As the new financial year approaches, Australians are being urged to get their tax affairs in order, with the Australian Taxation Office (ATO) tightening the reins on overdue tax debts.
Ignoring your tax debt could soon cost you even more. The ATO is raising penalties on overdue taxes, adding extra financial strain on those who don’t settle their obligations in time. As interest and fees climb, taxpayers are urged to act before their debts spiral out of control.
From 1 July, those who fall behind on their tax payments will face steeper consequences, as the interest charged on overdue tax debts will no longer be tax-deductible. This legislative change, which recently passed through parliament, is set to significantly impact individuals and small businesses across the nation.
The move to strip tax deductibility from the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) is expected to bolster tax revenue by a hefty $500 million in the fiscal years 2026 and 2027. But what does this mean for the average taxpayer, and why is the ATO taking such a firm stance?
Hripsime Demirdjian, an accounting firm founder, explained to Yahoo Finance that the ATO is currently grappling with over $50 billion in collectable tax debt. The decision to make the interest on overdue tax debts non-deductible is reportedly a strategic effort to prompt timely payment and, consequently, increase the cost of carrying debt.
The GIC is applied when tax debts are not settled by the due date, including instances where tax returns are submitted late. Meanwhile, the SIC comes into play when an incorrect self-assessment results in underpaid tax.
Both charges compounded daily and were deductible for tax purposes. The current GIC rate stands at 11.17 per cent per annum, with the SIC slightly lower at 7.17 per cent per annum.
This change was first announced in December 2023 during the Mid-Year Economic and Fiscal Outlook (MYEFO), with the government stating that the removal of these deductions would promote tax compliance and fairness among taxpayers.
The rationale is that by eliminating the tax deductibility of these charges, there will be a stronger incentive for all entities to accurately assess their tax liabilities and pay them promptly, levelling the playing field for those who already comply.
However, not everyone is on board with this new policy. The Council of Small Business Organisations Australia (COSBOA) has voiced its concerns, emphasising that the majority of small businesses strive to meet their tax obligations on time and in full.
COSBOA CEO Luke Achterstraat suggests that targeted measures aimed at high-debt accounts would be a more suitable and fair approach to foster voluntary compliance across the tax system.
CPA Australia has also expressed opposition, highlighting the potentially ‘devastating impact’ on small businesses that are already navigating the challenges of high interest rates and inflation.
According to CPA Australia tax lead Jenny Wong, ‘for tax-paying small companies, the non-deductibility of GIC effectively raises the penalty rate by 25 per cent. For sole traders, the increase could be up to 47 per cent, depending on their marginal tax rate.’
As you move closer to the implementation date, it’s crucial to understand the implications of these changes. For those who may be struggling with tax debts, now is the time to seek advice and explore payment plans or other options to avoid the increased costs that will come into effect from 1 July.
At YourLifeChoices, we understand that managing finances can be complex, especially when it comes to tax matters. We encourage our readers to stay informed and proactive in their tax affairs. If you’re concerned about how these changes might affect you or your business, consider reaching out to a tax professional for guidance.
We’d love to hear from you—have you had experiences with tax debt, or do you have concerns about the upcoming changes? Share your thoughts and stories with the community in the comments below.
Also read: ATO issues warning as millions face price hike—what you need to know
