As tax advisors and accountants, staying ahead of legislative changes is essential for guiding clients with accuracy and compliance. One of the most important recent changes is that the Australian Taxation Office (ATO) will soon deny income tax deductions for certain interest charges.
Under the Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2025, from 1 July 2025, deductions for the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC) will no longer be allowed.
This reform aims to:
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Encourage timely self-assessment and payment of tax obligations
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Remove advantages for late or non-compliant taxpayers
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Create a level playing field for compliant businesses and individuals
What Are ATO Interest Charges?
General Interest Charge (GIC)
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Applied when tax liabilities remain unpaid
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Compensates the ATO for the time value of money
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Calculated daily by adding 7 percentage points to the base interest rate (monthly average yield on 90-day bank-accepted bills), compounded daily
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Applies to unpaid tax liabilities such as income tax and running balance account (RBA) deficits (e.g., BAS accounts)
Shortfall Interest Charge (SIC)
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Applied when a tax shortfall is identified in an amended assessment (for income years 2004–05 and onwards)
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Neutralizes any financial advantage gained from underpaying tax
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Calculated by adding 3 percentage points to the base rate, compounded daily
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Starts accruing from the day the amended assessment notice is issued
Who Will Be Affected by ATO Interest Deductions 2025??
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All taxpayers will be impacted, regardless of entity type
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Applies to income years starting on or after 1 July 2025
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For those with substituted accounting periods (SAPs), deductions are denied for SAPs beginning after this date
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Even liabilities not requiring assessments, such as the family trust distribution tax, will fall under this rule
Example: A company with a SAP ending 31 December 2025 can still claim deductions for that year, but will be denied from 1 January 2026 onwards
How Are GIC and SIC Calculated?
GIC
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Starts after a notice of assessment is served (e.g., 21 days after an amended assessment)
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For RBA deficits, applies daily while the account remains in deficit
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May be backdated for late lodgments
SIC
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Calculated for the past period covered by the amended assessment
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However, it only starts accruing from the date the amended assessment notice is served
Reporting and Compliance Changes
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For Tax Time 2025 and prior, deductible interest will still appear as pre-fill data in myTax
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From Tax Time 2026, ATO systems and taxpayer guidance will reflect the new non-deductibility rules
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Taxpayers must continue verifying pre-fill data with their own records
Exceptions and Remissions
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Remissions Policy remains unchanged:
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GIC Remissions: No objection rights under Part IVC of the Taxation Administration Act 1953
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SIC Remissions: Objections are possible if more than 20% of the shortfall remains unremitted
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Assessability of Remissions
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If the original charge was deductible, remitted amounts are assessable income
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If the original charge was non-deductible (post-1 July 2025), remitted amounts will not be assessable
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ATO Delays in Audits
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These do not change the non-deductibility rules
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However, they may be considered when determining SIC remissions
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Key Takeaway for Tax Professionals
From 1 July 2025, ATO interest charges (GIC and SIC) will no longer be tax-deductible. This change underscores the importance of:
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Advising clients to pay their tax liabilities on time
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Monitoring interest accruals closely
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Planning ahead for the loss of deductions in financial reporting and tax strategies
Staying informed and updating compliance frameworks now will help both advisors and clients transition smoothly into the new ATO deduction landscape.
Pro Tip: Start reviewing client portfolios with outstanding or recurring ATO interest charges today. This proactive approach ensures your clients won’t face unexpected tax impacts in the 2025–26 income year.
Need help reviewing your clients’ tax positions before July 2025? Reach out to our advisory team for tailored compliance strategies.
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Credits
Soundera Pandian Selvaraj
One Business Services Team