A critical legislative shift will significantly impact how Australian businesses manage tax debt costs
Starting 1 July 2025, the Australian Taxation Office (ATO) will implement a fundamental change to tax law that will affect thousands of businesses across the country. The ATO will no longer allow taxpayers to claim income tax deductions for interest charges on unpaid tax debts, marking a significant shift in how tax debt costs are treated.
This change applies to both the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC) incurred on or after the effective date, representing one of the most impactful tax policy changes for businesses in recent years.
Understanding the Interest Charges
To fully grasp the implications of this change, it’s essential to understand how these interest charges work:
General Interest Charge (GIC) is applied daily to unpaid tax liabilities and is designed to encourage timely payment of taxes. As of March 2025, the GIC rate stands at 11.42%, compounding daily and making delays increasingly expensive for taxpayers.
Shortfall Interest Charge (SIC) is imposed when there’s a shortfall in tax payments due to an amended assessment. The SIC is calculated from the original due date until the shortfall is corrected, with the current rate at 7.17%.
These rates are significantly higher than most commercial lending rates, making tax debt an expensive proposition for businesses that fall behind on their obligations.
The Financial Impact on Businesses
Previously, businesses and individuals could claim deductions for these interest charges, effectively reducing the cost of late tax payments. This deductibility provided some relief for businesses struggling with cash flow issues or facing unexpected tax liabilities.
With the new legislation, any GIC or SIC incurred from 1 July 2025 onwards will be non-deductible, substantially increasing the after-tax cost of carrying tax debt.
To illustrate the impact, consider a business with a $50,000 tax debt that accrues $5,000 in GIC annually. Under the current rules, this business could deduct the $5,000, reducing their taxable income. For a business in the 25% tax bracket, this deduction saves $1,250 in taxes, making the effective cost $3,750.
Post-1 July 2025, this deduction will no longer be available, making the full $5,000 a direct, non-deductible expense. This represents a 33% increase in the real cost of carrying tax debt.
Strategies to Minimize the Impact
While this change will increase costs for businesses with tax debt, there are several strategies that can help mitigate the financial impact:
1. Prioritize Timely Tax Payments
The most effective strategy is ensuring all tax liabilities are paid on time to avoid incurring GIC or SIC altogether. This requires:
- Implementing robust cash flow management systems
- Setting up automatic payment arrangements with the ATO
- Creating dedicated tax reserve accounts
- Using quarterly tax calculators to estimate liabilities accurately
2. Explore Alternative Financing Options
Consider using business loans, overdrafts, or other commercial financing to pay tax debts. Interest on such loans remains tax-deductible, potentially offering a more cost-effective solution than allowing GIC to accrue.
For example, a business loan at 9% interest rate would have an effective after-tax cost of 6.75% (assuming a 25% tax rate), compared to the full 11.42% GIC rate that will no longer be deductible.
3. Review Existing Payment Arrangements
If you have existing ATO payment arrangements extending beyond 1 July 2025, it’s crucial to assess the financial impact of non-deductible interest and explore refinancing options. This might involve:
- Calculating the new effective cost of existing arrangements
- Exploring acceleration of payments before the July deadline
- Investigating refinancing through commercial lenders
4. Seek Professional Financial Advice
The complexity of this change and its potential impact makes professional advice more valuable than ever. Financial advisors and accountants can help develop strategies tailored to your specific circumstances, including:
- Cash flow forecasting and management
- Alternative financing structures
- Tax planning to minimize future liabilities
- Risk assessment and mitigation strategies
Preparing for the Change
Businesses should begin preparing for this change well before the July 2025 deadline. Key preparation steps include:
- Immediate assessment: Review current tax debt positions and payment arrangements
- Cost analysis: Calculate the potential increased cost under the new rules
- Strategic planning: Develop financing strategies that minimize the impact
- Implementation: Put new processes and arrangements in place before the deadline
How Sanford Finance Can Help
At Sanford Finance, we understand the challenges this legislative change may pose to Australian businesses. Our experienced team specializes in helping businesses navigate complex financial situations and can assist with:
- Debt refinancing solutions: Exploring commercial financing options to replace costly tax debt
- Cash flow management: Implementing systems to ensure timely tax payments
- Strategic planning: Developing comprehensive approaches to minimize the impact of these changes
- Alternative financing: Structuring cost-effective funding solutions for tax obligations
We work with a network of over 40 lenders to secure competitive rates and terms tailored to your specific situation, whether you need immediate funding for tax payments or longer-term arrangements to manage cash flow.
Take Action Now
Don’t wait until July 2025 to address these changes. The earlier you implement strategies to manage tax debt, the more you can minimize the financial impact on your business. With proper planning and the right financial partners, businesses can navigate this regulatory change while maintaining healthy cash flow and financial stability.
Contact Sanford Finance today:
- Phone: (02) 9095 6888
- Email: [email protected]
- Website: sanfordfinance.com.au
Our Sydney-based team is ready to provide expert guidance on financing solutions and strategic planning to help your business stay ahead of these important changes. Book a consultation today to ensure your business remains financially resilient in the face of evolving tax regulations.
This information is general in nature and should not be considered as specific financial or tax advice. Tax laws and regulations are subject to change, and individual circumstances may vary. Always consult with qualified professionals before making financial decisions.
