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CPA Australia has expressed concern about changes to deny deductions for the general interest charge and shortfall interest charge following the release of draft legislation for the measures.
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Denying deductions for SIC, GIC ‘a hammer blow for small business’
26 September 2024
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Treasury released draft legislation late on Tuesday on its plans to deny deductions for general interest charge and shortfall interest charge incurred from 1 July 2025.
The proposed changes were announced in the 2023-24 Mid-Year Economic and Fiscal Outlook.
Currently, all entities can claim a deduction for the general interest charge, which is imposed for the late payment of a tax liability. They can also claim a deduction for the shortfall interest charge, which is applied when incorrect self-assessment leads to a shortfall in tax paid.
The proposed legislation will remove the ability to claim these as deductions.
Taxpayers would continue to be able to apply to the ATO and request the remission of any GIC or SIC payable, the explanatory materials said.
“The Commissioner has the discretion to remit the interest charges where it is fair and reasonable to do so, taking into consideration the circumstances which led to the delayed payment of tax liabilities or the tax shortfall,” it said.
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CPA Australia said it is concerned the measure will disproportionally affect businesses with cash flow issues and sole traders.
CPA Australia tax lead Jenny Wong said removing the deductibility of the general interest charge and shortfall interest charge feels less like a nudge towards repaying outstanding tax debt and more like a penalty for taxpayers already struggling to meet their obligations.
“With the current high interest rates, this move will disproportionately affect businesses with cash flow issues, particularly sole traders on the highest marginal tax rate,” Wong said.
Wong noted that during the COVID-19 pandemic, the government effectively encouraged many businesses to delay tax payments, with the ATO offering flexible payment arrangements.
“If businesses had known that the general interest charge would later become non-deductible, they may have made very different financial decisions.”
“The impact on existing tax debt is concerning,” Wong said.
CPA Australia noted that for tax-paying small companies, the non-deductibility of GIC effectively raises the penalty rate by 25 per cent.
“For sole traders, it potentially increases the penalty rate by up to 47 per cent depending on their marginal tax rate,” Wong said.
“This significant increase could put additional financial pressure on businesses already struggling, and it may force directors to question the viability of their operations.”
Wong said these latest regulatory changes will “feel like another hammer blow to weary small businesses”.
“They could be forgiven for thinking they are always negatively impacted by government policy,” she said.
CA ANZ senior tax adviser Susan Franks previously warned that the changes to deductions concerning the GIC and SIC would see the cost of tax debt dramatically soar.
Franks said this policy change would result in many small businesses looking to their accountant for help as they try to pivot their financing to traditional institutions whose interest charges will be deductible and potentially cheaper.
Clients would be looking for advice on cash flow, financial analysis and business turnaround ideas from their accountant, she said.
Franks warned that not all businesses could find alternative tax-deductible finance.
“Many of the tax debts that the ATO will be left with will be for businesses whose viability is questionable.”
This policy may therefore result in the ATO holding a larger proportion of tax debts that may not be recoverable, according to the association.
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