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Whilst it is good that that the ATO is communicating the law change effective from 1 July 2025 regarding non deductibility for GIC (and SIC), it falls short of what is required.
GIC non-deductibility – more guidance required for practitioners to navigate impacts
24 June 2025
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8 minute read
The change impacts all taxpayers large or small and therefore has wide ramifications as GIC is currently deductible for all entities until 1 July 2025.
It is a relatively simple law change but that hides some of the nuances associated with interest deductibility and the general deduction provisions under the second limb of S8(1) which will now play a bigger role in determining deductibility after 1 July 2025.
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The general deductibility provisions under S8(1) however, will continue to allow a deduction for some taxpayers for interest on loans connected with running a business if alternative financing is obtained to pay down tax debts. Taxpayers not conducting a business will find the non-deductibility of GIC will dramatically increase the cost of funding unpaid tax debts. For example, taxpayers on the highest marginal tax rate will see a doubling of the effective cost of using the ATO as a source of funding.
The IPA was not supportive of this law change for a number of reasons, primarily due to the disproportionate impact this will have on the small business sector. Larger businesses who are less likely to have tax debts will find it much easier to obtain alternative finance.
Many small business owners may find it difficult to secure or time consuming to find a replacement for using the ATO as an unsecured financier at rates more favourable than the current GIC rate (11.17% for the June quarter). The uplift factor applied to GIC rate already compensates the Government for taxpayers who are late in paying their undisputed tax debts. The IPA is supportive of more affirmative ATO action on debt collection on a case-by-case basis and applying more pressure on businesses with the capacity to pay is not in dispute.
Some taxpayers and practitioners will be surprised that the law change does not provide any grandfathering provisions. Any assessments of GIC that happen — or GIC incurred daily after the initial assessment — after 1 July 2025 will be non-deductible regardless of the lodgement period it relates to or when the underlying debt was raised. This will be particularly unfair for taxpayers who are in dispute with the ATO and lose their case or their objection request is denied particularly after a lengthy delay.
Some clarification of the following points is needed from the ATO to provide more guidance to practitioners to help them navigate the challenges of this law change.
· Highlight that the assessment date determines deductibility as this effectively determines when GIC is incurred for tax purposes.
· Highlight that it is only after the issue date of the assessment that GIC is considered to be incurred on a daily basis.
· How the law change impacts liabilities that do not require an assessment such as Franking Deficit Tax (FDT) or Family Trust Distribution Tax (FTDT). Clarification is needed to understand how the new rules apply practically to liabilities where GIC accrues independently of an assessment process and whether they do not apply to such non-assessment liabilities.
· Clarification for taxpayers who enter into a payment arrangement entered into on or after 1 July 2025 in respect of a liability assessed before that date.
· Taxpayers who are in dispute with the ATO and have their objection denied or lose their case will need to consider implications of the denial of deductibility for GIC. Delays in the objection process can significantly add to the cost of pursuing taxpayer rights.
· As GIC accrues daily, in some cases there will be some apportionment required even if the assessment happens prior to 1 July 2025 if the debt remains unpaid after the new rules take effect.
· Whether the ATO system (Online Services For Tax Agents) will separate deductible versus non-deductible components.
· Some taxpayers conducting a business can effectively obtain alternative sources of finance and the interest incurred on the loan may continue to be eligible for a tax deduction (depending on the purpose and nature of the loan). However, s. 25-5(2) ITAA 1997 prohibits a deduction for interest on money borrowed for certain tax debts. Clarification is needed as to the practical application of s. 8-1 and s. 25-5 in relation to deductions for interest on such loans, including the application to different types of tax liabilities — income tax, PAYG withholding, FBT and GST debts.
· GIC remission will be more difficult to obtain as compared to previously as the ATO has tighten its approach to granting remissions. The ATO is currently reviewing GIC remissions however taxpayers need to understand that remissions may not be granted going forward.
· Whether the ATO will be more likely remit GIC for lengthy delays in the objection process where taxpayers have provided a reasonably arguable position.
Guidance addressing these points would be helpful for practitioners and taxpayers alike to assist navigating the new legislative framework from 1 July 2025.
ATO fact sheet (QC 73746): https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/deny-deductions-for-ato-interest-charges
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