SIGNIFICANT IMPACT FOR BUSINESS – Legislation Passed: General Interest Charge (GIC) and Shortfall Interest Charge (SIC) to Become Non-Deductible from 1 July 2025
On Wednesday, 26 March 2025, Parliament passed amendments that will deny deductions for general interest charge (GIC) and shortfall interest charge (SIC) incurred on or after 1 July 2025. This change is highly significant and could be very costly for businesses, particularly those with outstanding tax debts or regular participants in ATO payment plans.
The True Cost of GIC and SIC After 1 July 2025
Currently, GIC is charged at 11.17% and SIC at 7.17%. While businesses and individuals can currently claim a deduction for these charges, the removal of this deduction will dramatically increase the after-tax cost of carrying tax debt.
Depending on your marginal tax rate, the effective cost of GIC after 1 July 2025 will range from 9.56% for those on the lowest marginal rate to as high as 21% for those on the top marginal tax rate. For businesses or individuals already managing tight cash flow, this additional burden could severely impact their financial position.
Why This Change is Significant
Labor has stated that these amendments are designed to promote compliance and level the playing field between taxpayers who meet their obligations and those who do not. However, the impact on small businesses and sole traders is expected to be severe, with many advocacy groups and accounting bodies warning of potentially detrimental consequences.
The Tax Institute raised concerns that increased financial pressure from non-deductible GIC and SIC may force businesses to divert resources from critical operations, such as payroll or inventory management, putting their long-term viability at risk.
CPA Australia labelled the measure as excessive, particularly given the ATO’s already firm approach to debt recovery. CPA Australia’s tax lead, Jenny Wong, highlighted that businesses with cash flow challenges, particularly sole traders on high marginal tax rates, will be disproportionately affected. Wong questioned whether the change was about repaying tax debt or imposing penalties on taxpayers striving to meet their obligations.
Our Key Concerns and Recommendations for Clients
Given the seriousness of these changes, we are advising our clients to take proactive steps to mitigate potential risks. Our primary concerns and recommendations are:
1. Timely Notification of Tax Payment Due Dates
It is essential that you are aware of your tax payment due dates to avoid the imposition of GIC and SIC.
2. Strict Adherence to Lodgement Deadlines
Lodgement deadlines will become even more critical. Ensuring compliance with lodgement dates will minimise the likelihood of triggering GIC and SIC charges. We strongly recommend that clients provide all necessary information in advance to prevent delays in lodgement.
3. Awareness for Clients in ATO Payment Plans
For clients who are currently engaged in ATO payment plans, it is imperative that you are aware of these changes. Many businesses have relied on the ability to deduct GIC and SIC to offset some of the cost associated with payment plans. After 1 July 2025, the full cost of these interest charges will need to be borne by the business. Without adequate planning, this could come as a significant and unwelcome surprise.
Potential Refinancing Options and Tax Planning Considerations
Chartered Accountants Australia and New Zealand (CA ANZ) has previously cautioned that the denial of GIC and SIC deductions may drive businesses to seek alternative financing options, such as loans from traditional financial institutions where interest remains tax-deductible. However, not all businesses may be able to secure alternative financing, leaving some businesses exposed to significantly higher costs.
What This Means for Your Business
With these changes now enshrined in law, it is critical for businesses to:
- Monitor tax liabilities carefully and ensure timely payments.
- Avoid unnecessary delays in lodgement to mitigate exposure to GIC and SIC.
- Evaluate financing options to reduce exposure to high, non-deductible interest charges.
- Review ATO payment plans and consider alternatives where possible.
If you have any questions or would like to discuss how these changes may impact your business, please contact the team at Leenane Templeton. Being proactive now will help prevent significant financial strain in the future.