The Australian Taxation Office (ATO) imposes interest charges in specific circumstances where tax liabilities are paid late or underpaid as a result of amendments. These charges are a key component of the ATO’s compliance framework and are designed to ensure fairness and encourage timely payment of taxes.

For taxpayers, understanding how interest is applied, calculated and treated for tax purposes is essential for effective planning.

Types of Interest Charges

General Interest Charge (GIC): GIC is applied when a tax liability is not paid by the due date. It covers a range of obligations including income tax, PAYG Instalments, GST and Fringe Benefits Tax. GIV accrues daily and compounds until the outstanding amount is paid in full.

Shortfall Interest Charge (SIC): SIC applies when the ATO issues an amended assessment and determines that additional tax was payable. It is calculated from the original due date of the assessment through to the date the amendment is issued.

Changes to Deductibility from 1 July 2025

From 1 July 2025, interest charges imposed by the ATO – including GIC and SIC – will no longer be tax deductible.

This change removes a previously available deduction for interest costs incurred in managing tax liabilities, regardless of whether they relate to business or personal obligations.

Key implications include:

• Businesses will no longer be able to claim ATO interest as a tax deduction, even where it relates to income-producing activities.
• The change increases the effective cost of late payments and underpaid tax, making timely compliance even more important.
• Taxpayers with significant liabilities or complex affairs should review their position to manage potential exposure.

Interest Rates and Calculation

Interest rates for GIC and SIC are set quarterly by the ATO and are based on the 90-day Bank Accepted Bill rate plus a margin. Interest compounds daily, and recent rates have exceeded 10% per annum – making ATO interest one of the most expensive forms of debt.

Managing ATO Interest Charges

To mitigate the impact of interest charges, particularly in light of the upcoming legislative change:

• Ensure timely payments of all tax liabilities to avoid the imposition of GIC.
• Review historical tax positions to identify any potential amendments or understatements before the interest deduction is removed.
• Use voluntary disclosures where appropriate to reduce interest and penalty exposure.
• Consider bringing forward payments or resolving outstanding matters prior to 30 June 2025 to take advantage of the current deductibility treatment.
• Monitor cash flow and payment terms in anticipation of the increased cost of non-compliance from 1 July 2025.

With the removal of the tax deduction for ATO-imposed interest from 1 July 2025, taxpayers should be proactive in reviewing their tax affairs and compliance strategies. The change increases the real cost of late payments and shortfalls and places greater emphasis on accurate, timely reporting and payment.

Professional advice is recommended to manage exposure and ensure that any available deductions are maximised prior to the commencement of their new rules.