From 1 July 2025, taxpayers will no longer be able to claim a tax deduction for interest charges imposed by the Australian Taxation Office (ATO). This significant change, now enacted into law, alters a long-standing feature of the income tax landscape and may impact how taxpayers approach compliance and payment of tax liabilities.
Legislative Background
As part of the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO) released on 13 December 2023, the Federal Government announced its intention to remove the deductibility of ATO interest charges. This was legislated through the Taxation Laws Amendment (Tax Incentives and Integrity) Act 2025 (Cth), which amends the Income Tax Assessment Act 1997 (Cth).
The amendments remove the current provisions allowing deductions for the General Interest Charge (GIC) and the Shortfall Interest Charge (SIC), both of which have been deductible since their respective introductions—GIC from 1 July 1999 and SIC from 1 July 2004.
What Are ATO Interest Charges?
General Interest Charge (GIC)
GIC applies to unpaid tax liabilities across a range of taxes including income tax, GST, PAYG, and FBT. It is calculated daily and compounds over time, intended as a deterrent to late payment and to encourage timely compliance. As of Q4 2025, the GIC annual rate is 11.17%, with a daily rate of 0.03060274%.
Shortfall Interest Charge (SIC)
SIC is imposed when the ATO issues an amended assessment that increases a taxpayer’s liability due to an error or understatement in a previous self-assessment.
It applies from when the tax was initially due until the revised assessment is issued. Currently, the annual SIC rate is 7.17%.
Once the amended assessment is issued and the payment becomes overdue, GIC replaces SIC on the outstanding amount.
Key Change from 1 July 2025
From the start of the 2025–26 income year, GIC and SIC will no longer be tax deductible, regardless of whether the underlying liability relates to a prior income year. The repeal of paragraph 25-5(1)(c) and subsection 25-5(7), and insertion of subsection 26-5(1A), removes deductibility for any such charges incurred on or after 1 July 2025.
This also means that:
· Any GIC or SIC incurred from 1 July 2025 onward will not reduce a taxpayer’s taxable income.
· If ATO remits any GIC or SIC that was previously non-deductible, the remitted amount will not need to be included as assessable income.
· Conversely, deductible GIC or SIC incurred before 1 July 2025, if remitted later, must still be included in assessable income in the year of remission.
Implications for Taxpayers
The removal of deductions for GIC and SIC will increase the after-tax cost of late or underpaid tax liabilities, especially for high-income earners. For instance, under the current system, a taxpayer on the top marginal rate bears just over half the cost of GIC after tax. After 1 July 2025, the full cost of the interest becomes non-deductible, representing an effective 88% increase in cost for such individuals.
These changes are intended to strengthen incentives for timely and accurate self-assessment, while also removing what was seen as a form of government subsidy for taxpayers with unpaid liabilities.
Administrative Updates and Future Guidance
The ATO has announced that it will update relevant public rulings, including PS LA 2011/12 (remission of GIC) and PS LA 2006/8 (remission of SIC and GIC during shortfall periods), to reflect the legislative changes. However, no specific timeline for these updates has been provided.
What Remains Unchanged
· Interest charges incurred before 1 July 2025 remain deductible in the income years to which they relate.
· General deductibility rules under section 8-1 of the ITAA 1997 are unaffected. Interest expenses that are not ATO-imposed and are incurred in the ordinary course of earning assessable income or conducting a business remain deductible—provided they are not capital, private, or domestic in nature.
Conclusion
This legislative reform marks a significant shift in the tax treatment of interest penalties imposed by the ATO. Taxpayers should review their current compliance strategies and ensure they are prepared to meet payment deadlines and accurately self-assess to avoid the now fully non-deductible costs of ATO interest charges.
Need Help?
Proactive planning and rigorous attention to compliance will become even more important from 1 July 2025. Therefore, it is important to seek advice from professional tax accountants and tax lawyers like the team at The Quinn Group, who use their knowledge and expertise to ensure you meet your obligations and legally minimise your tax liability.
Call us on 1300 (QUINNS) or + 61 2 9223 9166, or submit an online enquiry today and schedule a meeting or teleconference.
