Managing tax interest after July 2025: What businesses need to know about ATO interest charges

The tax law amendment effective from 1 July 2025 has a significant impact on taxpayers’ ability to deduct ATO interest charges (GIC and SIC). With the repeal of prior deductibility rights, taxpayers must correctly determine the scope of deductible interest. This article systematically reviews the principles established in key tax ruling, determination and case law, demonstrating that deductions for GIC and SIC are now almost entirely disallowed in practice. It further extends the discussion to the deductibility of financing interest, noting that in the context of non-deductible GIC/SIC, taxpayers who raise funds through borrowings to meet their tax liabilities may still be able to claim deductions under relevant tax laws, depending on the nature of the entity and the commerciality of the arrangement. The article compares the treatment of non-business individuals, sole traders, and corporate taxpayers, and explores working capital alternatives, offering businesses practical pathways for compliant and efficient tax management.

A fundamental shift in the treatment of GIC and SIC

Within Australia’s tax framework, the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) have long been central elements of the tax penalty and compliance regime. Their purpose is not only to encourage taxpayers to meet their obligations in full and on time but also to compensate the government for the “time value” of delayed tax receipts.

Historically, GIC and SIC were deductible in many circumstances, providing some relief to taxpayers facing financial stress from late payment or underpayment of tax. However, with the government’s increased focus on transparency and tax base integrity, this position has now fundamentally changed. From 1 July 2025, all GIC and SIC will be completely non-deductible.

This reform is more than a reporting adjustment. It will have deep implications for cash flow planning, accounting treatment, and compliance costs.

Crucially, while the law sets a single commencement date, the key compliance challenge lies in determining when a GIC or SIC is considered to have been “incurred”. This distinction is the deciding factor for deductibility and introduces significant practical complexity.

GIC vs SIC: different rules, different timing

Characteristics and timing of GIC

GIC applies where a taxpayer fails to pay tax in full by the due date. Once an assessment is issued, the ATO applies a daily compounding interest rate until full payment is made.

Importantly, as confirmed by the Federal Court in Commissioner of Taxation v Nash [2013] FCA 336, GIC cannot be backdated to the original due date of the unpaid tax. Instead, it accrues only after the ATO has completed an assessment and determined the liability.

For the current reform purpose, this means that where an assessment is issued on or before 30 June 2025, GIC accrued up to that date may still be deductible. However, GIC accruing from 1 July 2025 onward is non-deductible. Taxpayers will therefore need to implement daily allocation and apportionment systems to correctly separate deductible and non-deductible components.

Different characteristics and timing for SIC

SIC operates differently. Under section 280-100(1) of the Taxation Administration Act (TAA), SIC arises when the ATO issues an amended assessment for a prior income year.

According to ATO Determination TD 2012/2, the timing of “incurred” is tied to the date the amended assessment is served, not to the underlying income year or tax originally payable.

For example, if an amended assessment relating to the 2023–24 year is served on 2 July 2025, the resulting SIC is deemed incurred in the 2025–26 income year. Despite the liability arising from earlier income years, no deduction is available because the “incurred” date falls after the legislative change.

Practical judgement of timing: the meaning of “incurred”

The ATO’s ruling TR 97/7 establishes that an expense is “incurred” when the taxpayer is definitively committed to the liability, even if it has not been paid.

Applied to GIC and SIC:

• GIC: Deductible only for amounts accruing up to 30 June 2025, provided an assessment was issued beforehand.

• SIC: Deductible only where the amended assessment was served on or before 30 June 2025.

The law contains no grandfathering provisions or transitional carve-outs. Even if the liability relates to earlier income years, deductibility is determined strictly by the date of incurrence. This creates substantial challenges for transitional compliance.

Borrowing to pay tax: when interest is deductible

The denial of GIC and SIC deductions raises a key question: if taxpayers borrow funds to meet tax liabilities and thereby avoid incurring GIC/SIC, is the interest on that borrowing deductible?

This effectively tests whether “non-deductible penalty interest” can be re-characterised into “deductible financing interest” through appropriate funding structuring. The outcome depends on the taxpayer’s profile:

1. Non-business individuals
   Loans taken to pay personal income tax or PAYGI instalments are generally non-deductible, as confirmed by ATO ID 2002/607 and s 25-5(2)(c). Unless the borrowing has a direct nexus with assessable income, no deduction is available.

2. Sole traders and business individuals
   Where tax liabilities arise directly from business activities, borrowings to meet these obligations may fall within s 8-1, allowing deductibility. Appropriate apportionment and documentation are required to separate business from non-business elements.

3. Corporate taxpayers
   Companies borrowing to support ongoing business operations and meet tax obligations are more likely to satisfy the s 8-1 “positive limbs”. Guidance in IT 2582 and TR 2019/1 suggests corporate taxpayers can generally claim such interest, provided the borrowing has a clear commercial purpose.

4. Working capital substitution strategy
   A practical alternative is to use existing funds to pay tax on time, then borrow to replenish working capital. This approach enhances compliance defensibility and strengthens the nexus between the borrowing and business operations, increasing deductibility prospects.

Compliance and reporting: precision as a safeguard

The denial of deductions for GIC and SIC introduces significant compliance complexity, driven by their different timing rules. 

To support compliance positions, taxpayers should maintain a robust documentation trail, including ATO daily interest rate schedules and calculations, copies of amended assessment notices with proof of service, and accounting reconciliation records reflecting tax adjustments. Such records not only strengthen deductibility claims for pre-1 July 2025 amounts but also prepare businesses for potential ATO scrutiny.

From 1 July 2025 onward, businesses should also adapt their financial reporting and a separate ledger account for “non-deductible interest charges” may help classify GIC and SIC as permanent differences for tax purposes, ensuring accurate adjustments in tax returns and transparent explanatory disclosures. 

Summary

The abolition of deductions for GIC and SIC from 1 July 2025 represents more than a technical rule change; it marks a decisive shift in how the ATO expects taxpayers to manage their obligations. Compliance will now depend on a precise understanding of when liabilities are “incurred”, careful separation of deductible and non-deductible amounts during the transition, and disciplined reporting of permanent differences. At the same time, businesses should evaluate financing strategies, recognising that while penalty interest is no longer deductible, borrowing costs may still be managed effectively within the tax law when linked to genuine commercial purposes. By combining technical accuracy with proactive compliance processes, taxpayers can not only mitigate audit risks but also build a more resilient and transparent tax position in this new environment.

For further guidance, please reach out to your local PKF advisers.