tax obligations and to develop strategies tailored to individual circumstances.

If you need help navigating these changes, please contact your local PKF advisor today.