In a perfect world, everyone pays their tax, GST and other Australian Taxation Office (ATO) obligations on time. However, cash flow does not always work in a way where all ATO debts are paid on time. From a business perspective, relying on the ATO for a bit of funding during periods of low interest rates might not have been the end of the world, albeit certainly not recommended.
However, two very significant developments have happened recently.
Firstly, interest rates have risen, therefore ATO debt due to the ATO General Interest Charges (GIC) and Shortfall Interest Charges (SIC) have become an expensive form of finance.
Secondly, the Australian Government released the 2023-24 Mid-Year Economic and Fiscal Outlook on 13 December 2023 with the decision to disallow tax deductions for Australian Taxation Office (ATO) interest charges.
In simple terms, below are some scenarios of what this means:
- For companies classified as base rate entities (very broadly, includes trading companies with turnover less than $50 million) – the extra cost of ATO debt interest will be 25%.
- For companies that are not base rate entities (very broadly, includes companies that earn passive income and trading companies with turnover of $50 million or more) – the extra cost of ATO debt interest will be 30%.
- For individuals at the top tax rate (including Medicare Levy) – the extra cost of ATO debt interest will be 47%.
At the risk of stating the obvious, this will be a very unfavourable outcome for any taxpayer who has an unpaid ATO debt that is accumulating interest.
By way of background, the ATO charges taxpayers with GIC on overdue tax liabilities, and SIC when a taxpayer incorrectly self-assesses their tax liability. Based on the current annual rate for GIC of 11.38% and 7.38% for SIC, interest charges can grow significantly with interest being compounded daily. Taxpayers should be aware interest charges accrue from the date the underlying debt was due.
Notably, GIC accrues on outstanding tax liabilities that have been entered into a payment arrangement by the taxpayer. Taxpayers with ATO payment plans should take careful consideration to the proposed changes with it worth considering alternate debt solutions where cashflow does not allow full payment to be made by due dates. As mentioned above, within the current interest rate environment and the proposed disallowance of interest on ATO debt, the old adage for a number of taxpayers using the ATO as a short-term debt facility may be no longer viable.
Currently, both GIC and SIC are tax-deductible for all taxpayers within the financial year they incur the interest charge. The deductibility of interest charges allows for a reduction in the effective interest rate based on the taxpayer’s marginal tax rate.
The amount of collectable debt has been increasing each year with $50.2 billion outstanding as of 30 June 2023. By removing the interest charge deduction, the Government’s clear intent is to address this large and increasing outstanding debt to encourage all taxpayers to correctly self-assess tax liabilities and pay tax debts on time, as well as prevent taxpayers with large outstanding debts to use the ATO as a loan facility.
This measure has not been passed as law yet, however, it will be expected to come in to effect from 1 July 2025. Any interest charges that have been accrued but not incurred at this date will not be tax deductible. Additionally, taxpayers with payment plans surpassing 1 July 2025 will be denied a deduction on interest charges incurred after this date.
Remission of ATO Interest Charges
The ATO has the discretion to remit GIC and SIC in circumstances they deem fair and reasonable, including;
- The delay in the tax payment being due to unforeseen circumstances (for example: natural disasters, industrial action, the unforeseen collapse of a major debtor or the sudden ill health of key personnel) and the taxpayer took reasonable action to reduce the delay.
- The delay in payment being due to the taxpayer but the taxpayer took reasonable action to reduce the delay.
- Payment of the full amount of GIC and/or SIC would result in serious financial hardship for the taxpayer.
The ATO will continue to consider remission of GIC or SIC where appropriate. Further to this, with deductions being denied, any GIC or SIC remitted from 1 July 2025 will no longer need to be included as assessable income as per ATO guidance issued on their website.
If you would like further information or assistance, please
contact your local Moore Australia advisor.