Date posted: 09/04/2024

Cost of tax debt to soar in 2025

From 1 July 2025 the general interest charge and shortfall interest charge will become non-deductible, dramatically increasing the cost of tax debt to businesses.

In brief

  • From 1 July 2025 the general interest charge and shortfall interest charge will become non-deductible, increasing the cost of tax debt.
  • Businesses now have a strong incentive to obtain finance from banks and will look to accountants for help.
  • This policy may result in the ATO holding a larger proportion of tax debts that may not be recoverable.

From 1 July 2025 the cost of tax debt will soar, incentivising businesses to pay tax first. Small businesses will look to their accountant for help in refinancing their business to access cheaper finance.

The current situation

Tax owed to the Australian Taxation Office (ATO) is subject to the general interest charge (GIC) and the shortfall interest charge (SIC), both of which are deductible.

GIC is payable when a taxpayer does not pay tax on time. It is calculated as the 90-day bank bill rate plus 7% (the uplift factor). Currently that rate is 11.34%.

SIC is payable in relation to errors made in a tax return that result in the underpayment of tax. It is broadly calculated from the date the tax should have been paid up to the time the amended assessment is made. GIC is not payable during this time but will apply instead of the SIC from the date of the amended assessment. SIC is equal to the 90-day bill rate plus 3%. The currently rate is 7.34%.

The base rate reflects the cost to Government from delayed receipt of revenue and the GIC uplift factor was set to encourage the payment of tax liabilities when due and discourage the ongoing use of tax debts as a source of business or private finance. Whether this is effective depends upon what alternative financing arrangements are available to the taxpayer.

Most large businesses can obtain finance more cheaply than the GIC. For most small businesses, the GIC approximates the interest rate that they would pay for an unsecured loan - and the ATO is often seen as a soft application free source of finance.

The announcement

There is more than $50B of collectable tax debt to collect. Sixty-five percent of all collectable debt owed, relates to small business and 74% of that relates to activity statements – that is GST, PAYG withholding, PAYG instalments and FBT. The ATO has been making changes to its debt collection procedures to quicken the pace of tax debt recovery, but tax debt levels remain extremely high.

The government has several choices when it comes to accelerating the collection of tax debt - improve ATO collection mechanisms or make the cost of debt so high that paying tax first becomes attractive.

In December 2023, the government went with the last option and announced that GIC and SIC payments incurred on or after 1 July 2025 will not be deductible.

Impacts of this change

If enacted, this change will result in many small businesses looking to their accountant to help them with cash flow, financial analysis, and business turnaround ideas, as they try to pivot their financing to traditional financial institutions whose interest charges will be deductible and thus potentially cheaper than incurring GIC.

There is an adage in financial circles that borrowing to pay tax may indicate deeper problems. Banks analysing the credit worthiness of businesses may try to gain comfort from accountant’s letters - something that accountants should avoid. CA ANZ has provided members with advice on how to manage this situation.

Not all businesses will be able to find alternative tax-deductible finance, and the government estimates that it will raise an additional $500M in the first year due to this initiative. Many of the tax debts that the ATO will be left with will be for businesses whose viability is questionable.

The ATO is a minor initiator of corporate insolvency appointments, but it does issue director penalty notices (DPNs) which often result in directors initiating insolvency proceedings to limit their personal liability. 

With firmer tax debt collection action on the rise, accountants should refresh their knowledge about DPNs and garnishee notices. 
Susan Franks, Senior Tax Advocate CA ANZ

But is making GIC and SIC non-deductible appropriate from a policy perspective?

Assuming that increasing the cost of tax debt is appropriate, why didn’t the government change the uplift factor? An increase in the uplift factor would have been standard across all taxpayers and simple to calculate.

By making GIC and SIC non-deductible their cost becomes dependent upon your legal structure and your taxable income. For example, a company, depending upon its size may have a tax rate of 30% or 25%, a sole trader could have a tax rate of 0%, 16%, 30%, 37% or 45% – a confusing situation which results in a healthy business run by a sole trader facing a much higher cost for outstanding tax debt than a struggling business.

Non-deductibility of SIC is particularly harsh as taxpayers are unaware of their debt. The government has argued that this “will increase incentives for all entities to correctly self-assess their tax liabilities.” The Review of Self Assessment (RoSA) considered this issue in 2004 and rejected the idea of increasing SIC for that purpose on the basis that the penalty regime which considers whether the taxpayer took reasonable care, was a more appropriate mechanism.

The government’s announcement was not subject to a consultation process. It is also an initiative that will have affect after the next election. Currently it is a sleeper issue – but once draft legislation is issued, I am sure many people will have opinions about this measure.
Susan Franks, Senior Tax Advocate CA ANZ

Small Firm, Big Impact podcast series

S4E5: Cost of tax debt to soar - Senior Tax Advocate Susan Franks CA joins host Gillian Bowen to go through what’s changing, what accountants can do to help their clients and where to find resources.

Listen to the podcast