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The proposed denial of deductions for GIC and SIC will markedly increase the cost of tax debts.
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The GIC landscape is shifting
06 February 2025
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17 minute read
Under a self-assessment system, taxpayers should be incentivised to pay the correct amount of tax and to pay that tax on time. Appropriately designed interest charges create equity among taxpayers and compensate the government for the deprivation of revenue that is not paid on time. However, certain important features need to be built into interest charge regimes to ensure they stand up to the principles of good tax law.
What’s changing?
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The position for taxpayers who have a tax debt is shifting dramatically from 1 July 2025. Income tax deductions will be denied for amounts of general interest charge (GIC) and shortfall interest charge (SIC) incurred by taxpayers on or after this date.
Background
Australia’s interest regime has operated since 1992. The GIC was introduced in 1999 and the SIC was introduced in 2005. A brief survey of its history shows that Australia’s current approach has been formally acknowledged by the International Monetary Fund as being an example of good practice in relation to the clarity that surrounds the calculation of interest charges for late payment.
Currently, two types of interest charges apply to tax debts owed to the Australian Taxation Office (ATO):
- GIC — generally imposed on unpaid tax liabilities, where taxpayers do not pay their tax on time. The GIC is currently calculated as the 90-day Bank Accepted Bill rate plus an uplift of 7%. The GIC rate for the January-March 2025 quarter is 11.42%.
- SIC — applies to shortfalls of tax liabilities that are revealed to have been incorrectly self-assessed. SIC applies from the date the tax should have been paid until the Commissioner amends an assessment of an amount of tax payable, at which point GIC kicks in. The SIC is currently calculated as the 90-day Bank Accepted Bill rate plus an uplift of 3%. The SIC rate for the January-March 2025 quarter is 7.42%.
GIC/SIC apply on a daily compounding basis and are updated quarterly to reflect movements in the Commonwealth’s cost of borrowing. The SIC is intended to ensure that taxpayers who understate their liability in returns that incorrectly self-assess a liability do not receive an advantage, in the form of a ‘free loan’, over those taxpayers who report and meet their tax liabilities in full by the due date, whereas the GIC is also intended to encourage taxpayers to pay their taxes on time.
GIC/SIC is currently tax-deductible for all entities. This means the cost of an unpaid tax debt is partially ‘subsidised’ by the Commonwealth Government, with the extent of that support depending on the taxpayer’s tax rate. A taxpayer on the top marginal tax rate will bear only 53% of the cost of GIC/SIC whereas a low-income earner (assuming a 16% tax rate + Medicare) bears 82% of the cost, and someone below the tax-free threshold bears the full cost.
Announcement and enabling Bill
On 13 December 2023, as part of the Mid-Year Economic and Fiscal Outlook 2023–24 (MYEFO), the Government announced that it will deny deductions for GIC/SIC incurred on or after 1 July 2025. The measure is explained in these terms:
"Removing these deductions will enhance incentives for all entities to correctly self-assess their tax liabilities and pay on time, and level the playing field for individuals and businesses who already do so. The Commissioner of Taxation will continue to have the ability to consider individual circumstances and remit GIC or SIC where appropriate.
This measure is estimated to increase receipts by $500 million in 2026–27."
Schedule 2 to the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024 (the Bill) proposes to give effect to this measure. At the time of writing, the Bill was before the House of Representatives. The denial of deductions for GIC/SIC will be enabled by amending sections 25-5 and 26-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
With the timing of the forthcoming Federal budget and election unknown, and few parliamentary sitting days until then, it is unclear whether the measure will become law before its proposed start date of 1 July 2025. What is clear is that if the enabling Bill is passed in the next month or so, the financial burden of tax debt will significantly increase for businesses and individuals across Australia.
Senate inquiry
In November 2024, the Bill was referred to the Senate Economics Legislation Committee (committee) for inquiry. In its report, the committee recommended that the Bill be passed.
In its submission to the inquiry, The Tax Institute (TTI) recognises that this is a significant change for taxpayers to navigate and the government can achieve its objectives without placing undue strain on taxpayers or the economy.
TTI made the following key recommendations to support taxpayers through this transition:
- 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;
- Reduce the uplift for GIC (7%) and SIC (3%) — the proposed measure will exacerbate the already onerous burden of these uplifts by up to 88% (the cost of a GIC/SIC liability for a top income earner is currently 53% of the liability, but will rise to 100% — an 88% increase in the ultimate cost of the GIC liability compared to the existing rules);
- Alternatively, if the uplifts are not reduced, restrict the denial of the deduction to the relevant uplift component so that only the base interest component remains deductible (noting this approach would be administratively more challenging); and
- Make GIC/SIC remission decisions unconditionally reviewable (an alternative approach is set out in the submission).
What will the change mean?
While no taxpayer seeks to have outstanding tax debts, deductibility of GIC/SIC has softened the blow and meant that keeping tax debts on foot is akin to obtaining an unsecured loan without the hassle of applying for finance. Removing deductibility will reduce the attraction of using the ‘bank of ATO’.
Impact on businesses
With the looming increase in the cost of tax debt, businesses will need to reassess their strategies for managing their tax debts. This includes:
- Whether outstanding tax debts can be repaid to avoid the higher cost;
- Bringing outstanding lodgments up to date, and don’t fall behind; -
- Proactively engaging with the ATO to address outstanding debts;
- Consider making voluntary disclosures to address undisclosed tax liabilities before GIC/SIC become non-deductible;
- Whether alternative finance can be secured from banks or other financial institutions at rates more favourable than GIC/SIC;
- Whether the cost of alternative finance is deductible (more on this below);
- The merit of requesting GIC/SIC remission, particularly in cases of financial hardship;
- Consider renegotiating existing payment plans that may otherwise be subject to the new rules; and
- What they can do to better manage their cash flow to avoid having a tax debt in the first place.
Small business may find it more difficult to obtain alternative finance than larger businesses, which may be less likely to have a tax debt in the first place.
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 (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).
Impact on taxpayers generally
The proposed measure is due to apply in an economic environment that is likely to continue to be challenging for taxpayers. While the intent of the proposed measure appears to be to promote timely tax compliance, the immediate impact on taxpayers, particularly those already facing overdue tax liabilities, could be profound.
The proposed non-deductibility of SIC is particularly harsh given that the charge is imposed in respect of the period during which the taxpayer is generally not aware of their tax shortfall.
Further, will making GIC/SIC non-deductible improve a taxpayer’s ability to correctly self-assess their tax liability?
Impact on the ATO
It is clear, from the explicit statements in the MYEFO announcement and the accompanying explanatory memorandum to the Bill, that reducing collectable debt is a key driver for the measure, as they explain:
"The amendments seek to reinforce the requirements imposed on all taxpayers to correctly self-assess their income tax liability, pay their tax on time, and assist in lowering the amount of collectable debt owed to the … ATO.
Concerningly, the amount of collectible tax debt has risen by 89% from June 2019 ($26.5 billion) to June 2023 ($50.2 billion) and has nearly doubled to June 2024 ($52.9 billion). Of greater concern is that small business represents around two-thirds of the collectable debt."
The non-deductibility of GIC/SIC may be designed to reduce collectable debt, but could the policy actually have the opposite effect? Taxpayers who may already be stretched financially, and who are operating in a challenging economic environment that has been exacerbated by high interest rates and inflation for some time, may find it even more difficult to bear the increased cost of their tax debts.
Ultimately, will the policy assist in reducing the amount of collectable debt?
Other considerations
Commissioner’s remission discretion
The right to request GIC/SIC remission will continue under the proposed measure. The Commissioner has the discretion to remit interest charges where it is fair and reasonable to do so, taking into consideration the circumstances that led to the delayed payment of tax liabilities or the tax shortfall. In doing so, ATO officers are expected to have regard to practice statements PS LA 2011/12 and PS LA 2006/8.
Practitioner feedback suggests that the ATO has over time tightened its approach to the granting of remissions. The ATO’s decision to deny GIC remission is not subject to internal review (section 14ZS of the Taxation Administration Act 1953 (TAA)). This means that where a taxpayer disagrees with the ATO’s decision not to remit GIC, the only recourse available to the taxpayer is to appeal the ATO’s decision in the Federal Court of Australia under the Administrative Decisions (Judicial Review) Act 1977), a costly and time-consuming exercise.
The impact of the increased difficulties to secure GIC/SIC remission and negotiate payment arrangements as the ATO takes firmer action on outstanding tax debts will be exacerbated by the introduction of the proposed measure. Given this, GIC remission decisions should become reviewable (noting SIC remission decisions are currently reviewable but subject to conditions).
Existing penal effect of GIC/SIC
The policy approach on interest charges should not be to disproportionately punish, but rather to deter people from failing to meet their tax obligations. The current GIC/SIC uplift rates are higher than required to achieve their objective and may risk being perceived as punitive following the introduction of the proposed measure.
Also consider that the GIC rate has increased by 63% since June 2021 when it was only 7.01%, and the SIC rate has more than doubled, with a 146% increase since then.
Clarification needed around date of application
The proposed measure is stated to apply to deny deductions for GIC/SIC incurred in income years starting or after 1 July 2025. On this basis, the proposed measure appears to apply prospectively to any notice of assessment issued for income years beginning on or after 1 July 2025, that is, new tax debts arising on or after this date. However, it remains uncertain whether the proposed measure will apply to amended assessments issued after 1 July 2025 that are referable to income years starting before that date.
The tax treatment of GIC/SIC liabilities referable to income years starting before 1 July 2025 should be grandfathered.
Further, clarification is also needed regarding the tax treatment of GIC/SIC in relation to payment arrangements entered into on or after 1 July 2025 in respect of a liability assessed before that date.
What about obtaining finance from a bank instead of the ATO?
Widespread conversations have started around taxpayers instead borrowing funds from a bank to discharge their tax debts, on the basis the interest expense would be deductible. This needs to be approached very carefully.
Sure, under the second limb of section 8-1 of the ITAA 1997, taxpayers can claim a deduction for an amount ‘necessarily incurred in carrying on a business for the purpose of gaining or producing [their] assessable income’. However, paragraph 25-5(2)(c) of the ITAA 1997 denies a deduction for expenditure for borrowing money (including interest payments) to pay income tax, PAYG withholding amounts or PAYG instalments.
The ATO’s 1990 ruling IT 2582 interestingly takes the position that interest incurred by a business on borrowings to pay income tax is a normal incident of conducting that business, so it follows that the interest is deductible (noting this was based on section 8-1’s predecessor provision: section 51(1) of the Income Tax Assessment Act 1936). How the ATO’s position in the ruling can apparently usurp the operation of the law (paragraph 25-5(2)(c)) is an interesting question. Another matter is the deductibility of interest on borrowings to pay an activity statement debt (GST, fringe benefits tax, luxury car tax, wine equalisation tax and other indirect taxes).
What is clear is that an individual who is not carrying on a business cannot claim a deduction for interest on borrowings to pay a tax debt.
Assessability of interest received from the ATO
No changes are proposed to the assessability of interest on overpayments, early tax payments or delayed refund of tax, resulting in a lack of symmetry with GIC/SIC on tax debts. Some have called for interest on overpayments of tax to therefore be treated as non-assessable non-exempt (NANE) income.
Disputed tax debts
No one will challenge the notion that taxpayers should pay the correct amount of tax and on time. A general tax debt is unquestionably payable, and interest charges should apply when it is not paid in full or on time. The ATO does not exist as a bank for those who do not meet their payment obligations in relation to general tax debts. But this is binary thinking.
Under a self-assessment system, the world is filled with infinite ‘shades of grey’. There is an inherent tension between the ATO and the taxpayer, because the onus is always on the taxpayer in a system where the ATO is the final arbiter, unless the taxpayer resorts to the appeals process in Part IVC of the TAA to challenge ATO positions they consider to be wrong.
Disputed tax debts often involve complex interpretations of the law and long-running disputes before the application of the law and the existence of a tax debt can be certain. This measure should not create an imbalance in the ATO/taxpayer relationship or make a taxpayer’s position when disputing a tax debt untenable due to the ongoing cost.
Final comment
Accountants Daily reported on 6 February 2025 that the Shadow Assistant Treasurer, Luke Howarth MP, said:
"If this measure ultimately passes, I can assure the small and family business communities that the coalition would urgently review its impact on small businesses, when in government and given that opportunity."
The future of this measure remains uncertain, and we watch with interest as the commencement date of this measure looms.
About the Author
Robyn Jacobson is the Senior Advocate at The Tax Institute.
About The Tax Institute
The Tax Institute is the leading forum for the tax community in Australia. Our reach includes membership of over 10,000 tax professionals from commerce and industry, academia, government and public practice and 40,000 Australian business leaders, government employees and students. We are committed to representing our members, shaping the future of the tax profession and continuous improvement of the tax system for the benefit of all, through the advancement of knowledge, member support and advocacy. Read more at taxinstitute.com.au
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