Proposed Amendments to GIC and SIC Deductibility

In news that is unlikely to be well-received by taxpayers already struggling with cash flow management, the Treasury has commenced consultation on 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.

The proposed amendments were foreshadowed in last year’s Mid-Year Economic and Fiscal Outlook 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 tax 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 11.34%. 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 7.34%. 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

The proposed amendments will, inter alia, repeal paragraph 25-5(1)(c) of the ITAA 1997 to deny the deductibility of GIC and SIC incurred¹. 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 exposure draft legislation does not provide for the repeal of sections 15-35 of the ITAA 1997, which requires interest on overpayments of tax to be returned as assessable income. 

RSM View 

The proposed amendments will complement and support the firmer approach to debt collection that has been espoused Australian Taxation Office (ATO) over the last 12 months by deterring reliance on the ATO as a short-term debt facility and will doubtlessly be welcomed by the Commissioner of Taxation who has entered his role amidst unprecedented levels of collectable debt (c. $50 billion). 

However, it could be reasonably contended that the proposed amendments 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. This is also expected to 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 when GIC/SIC rates and no tax deduction would be available are factored in, where under traditional financing arrangements a deduction may be available for interest paid). 

Subject to the outcomes of the consultation, there is likely to be 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 lack of or limited objection rights). 
 

FOR MORE INFORMATION

If you require further information regarding the consultation, which closes on 16 October 2024, 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. D