ATO Changes Tax Law to Deny Deductions for Interest Charges

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On December 13, 2023, the Government shared plans in the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO) to change tax laws. The proposed amendment aims to stop people from claiming tax deductions for interest charges imposed by the Australian Taxation Office (ATO). It's important to note that this change is still in the process of becoming law and hasn't been finalised yet.

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Which interest charges will the change apply to?

This change will apply to interest charges known as general interest charges (GIC) and shortfall interest charges (SIC). Starting from July 1 2025, taxpayers won't be able to claim deductions for these types of interest charges. In the future, if any of these interest charges are forgone and paid back to the business, the remitted amount won't have to be reported as assessable income since the deductions will no longer be claimed.

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Interest rates charged by the ATO

There is a misconception among many business owners that the ATO is a more cost-effective alternative to business finance. From the rates listed below, you can see this is not the case in many circumstances — especially given the change in tax law; the interest from business finance will generally be tax deductible, whereas interest charges from the ATO will not be.  

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The General interest charge (GIC) applies to unpaid tax liabilities as a penalty for late payment. It is worked out daily on a compounding basis. The shortfall interest charge (SIC) applies when fixing mistakes in income tax assessments from 2004–05 onwards — the interest is applied to any shortfalls and is a lower amount than the GIC.  

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GIC Quarterly Interest Charges

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SIC Quarterly Interest Charges

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How can I avoid ATO interest charges?

Generally speaking, to steer clear of interest charges from the Australian Taxation Office, ensure you pay your taxes on time and stay informed about due dates and any tax law changes. If facing financial constraints, consider arranging a payment plan with the ATO to avoid hefty interest fees. Regularly review your tax assessments for errors and promptly correct any discrepancies. Seeking professional advice from a tax professional can help you optimise deductions and minimise your tax liability. Taking these proactive steps will help you meet your tax obligations responsibly and avoid unnecessary interest charges.

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