Taxpayers preparing their 2025–26 returns face a change in the treatment of interest charged by the Australian Taxation Office (ATO). General interest charge (GIC) and shortfall interest charge (SIC) incurred on or after 1 July 2025 are no longer deductible under the rules applying to income years starting on or after that date.

The change removes the tax deduction that previously reduced the after-tax cost of these charges. It also affects interest associated with older tax debts: the year in which the underlying debt arose does not, by itself, preserve deductibility.

What the deductibility change covers

The Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025 removed deductions for the relevant ATO interest charges.

For taxpayers using the standard financial year, GIC and SIC incurred from 1 July 2025 cannot be claimed in their 2025–26 returns. Interest incurred before that date retains its treatment under the earlier rules.

This distinction concerns when the interest liability is incurred, rather than simply when the taxpayer pays it. Paying an older interest charge after the change does not automatically mean it becomes non-deductible.

Entities using substituted accounting periods have different application timing. Their treatment must be determined by reference to the relevant accounting period rather than assuming the standard financial-year transition applies identically.

GIC and SIC serve different purposes

GIC applies to unpaid tax liabilities and is calculated daily on a compounding basis. Outstanding interest can therefore contribute to further interest charges.

SIC can apply when an amended assessment increases a taxpayer’s liability. It broadly covers the shortfall period associated with the earlier under-assessment and is distinct from interest arising from late payment of the amended liability.

Both charges fall within the deductibility change, even though they arise in different circumstances.

For October–December 2026, the annual GIC rate is 11.51%, with a published daily rate of 0.03153425%. The annual rate for July–September 2026 was 11.43%.

These are quarterly rates. Applying the October–December rate to a full year is an illustrative assumption, rather than a prediction of the actual interest charged over that year.

A hypothetical example of the after-tax cost

Consider an eligible company taxed at an assumed 25% rate, carrying a $40,000 tax debt for 365 days without repayments.

If the annual GIC rate remained at 11.51% throughout that period and compounded daily, interest would total approximately $4,879. This calculation assumes no additional debts, payments or remission.

If that same interest had been fully deductible and the company could obtain an immediate tax benefit at 25%, the deduction would have reduced tax by approximately $1,220. The after-tax interest cost would have been about $3,659.

Without the deduction, the interest cost remains approximately $4,879. Under these assumptions, removing deductibility increases the after-tax cost by about one-third.

This comparison illustrates the effect of the deduction alone. Actual charges depend on quarterly rates, payment timing and the taxpayer’s circumstances; the value of a hypothetical deduction also depends on whether it could be used.

Payment plans do not automatically stop interest

An ATO payment plan allows a debt to be repaid through instalments, but GIC generally continues to accrue while an unpaid balance remains.

The repayment arrangement and the interest treatment are separate matters. Entering a plan does not, by itself, waive existing interest or prevent further charges.

Consequently, repayments reduce the debt while continuing interest can increase it. The balance remaining after each payment determines the ongoing exposure to charges.

Remission remains available in qualifying circumstances

The ATO can remit some or all interest where the relevant circumstances justify it. For GIC, circumstances that caused a payment delay, including factors outside the taxpayer’s control, can be relevant.

A request needs to explain the circumstances, relevant dates and steps taken to address the delay. Remission is discretionary and should not be treated as an automatic entitlement arising from financial difficulty or a payment plan.

Where non-deductible GIC or SIC incurred under the new rules is subsequently remitted, the remitted amount does not need to be included as assessable income. This differs from the treatment that can apply to previously deductible charges.