28-03-2025
Major ATO tax debt change for all Aussies: 'Devastating impact'
Aussies will be hit with bigger penalties from the Australian Taxation Office (ATO) if they fail to pay their tax debts on time. The interest applied on overdue tax debts will no longer be tax deductible from July 1, 2025, after laws passed parliament this week.
Legislation to remove tax deductibility for both the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) was passed by the Senate on Thursday. The change is expected to boost tax revenue by $500 million in 2026 and 2027.
Hive Wise founder Hripsime Demirdjian told Yahoo Finance the change would not be tax-beneficial for individuals and small businesses.
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'The reason why this measure was introduced is because the ATO has more than $50 billion in collectable tax debt,' she said.
'This change is being enacted in an effort to encourage the payment of tax debt on time, as the cost of debt will increase.'
The ATO applies the GIC when a tax debt hasn't been paid by the due date, this includes where a tax return has been lodged late.
The SIC applies when an incorrect self-assessment leads to a shortfall in tax paid. The ATO applies the SIC is applied to the shortfall amount.
The GIC rate is currently 11.17 per cent per annum, while the SIC is lower at 7.17 per cent per annum.
Both charges apply on a daily compounding basis and were tax-deductible.
The government first announced the change in December 2023 and said it would encourage tax compliance and benefit taxpayers who were already doing the right thing.
"Removing these deductions will enhance incentives for all entities to correctly self-assess their tax liabilities and pay on time, and level the playing field for individuals and businesses who already do so,' the government said in the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO).
The Council of Small Business Organisations Australia (COSBOA) has criticised the move and said it would impact small businesses the most.
'The overwhelming majority of small businesses are doing the right thing and seek to pay their tax on time and pay it correctly,' COSBOA CEO Luke Achterstraat said.
'Targeted measures to deal with high-debt accounts would be more appropriate and equitable to encourage voluntary compliance across the tax system.'
CPA Australia also argued against the change, noting it could have a 'devastating impact' on small businesses already dealing with high interest rates and inflation.
'For tax-paying small companies, the non-deductibility of GIC effectively raises the penalty rate by 25 per cent,' CPA Australia tax lead Jenny Wong said.
'For sole traders, it potentially increases the penalty rate by up to 47 per cent depending on their marginal tax rate.'
