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The Tax Institute has called for adjustments to the proposed changes around general interest charge deductions.
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'Punitive' GIC changes may trigger business failures, warns Tax Institute
20 January 2025
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The government must carefully consider its plans to deny deductions for the general interest charge (GIC) and shortfall interest charge (SIC) in the context of the broader economic environment, The Tax Institute has warned.
If legislated, the proposed amendments would apply to SIC and GIC incurred in income years starting on or after 1 July 2025.
In a recent submission, the institute said while it understood the government's intention to encourage timely payments, it warned that the ability to deduct the GIC and SIC would be a significant change for taxpayers to navigate.
It cautioned that while the policy intent may be to promote timely tax compliance, the immediate impact on taxpayers, particularly those already facing overdue tax liabilities, "could be profound".
"Increased financial pressure may force businesses to divert resources from critical operations such as payroll or purchasing inventory, putting their long-term viability at risk. This could, in turn, have significant consequences for the wider economy," the submission said.
"A potential rise in business failures could lead to increased unemployment, reduced consumer spending, and slower economic growth, creating a cycle of hardship that affects not only those taxpayers, but the community as a whole."
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The Tax Institute has made a raft of recommendations for improving the proposed measures to ensure they don't place undue strain on taxpayers or the economy.
The submission said that if the proposed measure too is enacted as currently drafted, then the GIC uplift rate should be reduced. The GIC uplift rate was set at 7 per cent in the early 2000s.
It noted that the proposed measure will significantly increase the effective cost of GIC by up to 88 per cent, depending on their marginal tax rate.
"A reduction in the uplift rates will convey to taxpayers that the policy approach on interest charges is not to disproportionately punish, but rather to deter people from failing to meet their tax obligations," it said.
"This option provides a fairer outcome for taxpayers who might already be stretched financially, and also will alleviate some pressure on those taxpayers who otherwise might be struggling in this economic environment with rising interest rates and inflation, among other things."
The GIC is set at a base rate, currently, 4.42 per cent, plus an uplift rate of 7 per cent, resulting in an effective rate of 11.42 per cent for the period from January to March 2025.
The SIC is set at the same base rate with an uplift rate of 3 per cent currently equating to an effective rate of 7.42 per cent for the same period.
"If the proposed measure proceeds in its current form, we consider that the uplift rates for both the GIC and SIC are higher than required to achieve their objective and may risk being perceived as punitive. We maintain that these rates should be reduced," the submission read.
The Tax Institute said another alternative would be limiting the non-deductibility of GIC and SIC to the relevant uplift component.
"This would serve the dual purpose of somewhat reducing the financial impact of the proposed measure and alleviating concerns that this measure may be punitive in nature," it said.
"However, we recognise that such an approach is likely to be administratively challenging and the feasibility of its practical implementation should be given further consideration."
The government also needs to clarify whether the proposed measure applies to amended assessments issued on or after 1 July 2025 that are referable to income years beginning before 1 July 2025, the submission said.
The institute would also like to see the government consider the measures in place that encourage the accuracy and accountability of the ATO in issuing amended assessments, given the proposed measures.
"This may help to create a more level playing field in the context of both over- and under-payments of tax," it said.
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