The Federal Government has enacted important changes to the way taxpayers are taxed on ATO interest charges. From 1 July 2025, General Interest Charge (GIC) and Shortfall Interest Charge (SIC) will no longer be tax-deductible. This represents one of the most significant reforms to ATO debt management in recent years and will materially affect individuals and businesses who rely on payment plans or have fluctuating cash flow.
What Are GIC and SIC?
GIC: Interest applied when tax liabilities are paid late.
SIC: Interest applied when additional tax becomes payable as a result of an amended assessment, audit, or other correction.
Historically, these charges were tax-deductible, reducing the effective cost for taxpayers and making ATO payment plans a relatively attractive form of short-term finance.
What Has Changed?
Effective 1 July 2025:
- GIC and SIC cannot be claimed as tax deductions.
- This applies to all interest incurred on or after 1 July 2025, even if the underlying tax debt relates to earlier years.
- Only interest charged up to 30 June 2025 will remain deductible under existing rules.
In simple terms the ATO interest will now be a full out-of-pocket cost.
Why Does It Matter?
This change increases the real cost of carrying ATO debt. Previously, taxpayers could reduce the burden of GIC/SIC through tax deductions.
From 1 July 2025:
- The effective cost of ATO interest increases by around 25–30% (depending on the taxpayer’s marginal tax rate).
- Many taxpayers may find that commercial finance is now cheaper than ATO debt.
- Businesses that previously used ATO payment plans as a cash-flow tool will be significantly impacted.
Who Is Most Affected?
- Small and medium businesses with irregular cash flow
- Individuals or entities with existing or recurring ATO debts
- Taxpayers subject to amended assessments or audit adjustments
- Businesses that rely on extended ATO payment plans
For these groups, the loss of tax deductibility can materially increase after-tax costs.
Practical Implications for Taxpayers
To avoid higher interest expenses, taxpayers should now:
1. Prioritise On-Time Lodgement and Payment
Avoiding GIC is now more important than ever.
2. Review Existing ATO Debts
Where possible, pay down outstanding liabilities to prevent non-deductible interest accruing.
3. Reconsider Cash-Flow Strategies
Using the ATO as a short-term lender may no longer be cost-effective.
4. Tighten Tax Governance
Accurate and timely reporting reduces the risk of SIC arising from errors or amendments.
5. Explore Alternative Finance Options
Commercial finance or business overdrafts may now be more economical than ATO payment plans.
Should you require further information in relation to ATO Penalties, please feel free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an obligation-free appointment.
The information in this document does not take into account your personal objectives, financial situation, or needs, so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser