The Government increases the burden on small business
The Government has removed the tax deduction for ATO General Interest Charges, from 1 July 2025.
The Australian Taxation Office (ATO) has recently announced a significant change that will significantly impact small businesses from July 1, 2025. From this date, General Interest Charges (GIC) will no longer be tax deductible.
This change has potential to significantly impact small business given how difficult it can be for small business to access finance. This also makes one wonder if the Government really wants to support small business, particularly given the current economic conditions and the substantial increase in small business insolvencies.
What Are General Interest Charges?
General Interest Charges are fees imposed by the ATO on overdue tax debts. These charges are calculated based on the balance of the unpaid debt and continue to accrue until the debt is paid in full. Historically, GIC has been tax deductible, allowing businesses to offset these costs against their taxable income, thereby reducing their overall tax liability.
Change in Deductibility
Effective from July 1, 2025, GIC will no longer be tax deductible. This means that businesses can no longer claim these interest charges as deductions, resulting in higher taxable income and, consequently, higher tax payments.
Impact on Small Businesses
The removal of the deductibility of GIC will have several ramifications for small businesses:
Increased Tax Burden
Small businesses often operate with tight cash flow margins and rely heavily on every possible deduction to manage their financial obligations. The inability to deduct GIC will result in an increased tax burden. This change may necessitate additional budgeting and financial planning to accommodate the higher tax expenses.
Cash Flow Management
The increase in tax payments due to the non-deductibility of GIC will affect the cash flow of small businesses. Companies may need to reassess their financial strategies, including their approach to managing overdue tax debts and payment arrangements with the ATO.
Potential for Higher Debt Levels
With GIC no longer being tax deductible, small businesses might find it more challenging to pay off their tax debts promptly. This could lead to higher levels of accumulated debt, as the interest charges will continue to accrue without the benefit of tax deductions.
Effect on Payment Arrangements with the ATO
Many small businesses enter into payment arrangements with the ATO to manage their tax debts. These arrangements allow the debt to be paid overtime, providing cashflow relief for businesses. The changes to the deductibility of GIC will now make these arrangements much more costly going forward.
Renegotiation of Terms
Small businesses may need to renegotiate their payment terms with the ATO to manage the impact of the increased costs. This could involve extending the repayment period or altering the repayment amounts to align with the new financial landscape.
Increased Cost of Payment Arrangements
The cost of maintaining a payment arrangement with the ATO will increase, as the interest charges will no longer be offset by tax deductions. Businesses may need to look for alternative forms of funding. Or look to use the ATO interest free small business repayment arrangement.
Strain on Financial Stability
The additional financial strain caused by the non-deductibility of GIC may affect the overall financial stability of small businesses. Firms must ensure they have robust financial management practices in place to navigate these changes effectively.
Strategic Planning for Small Businesses
To mitigate the impact of these changes, small businesses should consider several strategic planning measures:
• Review and Adjust Financial Plans: Conduct a thorough review of existing financial plans and adjust them to incorporate the increased tax payments due to non-deductible GIC.
• Enhance Cash Flow Management: Develop strategies to improve cash flow management, ensuring that businesses can meet their tax obligations without the need of entering into an ATO payment arrangements.
• Look at alternative sources of funding, overdraft facilities, business lines of credit and short-term business loans.
• Negotiate Payment Terms with the ATO, the ATO have interest free payment terms for debts of less than $50,000, if your business is able to meet certain eligibility criteria.
Conclusion
The ATO's announcement that General Interest Charges will no longer be tax deductible from July 1, 2025, represents a significant shift in the financial landscape for small businesses. These changes will increase the tax burden, affect cash flow management, and potentially lead to higher debt levels. Given the substantial increase in small business insolvency over the past 12 months, you might ask yourself if the Government really wants small business to succeed.
In the first eight months of the 2024–25 financial there has been a significant increase in the number of companies entering external administration. Specifically, 9,429 companies faced external administration, a significant rise of 42.6% from the 6,611 companies recorded during the same period in 2023–24.
In particularly there has been an exponential growth in small business restructuring appointments. These appointments have surged by over 200%, reaching 1,874 for the first eight months of the 2024–25 financial year, compared to just 666 appointments during the same period in 2023–24. Small business restructuring now accounts for 20% of all companies entering external administration.
