Move to deny the deductibility of tax-related interest charges going ahead

Despite the recent cut in interest rates, taxpayers already struggling with cash flow management will be disappointed to hear that the proposal to deny deductibility for tax-related interest charge from 1 July 2025 are going ahead, subject to passing Parliament before the upcoming Federal Election. 

In late January, the Senate Standing Committee on Economics (the Committee) recommended that the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024 be passed. Although the Bill currently remains before Parliament, the Committee views were that the proposed amendments to the Income Tax Assessment Act 1997 (ITAA 1997) to deny the deductibility of general interest charge (GIC) and shortfall interest charge (SIC) incurred on or after 1 July 2025 should go ahead.

The proposed amendments were originally foreshadowed in the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO) and are forecast to generate additional cash receipts of $500 million during the period to 30 June 2027.

Nature and current treatment of GIC and SIC

GIC applies where a taxpayer fails to pay certain tax-related liabilities (e.g., income tax) on time, whereas SIC is payable on additional amounts of income tax for which a taxpayer is liable as a result of an amended assessment and broadly applies from the date the income should have been paid up to the date on which the amended assessment is issued (i.e., the ‘shortfall period’). 

The prevailing rate of GIC, which applies on a daily compounding basis, currently is 11.42%. This represents an uplift of seven percentage points over the 90-day bank bill rate. The prevailing rate of SIC, which also applies on a daily compounding basis, currently is 7.42%. This represents an uplift of three percentage points over the 90-day bank bill rate. The rationale for the lower rate of SIC vis-à-vis GIC  is that taxpayers generally cannot have been aware of their liability during the ‘shortfall period’. 

Presently, GIC and SIC are both specifically deductible for income tax purposes when incurred. 

Proposed Amendments

When enacted, the proposed amendments will, inter alia, repeal paragraph 25-5(1)(c) of the ITAA 1997 to deny the deductibility of GIC and SIC incurred^[1]. Consequential amendments will exclude the remission of GIC and SIC from the definition of ‘assessable recoupment’ under subsection 20-25(2A) of the ITAA 1997. 

Unfortunately, but perhaps not unsurprisingly, the amendments do not provide for the repeal of section 15-35 of the ITAA 1997, which requires interest on overpayments of tax to be returned as assessable income. 

RSM View 

The proposed amendments complement and support the firmer approach to debt collection that has recently been espoused by the Australian Taxation Office (ATO) by deterring reliance on the ATO as a short-term debt facility and will doubtlessly be welcomed by the Commissioner of Taxation who entered his role amidst unprecedent levels of collectable debt (c. $50 billion). 

However, it could be reasonably contended that the new regime will imbue GIC and SIC with a punitive character to such an extent that they no longer constitute ‘interest charges’. This is expected to be particularly problematic for smaller businesses, which may already be struggling with cash flow, and unable to secure alternative tax-deductible finance.

Indeed, it will be interesting to see whether the calculation of the GIC and SIC rates after 1 July 2025 will change – having always been understood that the high rates over the 90-day bank bill rate reflected their tax deductibility. 

The new provisions, once enacted, will also cause taxpayers to ‘think twice’ regarding the management of their tax debts and how to finance them (e.g., using existing facilities may be more prudent given high GIC/SIC rates with no tax deduction, when under traditional financing arrangements a deduction may be available for interest paid). 

Although the amendments have been well flagged, there is no ‘grandfathering’ of existing debt, placing taxpayers who made decisions based on assumed deductibility in a predicament. 

Whilst taxpayers will still be entitled to request the remission of GIC and SIC, it should be noted that taxpayers do not have any objection rights with respect to any GIC remission decisions, and many SIC remission decisions. 

This underscores not only the importance of taxpayers staying up to date with their tax debts but also the importance of seeking advice when engaging with the ATO on matters such GIC and SIC remission (i.e., given the lack of or limited objection rights). 

FOR MORE INFORMATION

If you require further information or require cash flow, financial or business turnaround advice, please contact your local RSM adviser.

1. A new subsection 26-5(1A) of the ITAA 1997 will also be introduced to expressly deny the deductibility of GIC and SIC.