The Australian government has announced a significant change to tax debt regulations, set to take effect from July 1, 2025. Starting on this date, the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) will no longer be deductible, marking a major shift in how businesses manage tax liabilities.
Why Is This Change Happening?
With over $50 billion in outstanding tax debt, predominantly owed by small businesses, the government is accelerating recovery efforts to strengthen the country’s financial health and ensure businesses meet their tax obligations.
By removing deductibility, the government aims to streamline repayment processes, encouraging businesses to clear tax debts sooner and avoid escalating penalties or legal consequences.
What Does This Mean for Businesses?
Previously, businesses could deduct GIC and SIC to reduce the overall financial burden of tax debt. However, once this change takes effect, tax debt will become more expensive, impacting cash flow and financial planning. Businesses must prepare for:
- Higher tax debt costs due to non-deductible interest charges.
- Increased ATO scrutiny, with stronger enforcement measures.
- The need for proactive financial management to avoid penalties.
Example:
Before July 1, 2025 (Deductible GIC & SIC)
- A business has an outstanding tax debt of $100,000.
- The General Interest Charge (GIC) is 11.38% per annum.
- Annual GIC cost: $11,380.
- If the business is taxed at 30%, they could deduct the GIC, reducing taxable income by $11,380.
- Tax savings: $3,414.
- Effective cost of GIC after tax deduction: $7,966.
After July 1, 2025 (Non-Deductible GIC & SIC)
- The same business still owes $100,000.
- GIC remains at 11.38% per annum.
- Annual GIC cost: $11,380.
- No tax deduction available.
- Effective cost of GIC: $11,380 (full amount paid without tax relief).
| Scenario | Tax Debt | Gic Rate | Annual Gic Cost | Tax Deduction | Tax Savings | Effective Cost of Gic |
|---|---|---|---|---|---|---|
| Before July 1, 2025 (Deductible Gic & Sic) | $100,000 | 11.38% | $11,380 | YES | $3,414 | $7,966 |
| After July 1, 2025 (Non-Deductible Gic & Sic) | $100,000 | 11.38% | $11,380 | NO | $0 | $11,380 |
How Businesses Can Prepare
To minimize financial strain and ensure compliance, businesses should consider:
- Reviewing current tax debt strategies and adjusting repayment plans before July 1, 2025.
- Exploring alternative financing options, such as traditional financial institutions, which still offer deductible interest charges.
- Seeking professional advice from tax debt specialists to manage obligations effectively and avoid penalties.
Final Thoughts
This policy change will impact businesses across Australia, act now before the new rules come into place on 1 July 2025. By reassessing tax debt strategies and seeking expert guidance, businesses can navigate these new regulations without compromising financial stability.
Chifley Advisory can help businesses prepare now, ensuring they are set for success in the next financial year. Reach out today to secure a strategy that protects your business from unexpected tax debt challenges.
