In a move set to impact borrowers across Australia, the federal government has legislated changes that will prevent taxpayers from claiming income tax deductions for interest charges imposed by the Australian Taxation Office (ATO). The amendment to tax law will come into effect on July 1.
The changes specifically target the General Interest Charge (GIC), which applies to unpaid tax liabilities, and the Shortfall Interest Charge (SIC), which is levied when an amended assessment results in a tax shortfall. Previously, these charges were deductible, reducing the overall cost for taxpayers who incurred them.
"That's no longer going to be an option," Siobhan Williams (pictured), head of mortgages at Pepper Money, told Australian Broker. "Previously, if somebody, a [small and medium-sized enterprise] (SME), for example, owed tax to the tax office at the end of the financial year, what they could do is use that as a deduction. If they owed $10,000 tax and they earned $100,000, instead of paying tax on $100,000, they'd pay tax on $90,000. So it was a tax deductible opportunity."
The government announced this policy change in the 2023 to 2024 mid-year economic and fiscal outlook, citing concerns that the deductibility of these charges undermined their intended purpose as a deterrent for late or incorrect tax payments. The Senate Economics Legislation Committee supported the removal of the deduction, stating that it would ensure fairness between taxpayers who meet their obligations on time and those who do not.
"The ATO is cracking down on SMEs, who were using [the ATO] like a lender, and basically saying [to the SMEs], no more benefits for you," Williams said.
At present, the annual GIC and SIC rates are typically higher than standard bank and non-bank loans. That means borrowers will pay the price with higher interest rates.
"The general interest charge for the April to June 2025 quarter that the ATO is charging is 11.17%," Williams explained. But she added that borrowers have other options, including moving their debt to a bank or non-bank that carries a lower rate.
"If an SME decides to move their tax debt from being owed to the ATO to a loan facility, that loan facility will then appear on their balance sheet, and they can deduct any interest charges that are business debt related and achieve the same tax benefit that they were achieving previously, pre-1 July, by changing their structure," Williams said.
"Refinancing that debt to a loan with a lender like Pepper Money, you're going to be looking at significant savings on the interest rate," she said. "Depending on the customer profile, it could be as low as 7%. So it's a significant difference in the actual interest component. And then as far as the savings from an individual's perspective, it's going to depend on two things: One, is the size of the tax debt, and the other depends on which tax bracket they're in."
"It's not so much [as a broker] giving the client advice. It's about tapping the client on the shoulder and ensuring that they are aware of these legislative changes and the borrowers have spoken with an accountant about how these changes might impact them, should they have current tax debt outstanding, or if they're in a position where they might strike up future tax debt in the July to October quarter," Williams said. "There's likely a number of Australian consumers out there who are not aware of these changes. So it's time for them to be made aware of this change and to understand what their options are."
In addition to communicating the change to borrowers, highlighting the increased cost of the tax debt and potential debt consolidation, brokers should encourage clients to review their tax planning and cash flow management systems.
"And when you look at outstanding tax debt, there's another sort of factor to consider: The ATO hasn't necessarily been taking significant actions to recover their debt when it's a new tax debt," Williams said. "But when it's an old tax debt, and when the new tax returns are due to be lodged, there are a whole heap of Australians out there who are not able to lodge their next lot of tax returns until they've paid the old debt. So [consolidating debt] allows them to proceed with lodging their next lot of tax returns by clearing that cumulative tax debt. Because tax debt from the last financial year and then tax debt in the current financial year are red flags for the ATO. You can't have year-on-year cumulative tax debt and escape the lens of the ATO. So, by clearing that tax debt, it allows borrowers to move forward with future lodgements."
