The Australian Government announced in the 2023-2024 Mid-Year Economic and Fiscal Outlook measures now contained in Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024, which propose that from 1 July 2025 any GIC / SIC incurred by a taxpayer will be non-deductible for income tax purposes.
The Bill was referred to the Senate Estimates Committee (‘Committee’) for consideration and in November 2024 the Committee released its report supporting the proposed legislation. Numerous submissions were made from various bodies to the Committee (i.e. the Tax Institute, CPA Australia) highlighting potential issues with the proposed Bill, alternative pathways or modifications – however despite the Committee’s consideration, these were not supported.
With the impending Federal Election there are a limited number of sitting days for this Bill to be passed and the Liberal Party have indicated that they would review these rules if implemented. As shown below, there are significant issues arising from incurring GIC / SIC and the best approach is to appropriately manage tax affairs and cash flows that factor in timely lodgment and payment of tax liabilities.
Current GIC / SIC landscape
Very broadly, GIC and SIC are mechanisms designed to encourage taxpayers to correctly assess and pay their tax liabilities on time with the amounts applied on a daily compounding basis at the pre-determined rate of interest. For most taxpayers it would be expected the SIC / GIC rate is higher than the standard cost of funds otherwise obtainable by a taxpayer.
- SIC – applies to additional tax liabilities arising from an amended assessment where a taxpayer has underestimated their original tax liability under the self-assessment system. SIC applies from the date the original tax liability arose until an amended assessment has been issued by the Commissioner from which GIC will subsequently apply.
As such, it is as an integrity measure to encourage taxpayers to correctly assess their tax liability by effectively creating an interest-bearing loan on the shortfall amount regardless of whether the shortfall for the taxpayer is deliberate or accidental. The SIC rate is the 90-day Bank Bill rate plus 3 per cent (i.e. 7.42 per cent for Jan-Mar 2025).
- GIC – GIC is designed to encourage taxpayers to meet their tax obligations on-time by applying a relatively high interest rate to tax liabilities that are overdue (i.e. form late lodgment, or, an amended assessment). The GIC rate is currently the 90-day Bank Bill rate plus 7 per cent (i.e. 11.42 per cent for Jan-Mar 2025).
With these amounts being deductible, the after-tax impact of the GIC/SIC to taxpayers at various tax rates is as follows:
| Taxpayer |
Tax Rate |
After-tax GIC/ SIC
incurred by taxpayer |
|
Company
|
30%
|
70%
|
|
Company
|
25%
|
75%
|
|
Individual (Top rate)
|
47%
|
53%
|
Reasons for the Bill and consultation
The reasoning for the proposed measures to make GIC / SIC non-deductible is to further the overall purpose of the GIC / SIC system, as significantly increasing the cost of incorrectly assessing a liability, or making payments on time should incentivise taxpayers to meet their obligations. It is anticipated that the measure will assist the ATO in its action to reduce its outstanding tax obligations of over $50 billion.
Feedback from numerous stakeholders on the Bill was obtained by the Committee raising issues with its current form such as:
- The ATO’s current strict approach to SIC / GIC remissions will be exacerbated by these rules.
- That the uplift rates of 3 per cent / 7 per cent (over RBA 90 day official interest rates) were already an appropriate incentive to meet tax obligations in light of alternative funding options.
- The risk of a disproportionate application of the rules to small businesses and taxpayers already facing cash flow difficulties which is likely to exacerbate their challenges.
- The need for a quantum threshold to protect more vulnerable taxpayers (i.e. only on debts exceeding $100k).
- Issues where there are disputes over a tax treatment with the ATO that may take significant time to reconcile (including the current 50:50 approach for certain disputes). The new rules will create an imbalance and additional risk for taxpayers in running disputes with the ATO where a position isn’t agreed.
- That refunds of overpayment where interest is paid will remain assessable creating a lack of symmetry in the tax system.
Despite the issues raised during the consultation process, the Committee recommended the Bill be passed to address the Government’s increasing unpaid tax debt receivables and ensure taxpayers who do not pay on time are not advantaged. They noted that the current ability for amounts to be remitted was an appropriate safeguard, however, it has become apparent to practitioners that the ATO’s exercise of this discretion has tightened overtime with the only appeal option being to the Federal Court.
Impact on taxpayers and key considerations
Impact on taxpayers
If passed, from 1 July 2025 any GIC or SIC incurred will no longer be tax deductible, potentially resulting in higher tax liabilities for those who frequently incur these charges. This legislative change is expected to significantly negatively affect small businesses and individuals who may already face cash flow challenges.
As an example of the impact of the change, taxpayers will now bear 100 per cent of the economic cost of the GIC / SIC incurred (subject to remission) which will in turn increase the effective after-tax interest rate on the debt. With respect to GIC, the changes are expected to be as follows:
| Taxpayer |
Tax Rate / Deduction for taxpayer |
Interest rate exc. tax deduction |
Interest rate – post tax deduction |
Change % if non-deductible |
Cumulative increase in cost |
|
Company
|
30%
|
16.32%
|
11.42%
|
4.896%
|
42.86%
|
|
Company
|
25%
|
15.22%
|
11.42%
|
3.805%
|
33.33%
|
|
Individual (Top Rate)
|
47%
|
21.55%
|
11.42%
|
10.129%
|
88.68%
|
Individual taxpayers on the highest marginal tax rate will be the most impacted by these proposed changes. Further, as these rules are not ‘grandfathered’, those already in hardship are expected to be placed under greater financial pressure on their tax debts which may impact businesses more broadly – rather than applying it to future debts as an incentive to not neglect tax liabilities. Also, in an environment where the RBA has recently cut rates to ease the burden of debt on taxpayers, these measures will effectively have the opposite effect and raise the after-tax cost of ATO debt.
Managing tax debts
With the higher cost of ATO debt arising from the proposed Bill, businesses will need to ensure that they are appropriately managing their tax affairs. Key avenues that can be utilised to reduce the impact of this Bill include and the general imposition of GIC / SIC include:
- Correct self-assessment – taxpayers should work closely with their advisers to ensure that their tax returns are correct and supported by appropriate documentation and thus reduce the risk of incorrect underpayments of tax (and resulting SIC) occurring.
- Tax compliance/liability timing management – Taxpayers should ensure they have appropriate tax reporting systems and cashflow/financing planning to enable timely lodgment and payment of tax.
There is ATO support for the deductibility of amounts borrowed by a taxpayer to meet tax obligations in IT 2582 (issued in 1990) which was issued under the predecessor of s8-1 but remains the ATO’s current approach. Despite this approach from the ATO there is apparently conflicting rules in s25-5(2)(c) relating to amounts obtained to fund tax liabilities. It is unclear how these two views reconcile, as such to avoid any risk on external financing being non-deductible it is recommended that clear records are kept as to the purpose and use of funds to demonstrate a link to an income producing purpose in case of an ATO review.
- ATO engagement – Where there is an unavoidable outstanding tax debt, it is recommended to engage early with the ATO to discuss your options. ATO engagement can range from voluntary disclosures where you need to amend due to identified errors, to entering into payment plans with the ATO. Despite the recent more stringent approach to remissions, it is still more likely that the ATO will remit GIC or SIC where there has been appropriate engagement and provision of reasonable grounds for remission.
The proposed non-deductibility of GIC and SIC charges represents a major shift in tax policy with a more stick than carrot approach to enforcing compliance.
Taxpayers should ensure they are being proactive in understanding and managing their tax affairs. Grant Thornton is experienced in helping clients appropriately manage their affairs and engage with the ATO as necessary – please reach out to your Grant Thornton tax contact to discuss these and any other tax related measures.
Article contributed by Ben Peoples - Tax
Learn more about how our Corporate tax & advisory services can help you
