Author: Jack Ruan, Director
15/05/2025
Background
General interest charge (“GIC”) is applied by the Australian Taxation Office (“ATO”) if a tax related liability remains unpaid after the date it was originally due for payment. Shortfall interest charge (“SIC”) is applied when there is a tax shortfall upon amendment of a tax return, and it is applied for the period between the original due date and actual payment.
Both GIC and SIC are specifically tax deductible under Income Tax Assessment Act 1997. However, recent legislative changes now mean that any GIC or SIC incurred on or after 1 July 2025 is NOT tax deductible.
Implication for taxpayers
The interest rate set for GIC or SIC is usually higher than standard commercial rates. However, the deductibility of these charges made them more comparable to commercial interest rates on an after-tax basis. Please refer to the illustration tables below:
Generally, if a taxpayer borrows money to pay an income tax liability, a deduction will be denied under the negative provisions of Section 8-1 on the basis that it is private or domestic in nature. However, the specific deductibility of the GIC or SIC meant that the after-tax rate would at times be considered more attractive than standard funding costs. Without a tax deduction, the economic cost becomes much higher. In the absence of further rate cuts by the Reserve Bank, we expect the GIC and SIC rates to remain at similar levels to the table above.
We note that there is no grandfathering of the rules to tax debts already outstanding before 1 July 2025. Therefore, if GIC or SIC is incurred on an outstanding amount on or after 1 July 2025, it will be non-deductible.
Whilst GIC/SIC becomes non-deductible from 1 July 2025, in the event there was a remission of GIC or SIC by the ATO it will no longer need to be included as assessable income where a deduction was not available. This at least ensures there is no unfair inclusion of non-deductible interest as income at a later time.
Please note, if the remission relates to GIC or SIC incurred prior to 1 July 2025 (i.e. a period when it was deductible), the amount of the remission will need to be treated as assessable income, effectively reversing the tax benefit of the interest deduction previously claimed.
What taxpayers should consider in the management of tax affairs
It is the responsibility of the taxpayer to meet lodgement obligations and payment of tax liabilities on time. Given the increased economic cost on late payments and the non-deductible status of GIC/SIC, it is now even more important these obligations are met.
We advocate the following practice at various stages of managing your ongoing tax obligations:
- At the information collation stage, we encourage clients to consider collating tax information at the earliest possible time following the end of a tax year. Due to varying due dates, your Blaze Acumen adviser will often engage with you to request information in advance of the due date. As a rule of thumb, to allow for proper consideration of tax issues and subsequent processing, it is advisable to provide your tax information no later than 8 weeks before an annual tax return due date, and 3 to 4 weeks before an activity statement due date depending on the type of lodgement. If you anticipate being due a tax refund, you should provide your information significantly earlier than this.
- At the tax return preparation stage, we encourage clients to actively engage with your Blaze Acumen adviser to resolve any queries. This may enable your adviser to identify at the earliest possible stage if you are likely to have an income tax liability for a particular year.
- When tax returns or activity statements are lodged and any tax liability becomes certain, we encourage clients to make prompt payments to the ATO before the due dates.
- In the event there is not sufficient cash flow to pay a tax liability, clients should explore if there is an alternative funding option available to avoid incurring non-deductible ATO interest charges.
Taxpayers should consider their financing options
For clients who may have an outstanding tax liability or payment plan in place, they may wish to look at their current funding cost and consider if there are alternative funding arrangements that can provide a cheaper solution than the applicable GIC/SIC rates.
For any taxpayers who are not carrying on a business, interest on money borrowed to fund a tax debt is generally not tax deductible. However, the situation could be different for company taxpayers carrying on a business. In Taxation Ruling IT 2582, the Commissioner expressed the view that money borrowed by a company during the operating of its business to pay income tax may have a sufficient nexus with carrying on the business and therefore the interest expense would be tax deductible.
We also note that in Taxation Ruling TR 2005/12, the Commissioner expressed the view that interest on money borrowed by a trustee of a trust to fund the payment of an unpaid present entitlement to a beneficiary, may be tax deductible where there is a sufficient nexus with the assessable income earning activity of the trust, or business carried on by the trust. Therefore, there may be options available for a trust to borrow to pay the unpaid present entitlement of beneficiaries and claim an interest deduction in the trust, rather than the beneficiaries borrowing to fund a tax payment and an interest deduction being denied.
Any specific advice will need to consider your specific circumstances to determine if the taxation rulings can apply. However, these demonstrate that taxpayers have options to better manage the interest exposure. Please contact your Blaze Acumen adviser for any specific advice.
Where Blaze Acumen can help
We understand that in some situations there will be reasons that a tax obligation or tax debt is unable to be met by its due date. We strongly encourage you engage with your Blaze Acumen adviser at the earliest practicable stage to discuss your options in managing your tax payment obligations. If it becomes clear that a lodgement due date cannot be met, then the management of any pending tax liability becomes important as interest charges are incurred on the outstanding tax debt from the due date. For example, we can work with you to determine a reasonable estimate of tax payable and then a payment can be made before the due date to reduce potential ATO interest exposure.
We can also assist you with considering alternative funding options and the deductibility status of such arrangement which may be specific to your circumstances.
In the event GIC/SIC is incurred, we can provide assistance in negotiating with the ATO for a full or partial remission. However, we need to emphasise that the remission is at the ATO’s discretion and is only given under extenuating circumstances according to their practice statements. We have recently seen increased difficulty in obtaining remissions, therefore we advise that this strategy should be used as a last resort. The best practice is to meet tax obligations when they fall due and avoid incurring GIC or SIC.
If you have any questions after reading this article, please do not hesitate to contact your Blaze Acumen adviser.