One of the most common issues business owners face is tax debt. With the right strategies and with the help of a small business accountant, you can manage tax debt effectively—and in some cases, even claim deductions on the interest charged.
Understanding Tax Debt for Small Businesses
Tax debt arises when a business cannot pay its tax liabilities on time. This can happen for many reasons, including:
- Cashflow shortfalls – seasonal revenue dips or slow-paying customers.
- Over spending – using tax money to cover other expenses and hoping to catch up later.
The ATO offers options such as: Payment Plans – to spread the tax debt over time (your tax accountant Melbourne can help you enter into a payment plan with the ATO)
ATO Interest Charges on Tax Debt
When a tax liability is unpaid, the ATO charges interest called the General Interest Charge (GIC). The GIC rate is updated quarterly and is typically higher than commercial borrowing rates (around 10–12% p.a. in recent years).
Key points about GIC:
- It compounds daily until the debt is paid.
- It applies to most unpaid tax liabilities.
- The ATO can remit (reduce) GIC. As mentioned earlier, best to contact your small business accountant to apply for a remission on your behalf.
When Is Interest on Tax Debt Deductible?
The critical question for business owners is whether GIC or other interest costs can be claimed as a tax deduction.
- General Interest Charge (GIC): Not deductible
- GIC is no longer tax deductible. This is a recent change by the government – designed to encourage taxpayers to pay off their ATO debts before any other debts.
- Shortfall Interest Charge (SIC): Not deductible
- SIC is imposed when the ATO reassesses your tax return and finds you should have paid more tax earlier. This is also not tax deductible.
- Penalties: Not Deductible
- Administrative penalties, such as those for late lodgment or false statements, are not deductible.
As a business owner, one can borrow money from the bank to pay off an ATO debt. The interest paid on this debt can be deducted for tax purposes.. Suppose, for example, that a business owner has an ATO debt of $10,000. And suppose the ATO charge GIC of 10%. After 12 months and after the ATO’s GIC interest is added, this debt will balloon to $11,000. In this situation, the business owner can borrow $11,000 from the bank and use this money to pay off the ATO debt. The interest payable on this loan to the bank will be tax deductible. In summary, Interest payable on the bank loan will be tax-deductible, provided the loan proceeds are used to repay a debt owed to the ATO. However, interest charged by the ATO itself is not deductible for tax purposes.
Managing Tax Debt Proactively
If you’re facing tax debt, here are some steps to take:
- Stay on top of lodgments – even if you can’t pay, lodging on time avoids additional penalties for late lodgement.
- Communicate with the ATO – payment plans are usually approved if you and your tax accountant Melbourne are proactive.
- Seek remission of interest with the help of your small business accountant.
- Consider refinancing – borrowing from a bank to pay off the ATO is likely to be a viable strategy.
- Work with your small business accountant – a tax adviser can negotiate with the ATO and ensure you minimise any interest charged by the ATO.
If you have any questions, please do not hesitate to contact your friendly Nobel Thomas team.
