Beware ATO Interest Charges

Since 1 July 2025, any General Interest Charge (GIC) and Shortfall Interest Charge (SIC) payable to the ATO on overdue tax debts is no longer tax deductible.

The current annual rate of GIC is 10.78%, meaning overdue ATO debts are now a significantly more expensive form of funding.

Things to Consider

• ATO debt should be prioritised accordingly and managed proactively (like all financial obligations).
• 3rd party borrowings to pay overdue tax debts may be preferred to leaving these debts unpaid due to the likely comparatively lower after-tax cost.  Whether this is advantageous must be determined on a case-by-case basis given interest on 3rd party borrowings to pay income tax debts will not always be tax deductible.
• If making a request to the ATO for remission of interest charges, it is important to make the request as comprehensive as possible.  In other words, provide supporting documents and detailed, rational explanations as to why the tax debt was unable to be paid on time.  It is also important to ensure the ATO’s guidelines on remission of interest are addressed.
• If you are currently subject to ATO review or audit, these changes may impact your decisions around voluntary disclosures in order to minimise potential interest exposure.

Remember to consider interest deductibility across your group if there is ATO debt. It is important to be able to demonstrate the nature and use of borrowed funds relate to producing assessable income (or that interest is incurred to carry on a business).

Background

If a taxpayer has an overdue tax payment owing to the ATO (this could be income tax, GST, PAYGW, SGC or FBT) the ATO will likely apply GIC to the amount owing. If a taxpayer’s assessment is amended and this results in additional income tax, the ATO may apply SIC (current rate of 6.78%).

Previously, these interest charges were specifically allowed as a tax deduction as part of a taxpayer’s cost of managing their tax affairs (under section 25-5 of the Income Tax Assessment Act 1997).

A taxpayer may apply for remissions of ATO-applied interest under the framework set down in ATO Practice Statement PS LA 2006/8. Broadly, remission of interest will be considered where it is reasonable to do so, i.e. factors outside the taxpayer’s control led to the interest being incurred.

Following the income tax years impacted by Covid-19 there has been a commendable level of leniency by the ATO when assessing remission requests. In more recent times, this landscape is now notably reverting to more strict assessment of remission requests, resulting in taxpayers paying more GIC and SIC in recent years.

The legislated changes were introduced with the purpose of “significantly increasing the cost of incorrectly assessing a liability, or making payments on time should incentivise taxpayers to meet their obligations”.  It is interesting to observe the same effect could have been achieved by increasing the GIC and SIC rates and leaving the legislation as it was.

The ATO forecast that they will increase collections by around $500 million in the 2026/27 income year alone from this measure.

Legislative Changes

The new legislation operates by removing the specific deduction in section 25-5 and also by prohibiting deductions under section 26-5 ITAA1997 (which denies deductions for fines, penalties and now ATO interest).

Regarding the start time from when these changes take effect, the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2025 states these changes:

‘Apply in relation to assessments for income years starting on or after 1 July 2025’. The Explanatory Memorandum to the legislation states ‘The Government will deny deductions for Australian Taxation Office (ATO) interest charges, specifically the general interest charge (GIC) and shortfall interest charge (SIC), incurred in income years starting on or after 1 July 2025’.

This ambiguous wording relies heavily on the meaning of when an expense is ‘incurred’ for income tax purposes (the interpretation of which has been the subject of many disputes and case law).

According to the ATO’s published guidance on their website, their view is that GIC or SIC is incurred when a taxpayer becomes liable to pay the interest charge. GIC is incurred on a daily basis, whereas SIC is incurred in the year you are assessed (taxpayer receives a notice of assessment). This interpretation could create some harsh consequences for taxpayers who received an amended assessment following a voluntary disclosure or ATO review.