EFFECTIVE 1 JULY 2025
Introduction
Starting 1 July 2025, significant changes to Australian tax law will impact how businesses and individuals handle interest charges from the Australian Taxation Office (ATO). Under the new legislation, taxpayers can no longer claim income tax deductions for certain ATO-imposed interest charges. This article outlines the key aspects of this change and its implications.
Key Changes
The Australian government has enacted legislation, as part of the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO), to amend the tax law. Effective for income years starting on or after 1 July 2025, the law denies income tax deductions for:
- General Interest Charge (GIC): Applied to unpaid tax liabilities, calculated daily on a compounding basis.
- Shortfall Interest Charge (SIC): Imposed when a tax shortfall arises due to an amended assessment.
Previously, these interest charges were deductible in the year they were incurred. Under the new rules, any GIC or SIC incurred on or after 1 July 2025 is not deductible, regardless of whether the underlying tax liability relates to periods before or after this date.
Implications for Taxpayers
- Non-Deductibility: Taxpayers will no longer be able to reduce their taxable income by the amount of GIC or SIC incurred from 1 July 2025 onwards.
- Remitted Interest: If the ATO later remits GIC or SIC amounts incurred on or after 1 July 2025, these remitted amounts will not need to be included as assessable income, since no deduction was claimed initially.
- Pre-1 July 2025 Charges: GIC and SIC incurred before 1 July 2025 remain deductible under the previous rules. If such amounts are remitted after this date, the remitted amounts must be included as assessable income in the year the remission occurs.
Action Steps
- Review Tax Liabilities: Assess any outstanding tax debts and consider settling them before 1 July 2025 to ensure associated interest charges remain deductible.
- Consult Tax Professionals: Seek advice from tax advisors to understand how these changes may affect your specific circumstances and to plan accordingly.
- Stay Informed: Keep abreast of further ATO guidance and updates related to this legislative change.
Conclusion
The denial of deductions for ATO interest charges marks a significant shift in tax policy, aiming to encourage timely tax payments. Taxpayers should proactively manage their tax affairs to mitigate the financial impact of these changes.
