The 2026 Federal Budget could reshape CGT and negative gearing >> read what it means for you
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From 1 July 2025, taxpayers will no longer be able to claim income tax deductions for interest charges imposed by the ATO on outstanding tax debts.
There are two types of interest charges: the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC).
What are GIC and SIC?
- General Interest Charge (GIC): This is applied daily to unpaid tax liabilities, such as late payments of income tax, GST, or PAYG withholding.
- Shortfall Interest Charge (SIC): Imposed when a taxpayer has a shortfall in their income tax assessment, typically from underreporting income or overclaiming deductions. It accrues from the date of the original assessment until the amended assessment is issued.
Implications for taxpayers
- Increased tax liabilities: Without the ability to deduct GIC or SIC, taxpayers may face higher taxable incomes and, consequently, higher tax bills.
- Cash flow considerations: Businesses and individuals using ATO payment plans must now factor in the full cost of interest charges, as these will no longer provide tax relief.
- Compliance incentives: The change reinforces the importance of timely and accurate tax payments to avoid incurring non-deductible interest charges.
Transitional rules
- Interest incurred before 1 July 2025: GIC and SIC incurred before 1 July 2025 remain deductible. However, if these charges are later remitted by the ATO, the remitted amount must be included in assessable income in the year of remission.
- Interest incurred on or after 1 July 2025: No deduction is allowed, and any subsequent remission does not need to be included in assessable income.
Strategic considerations
With the legislation changes from 1 July 2025, taxpayers should now:
- Review outstanding tax debts and consider settling them before 1 July 2025
- Reassess the use of ATO payment plans in light of the non-deductibility of interest
- Consult with tax advisors to understand the full impact on their financial and tax planning strategies
- Consider opportunities to refinance ATO debt with lender finance. This strategy would enable the continued deductibility of interest costs incurred on the lender finance. Furthermore, taxpayers may find that the rate of interest incurred on the lender finance obtained is actually less than the cost of GIC and SIC being imposed by the ATO on their tax debts outstanding.
Bottom line
This change marks a pivotal change in the Australian tax landscape. By removing the tax benefit associated with late payments, the government aims to encourage greater compliance and timely tax payments. Taxpayers are urged to act now to mitigate the financial impact of this reform.