No More Tax Deductions on ATO Interest Charges: Key Tax Planning Considerations Under the New Law
- Wis AU
- May 9
- 3 min read
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The formal enactment of the Treasury Laws Amendment (Tax Incentives and Integrity Measures) Act 2025 marks a significant change in Australia’s tax system. Starting from 1 July 2025, taxpayers will no longer be able to claim income tax deductions for interest charges imposed by the ATO, specifically the Shortfall Interest Charge (SIC) and General Interest Charge (GIC).
This change, announced in the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO), aims to enhance tax compliance by removing the tax deductibility of ATO-imposed interest charges, therefore preventing taxpayers from treating penalties arising from late payments or incorrect tax filings as deductible expenses. This ensures that penalties from underpayment of late payment of tax are treated as genuine financial consequences and not deductible business cost.
What Are GIC and SIC?
The ATO applies these charges under different circumstances:
General Interest Charge (GIC): Interest applied daily to unpaid tax liabilities until the amount is settled.
Shortfall Interest Charge (SIC): Interest imposed when a tax shortfall arises due to underreported income or incorrect reporting, typically following an amended assessment.
Under current law, both GIC and SIC have generally been deductible for income tax purposes. However, this treatment will fundamentally change from 1 July 2025 onward.
Risk for Individuals
Date interest is incurred | Deductible? |
On or before 30 June 2025 | Yes |
On or after 1 July 2025 | No |
This change applies based on the date the interest is incurred, not the tax period to which it relates. Interest incurred from 1 July 2025 onward is non-deductible, regardless of whether it pertains to earlier tax obligations.
The legislation also simplifies how remitted charges are treated: if the ATO later cancels any portion of the GIC or SIC, the remitted amount does not need to be reported as assessable income.
Implications for Taxpayers
This legislative change will have broad impacts on financial management, tax compliance, and budgeting practices:
Increased tax burden: Interest charges will now become after-tax costs, increasing total tax-related expenditure.
Greater compliance pressure: Accurate and timely tax reporting and payments will become critical.
Cash flow volatility: Finance teams must plan for the impact of non-deductible interest charges on operating liquidity.
Stronger internal controls required: Organizations will need to reinforce internal controls to avoid underreporting or missed liabilities which could potentially result in costly interest charges.
How Should Taxpayers Prepare?
With the effective date fast approaching, taxpayers should take proactive steps to limit exposure to non-deductible interest charges:
Review and strengthen tax compliance processes Review current practices on the tax lodgment and payment procedures to ensure accuracy and timeliness.
Avoid underpayment or late payment of taxes Ensure payments, especially for quarterly instalments and year-end balances, are made on time and based on correct assessments.
Implement interest charge tracking systems Maintain dedicated internal records to accurately log when GIC/SIC liabilities begin accruing and distinguish between pre and post 1 July 2025 charges.
Update financial forecasts Adjust budgets and projections to factor in the cost of non-deductible interest charges where relevant.
Understand remission options Although deductions will no longer apply, taxpayers may still apply for interest remissions under some circumstances. Keeping strong records will be key to a successful remission application.
Conclusion
This legislative change sends a clear regulatory message that strong tax compliance is the most effective way to manage future tax costs. It means that tax penalties should carry real consequences. With the non-deductibility of the ATO-imposed interest charges, cost of non-compliance will be felt more directly in financial results.
If you would like to better understand how this legislative change may affect your organization—or if you wish to review and optimize your tax compliance framework—our team is here to assist. We offer tailored, practical solutions to support a smooth transition and help minimize emerging risks under the new legislation.
Source: Denying deductions for ATO interest charges, ATO website. Denying deductions for ATO interest charges | Australian Taxation Office
