The Federal Government proposes to amend the Income Tax Assessment Act 1997 (ITAA97) to prevent clients from claiming tax deductions for General Interest Charge (GIC) and Shortfall Interest Charge (SIC) incurred on or after 1 July 2025. These changes are designed to discourage clients from using the Tax Office (Tax Office or ATO) as a pseudo bank or form of funding.
The existing rules
The Tax Office imposes GIC and SIC on outstanding tax liabilities to encourage clients to accurately calculate their tax liabilities, and pay those liabilities, to the ATO on time. GIC and SIC also levels the playing field between clients.
The charges are briefly summarised below.
- SIC: This interest applies when a client is investigated by the Tax Office and an amended assessment correcting the amount of tax they are required to pay is issued by the ATO. SIC accrues from the original due date of the tax liabilities until the time the ATO issues the amended assessment. GIC then applies after that time.
- GIC: This interest applies when a client has not paid the Tax Office on time and the tax liabilities is overdue, including where late lodgments have occurred.
Under the current law, clients are allowed to claim a tax deduction for GIC and SIC, reducing their taxable income and effectively lowering their overall tax liability. In this way, GIC and SIC payable to the Tax Office is no different to interest payable to a third-party financier.
By way of example, consider a business client that is audited by the ATO and the audit shows the client short-paid the ATO $1 million. In addition to the tax shortfall of $1 million, the ATO will also impose:
- SIC of $150,000 for the period between the original due date of the tax and the reassessment date; and
- GIC of $350,000 for the period from the due date for the additional tax under the reassessment until the outstanding tax is paid in full.
(Note the above figures are for illustrative purposes only).
Under the current rules, the business can claim a tax deduction for the total interest paid to the ATO on $500,000. Assuming the business has a corporate tax rate of 30%, this deduction would result in an effective reduction in tax of $150,000.
The proposed rules
Under the proposed rules, the tax deduction and reduction in effective tax will stop. The effect of the change will see effective rates of interest payable to the ATO increase substantially. In simple terms, taxpayers will now pay the full current GIC/SIC interest rate without a tax benefit, making their actual interest cost higher. See the table below.
| Client | GIC Rates (~%) | SIC Rates (~%) | ||
|---|---|---|---|---|
| - | Current | Effective | Current | Effective |
| Individuals | 11.42 | 21.55 | 7.42 | 14.00 |
| Companies (base rate) | 11.42 | 15.23 | 7.42 | 9.89 |
| Companies (ordinary rate) | 11.42 | 16.31 | 7.42 | 10.60 |
Why the need for change?
The Federal Government’s proposal to deny deductions for GIC and SIC arises from concerns that the current law does not act as a sufficient deterrent for clients who do not pay the Tax Office on time.
The Senate Economics Legislation Committee in its report on the proposed changes has endorsed removing this deduction, stating:
“…Individuals and businesses who meet their tax obligations on time should not be disadvantaged compared to those who delay payments and incur interest charges. Addressing this imbalance is critical to ensuring fairness and compliance within the tax system.
…
The committee considers that the current arrangements, where taxpayers can deduct the GIC and the SIC, are too generous and undermine the deterrent purpose of these charges. Removing the ability to deduct these charges would ensure that interest on overdue tax liabilities remains an effective deterrent and will promote accurate self-assessment and timely payment of tax liabilities.”
Another key driver of the change is the Federal Government’s concern with the ATO’s ballooning debt book, which has nearly doubled in recent years, reaching $52.8 billion in the 2024 financial year!
No changes are proposed to the ATO’s powers to cancel GIC and SIC.
How can we help?
The Tax Office’s chief Mr Rob Heffernan recently said that the ATO will be targeting around 20,000 taxpayers with tax debts exceeding $10 billion, using the strongest powers available to the ATO.
We can help by proactively liaising with the Tax Office to arrange payment deferrals and to have interest cancelled.
Please contact us to discuss your circumstances in more detail.
This article was written by Vincent Licciardi, Partner and Anne Fernando, Senior Associate.
