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Changes to the deductibility of the general interest charge and shortfall interest charge may see the ATO holding a larger proportion of unrecoverable debt.
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Cost of tax debt ‘to soar in 2025’, CA ANZ warns
11 April 2024
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The cost of tax debt will dramatically increase from 1 July next year when the general interest charge (GIC) and shortfall interest charge (SIC) become non-deductible, CA ANZ has cautioned.
CA ANZ senior tax adviser Susan Franks said the proposed policy will incentivise businesses to pay tax first and many will be looking to their accountant for help in refinancing their business.
Under the current law, both GIC and SIC are deductible. GIC is payable when a taxpayer doesn’t pay on time.
“It is calculated as the 90-day bank bill rate plus 7 per cent (the uplift factor). Currently, that rate is 11.34 per cent,” Franks explained.
SIC is payable in relation to errors made in a tax return that result in the underpayment of tax.
“It is broadly calculated from the date the tax should have been paid up to the time the amended assessment is made,” she said.
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“GIC is not payable during this time but will apply instead of the SIC from the date of the amended assessment. SIC is equal to the 90-day bill rate plus 3 per cent. The current rate is 7.34 per cent.”
The base rate reflects the cost to the government from delayed receipt of revenue and the GIC uplift factor was set to encourage the payment of tax liabilities when due and discourage the ongoing use of tax debts as a source of business or private finance.
Whether this is effective depends upon what alternative financing arrangements are available to the taxpayer, the association said.
Most large businesses can obtain finance more cheaply than the GIC, noted Franks.
“For most small businesses the GIC approximates the interest rate that they would pay for an unsecured loan – and the ATO is often seen as a soft application free source of finance,” she said.
If enacted, 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 therefore potentially cheaper, she explained.
Clients will be looking for advice on cash flow, financial analysis and business turnaround ideas from their accountant, she said.
However, Franks warned that not all businesses can 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,” she said.
This policy may therefore result in the ATO holding a larger proportion of tax debts that may not be recoverable, according to the association.
“The ATO is a minor initiator of corporate insolvency appointments, but it does issue director penalty notices which often result in directors initiating insolvency proceedings to limit their personal liability,” said Franks.
“With firmer tax debt collection action on the rise, accountants should refresh their knowledge about DPNs and garnishee notices,” she said.
The policy change will also impact businesses differently depending on their legal structure and taxable income.
“For example, a company, depending upon its size may have a tax rate of 30 per cent or 25 per cent, a sole trader could have a tax rate of 0 per cent, 16 per cent, 30 per cent, 37 per cent or 45 per cent – a confusing situation which results in a healthy business run by a sole trader facing a much higher cost for outstanding tax debt than a struggling business,” said Franks.
The government could have alternatively gone with the option of increasing the uplift factor which would have been standard across all taxpayers and simple to calculate.
The association noted that the government’s announcement was not subject to a consultation process and would not apply until after the next election.
“Currently it is a sleeper issue – but once draft legislation is issued, I am sure many people will have opinions about this measure,” said Franks.
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