Legislation to deny deductions to general interest charge must be reconsidered, says CPA Australia

• The tax laws and incentive bill to deny deductions for general interest charge and short fall interest charge should be amended.
• All submissions were effectively ignored by Treasury, with the government deciding to go ahead with this blanket indiscriminate policy.
• ATO facing criticism from CPA Australia members for long delays in service delivery and uncertainty of inconsistent outcomes on GIC remission requests. 

CPA Australia is strongly urging the Senate Economics Legislation Committee to reconsider the government’s proposed denial of general interest charge (GIC) and shortfall interest charge (SIC) measures and not pass the Bill without amendments. 

CPA Australia’s Tax Lead, Jenny Wong, says the Bill to remove deductions for the general interest charge will have a devastating impact on small businesses already grappling high interest rates and inflation.

“We have previously expressed significant concerns regarding the disproportionate impact on small businesses and sheer lack of fairness on taxpayers with cash-flow troubles,’ says Ms Wong. 

“It’s very disappointing that our submission in September containing amendments to the Exposure Draft to address these critical issues has simply been ignored.

“All submissions were effectively ignored by Treasury and the Government has decided to go with this indiscriminate policy of denying GIC/SIC deductions for everyone, rather than targeting those with high tax debt accounts.

“Introducing a blanket policy instead of a targeted measure to address accounts with high levels of tax debt is indiscriminate and punitive.

“With interest rates as high as they are, this will disproportionately affect businesses with cash flow issues, particularly sole traders on the highest marginal tax rate.

“You have to question if this really is about repaying outstanding tax debt, or just a penalty on taxpayers struggling to do the right thing and meet their obligations. The impact on existing tax debt is very concerning.”

Ms Wong highlights that, during the COVID-19 pandemic, governments encouraged many businesses to delay their tax payments, with the ATO offering flexible payment arrangements. 

“Good sense says that if businesses had known the GIC would later become non-deductible, they might have made quite different financial decisions,” she says, 

“For tax-paying small companies, the non-deductibility of GIC effectively raises the penalty rate by 25%. For sole traders, it potentially increases the penalty rate by up to 47% depending on their marginal tax rate. This significant increase could put additional financial pressure on businesses already struggling, and it may force directors to question the viability of their operations.

“By making these interest costs on tax debts non-deductible, the proposal risks accelerating the accumulation of tax liabilities of small businesses to unsustainable levels, potentially threatening the viability of many small businesses.”

This measure comes at a time when the ATO faces criticism from CPA Australia members for long delays in service delivery and the uncertainty of inconsistent outcomes on GIC remission requests. 

“The ATO’s operational challenges also adds fuel to argument that the proposal to deny deductions for GIC/SIC unfairly penalise taxpayers who may already face delays in obtaining certainty and assistance from the ATO,” said Ms Wong.

“Taxpayers can be misled when comparing interest rates as they will not necessarily be aware of the additional costs, much like hidden fees in financial products. 

“In the interest of transparency and fairness to taxpayers, repayments should be encouraged through a higher GIC/SIC margin rather than hidden costs that are realised through tax assessments.”

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