Businesses and individuals who fail to meet their tax payment deadlines will no longer be eligible to claim a tax deduction for interest paid to the Tax Office if Treasurer Jim Chalmers gets his way.

The general interest charge (GIC) is applied in cases where tax debts remain unpaid within the stipulated timeframe, while the shortfall interest charge (SIC) is imposed when a taxpayer inaccurately assesses their owed amount. Presently, both charges are eligible as a tax deduction. Jim Chalmers mid year briefing flagged a removal of tax deductibility as a fairness initiative commencing on or after July 1, 2025.

In addition to this update, starting from January 1, 2024, the rates for GIC and SIC have also increased from 7.15% and 11.15% to 7.38% and 11.38%, respectively.

What does this mean come tax time?

Historically, taxpayers have been able to choose between using a commercial bank or the Tax Office to finance tax payments as both types of interest is deductible.  Moving forward taxpayers must carefully evaluate the implications of these changes, considering strategies to manage and mitigate the accrual of GIC and SIC.

Such strategies may encompass:

• Avoiding making late tax payments, including the use of payment plans;
• The impact of voluntarily amending returns or making a voluntary disclosure;
• Whether to agree to period of review (“POR”) extension requests from the ATO;
• Considering the impact of delays which occur when the ATO is undertaking lengthy reviews and audits and taking a long time to provide clarity;
• certain issues (such as transfer pricing) which have an unlimited POR;
• negotiating the apportionment of settlement components with the ATO; and
• ensuring robust and compelling submissions are made to the ATO Commissioner to exercise the discretion to remit GIC and SIC in appropriate cases.

Despite these alterations, there has been no announcement regarding whether interest received on over paid tax will remain taxable.

The government’s move to remove deductibility aims to encourage accurate self-assessment and timely tax payments, but the evolving tax landscape and increasing complexity pose challenges. Formal consultation on these proposed changes is eagerly awaited.

Should you have any questions about how these changes will impact you please reach out to your Engagement Partner.