Tax deduction denial on general interest charge a blunt instrument

This article was current at the time of publication.

Pressure is continuing to mount on the Federal Government to reconsider legislation that will disallow the tax deductibility of interest charges imposed by the Australia Taxation Office (ATO).

If passed in Parliament, the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024 will remove the ability for businesses and individuals to claim either the general interest charge (GIC) or the shortfall interest change (SIC) as deductions.

GIC and SIC charges are levied retrospectively by the ATO when tax debts have not been paid on time, or if a tax liability has been incorrectly self-assessed and resulted in a shortfall of tax paid.

The GIC rate is currently 11.42 per cent, while the SIC rate is 7.42 per cent. Both are applied on a daily compounding basis, with the rates updated quarterly to reflect movements in the Commonwealth’s borrowing costs.

The Senate Economics Legislation Committee recently recommended the government’s Bill be passed, stating that the ability of taxpayers to deduct GIC and SIC charges were overly 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,” the Committee said.

Amendments vital

However, in a submission to the committee, CPA Australia has stressed that the Bill should not be passed without amendments.

“The proposal to permanently deny deductions for GIC and SIC represents a punitive measure that risks exacerbating financial hardship for small businesses already facing challenges such as high inflation, elevated interest rates, and cash flow constraints,” CPA Australia’s submission states.

“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.”

A blunt instrument

CPA Australia’s tax lead, Jenny Wong, says that not allowing the GIC and SIC deductions is a blunt instrument that will penalise all taxpayers, “even those who have historically done the right thing and might have missed a payment due to genuine hardship.

“The new rules don’t discriminate between the good payers and the bad payers. It’s also not an obvious penalty like an ‘on-the-spot’ fine, but instead it’s a hidden financial penalty for small businesses which will come through in their tax return and assessment.”

Wong says that with 30 per cent of collectable debt relating to disengaged taxpayers, there is a question as to whether the new rules will address the root causes of the problem.

“If the root of the problem is that the disengaged taxpayers won’t pay their tax debts to the government then instead of penalising everyone indiscriminately, including those who have historically done the right thing, there needs to be a more targeted approach rather than a blanket, zero-tolerance approach,” she says.

This could involve the ATO using a more risk-based approach, focusing on high-value debts and high-risk taxpayers, and for the regulator to look at other ways to improve voluntary compliance.

“If the goal is to target taxpayers who are disengaged from the system, you have to understand why they’ve disengaged.

“Is it because they’ve tried to comply but found the ATO’s service delivery frustrating and eventually gave up?

“Until trust is rebuilt, and open communication is established, it will be difficult to re-engage these taxpayers and make real progress in helping them pay off their tax debts. On the other hand, those who have consistently done the right thing shouldn’t be subjected to punitive measures.”

Wong says the ATO has put businesses on notice that they are now focusing on those businesses who refuse to engage with it and continue to ignore phone messages and letter reminders.

“If the ATO has these processes in place, there isn’t a need for a law change to make GIC/SIC non-deductible.”

Key CPA recommendations

1. Introduce targeted measures that focus on high-debt accounts rather than penalising generally compliant small businesses by denying a deduction for GIC and SIC.
2. The base rate used (or the uplift percentage) be reduced to a lower percentage if the government is to proceed with denying deductions. Alternatively, GIC should remain deductible for a reasonable period (e.g., 60 days from the date of assessment or amended assessment) to provide taxpayers with sufficient time to secure financing or refinancing.
3. Retain deductibility for SIC as it is not related to late payments of tax but arises from tax shortfalls.
4. Subject the introduction of other targeted measures, limit non-deductibility to interest accrued from 1 July 2025 onward to ensure fairness and prevent retrospective application.
5. Create symmetry in the tax treatment for interest on overpayments of tax and interest on unpaid tax liabilities.

Wong says taxpayers who can pay their debts on time should do so. Wong also urges tax agents to encourage clients to prioritise their tax and super obligations to prevent interest accruing or face harsher collection action by the ATO.

“For taxpayers unable to pay in full and on time, there are options available such as ATO payment plans. You may be able to set up a payment plan online through online services for agents if your client’s debt is less than A$200,000, or your clients can also do this directly through online services for business.

“If you are experiencing genuine financial hardship, additional options are available, including deferring payment due dates and interest remissions.”