It is notably obvious that owing debt to the ATO is not as simple as it used to be. With the amount of collectable debt increasing each year and $50.2 billion outstanding as of 30 June 2023, taxpayers and their advisors will soon find out (if they haven’t noticed already), that the ATO is much tougher than it has been in the past with its’ terms and conditions and its’ collection and enforcement of outstanding tax debt.
It has now added another measure to its’ arsenal on debt collection. On 13 December 2023, as part of the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO), the Government announced that it will amend the tax law to deny deductions for ATO interest charges. Although this measure is not yet law, once enacted, it will mean that after 1 July 2025, taxpayers will no longer be able to claim a tax deduction for ATO interest charges.
The general interest charge (GIC) is incurred when a tax debt has not been paid on time, while the shortfall interest charge (SIC) is imposed when a taxpayer incorrectly self-assessed how much they owed the government. Both charges are currently tax deductible.
The current deductibility of interest charges allows for a reduction in the effective interest rate based on the taxpayer’s marginal tax rate. Even though this measure has not been passed as law, with a start date of 1 July 2025, taxpayers with outstanding debts or who currently negotiating repayment plans need to consider the potential impact of these changes including:
- Voluntarily amending returns or a making a voluntary disclosure;
- Payment plans surpassing 1 July 2025 being denied a deduction on interest charges incurred after this date;
- Making late tax payments, including through payment arrangements; and
- Consider submitting a compelling submission for a Commissioner’s discretion for a remission of GIC and SIC in circumstances such as where:
- Delays occurred when the ATO is undertaking lengthy reviews and audits;
- Payments are made early or a payment arrangement is entered into;
- The taxpayer is relying on the ATO’s advice or general administrative practice;
- Circumstances that existed which were beyond the taxpayer’s control (such as where there is a natural disaster or serious illness); or
- A delay in payment but where the taxpayer took reasonable action to reduce the delay.
Finally, where a tax debt is in dispute, we recommend dealing with that via discussion, negotiation or more formal processes like Objections or Appeals sooner rather than later so the matter is resolved and the tax debt determined to mitigate the impact of these new measures. The Government’s intent is clear and aims to address the significant and growing outstanding tax debt situation by removing the interest charge deduction in order to discourage taxpayers with large outstanding debts to use the ATO as a loan facility. It would be prudent to be mindful of these measures in dealings with the ATO on tax debt.
If you would like to discuss these matters further, please call Mimi Ngo.