NAVIGATING THE NEW TAX LANDSCAPE

Impending changes to ATO Interest Charge Deductions

In a significant development, the Australian Government has proposed a measure to remove tax deductions for Australian Taxation Office (ATO) interest charges starting from 1 July 2025. This change, if implemented, will have far-reaching implications for taxpayers, who will no longer be able to claim deductions for general interest charges (GIC) and shortfall interest charges (SIC) incurred on or after the specified date. In this article, we will explore the potential impact of this measure and discuss its implications for different entities and individuals.

 

The shift in financial landscape

Until now, some taxpayers have relied on the ATO for funding during periods of low interest rates, considering it a viable option. However, two significant factors have altered this landscape. Firstly, interest rates have risen, making ATO debt increasingly expensive due to the imposition of GIC and SIC. Secondly, the Australian Government announced the decision to disallow tax deductions for ATO interest charges in the 2023-24 Mid-year Economic and Fiscal Outlook. These developments have prompted a reevaluation of the financial implications of unpaid ATO debts accumulating interest.

 

The impact on different taxpayers

The removal of tax deductions for ATO interest charges will have varying effects on different entities and individuals. Here are some scenarios to consider: 

  • Base rate entities
    For companies classified as base rate entities (including trading companies with a turnover of less than $50 million), the additional cost of ATO debt interest will be 25%.
  • Non-base rate entities
    Companies that are not base rate entities (such as those earning passive income or trading companies with a turnover of $50 million or more) will face an extra cost of 30% for ATO debt interest.
  • High-tax individuals
    For individuals subject to the top tax rate (including the Medicare Levy), the additional cost of ATO debt interest will be a staggering 47%.

 

Unfavourable outcomes for taxpayers

It is evident that the removal of tax deductions for ATO interest charges will be an unfavourable outcome for taxpayers with unpaid ATO debts accumulating interest. The ATO charges GIC on overdue tax liabilities and SIC when a taxpayer incorrectly self-assesses their tax liability. These charges can grow significantly, with interest compounded daily. It is crucial for taxpayers to be aware that interest charges accrue from the due date of the underlying debt.

 

Considerations for taxpayers

Taxpayers with ATO payment plans should carefully consider the proposed changes and explore alternate debt solutions if cash flow constraints prevent full payment by the due dates. With the change in interest rates and the potential disallowance of interest on ATO debt, relying on the ATO as a short-term debt facility may no longer be viable for many taxpayers.

 

Remission of ATO interest charges

The ATO retains the discretion to remit GIC and SIC in certain circumstances deemed fair and reasonable. These circumstances include unforeseen events causing delays in tax payments, reasonable actions taken by taxpayers to reduce delays, and situations where paying the full amount of GIC and/or SIC would result in serious financial hardship. It’s worth noting that any GIC or SIC remitted after 1 July 2025, if the measure is implemented, will no longer be included as assessable income, as per ATO guidance.

 

Conclusion

While the proposed measure to remove tax deductions for ATO interest charges is not yet law, it is expected to come into effect from 1 July 2025. This change aims to address the growing outstanding debt and encourage taxpayers to accurately self-assess their tax liabilities and pay their debts on time. As the financial landscape evolves and interest rates rise, taxpayers should carefully consider their ATO debts and explore alternative strategies to manage their financial obligations effectively.

Here at Regency Partners, we understand the complexities of tax obligations and can provide expert guidance tailored to your specific circumstances. Contact us today to discuss how these impending changes may impact your financial situation.

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