Taxpayers will be restricted from claiming deductions for general interest charge (GIC) and shortfall interest charge (SIC) incurred on or after 1 July 2025, after Parliament passed amendments on Wednesday (26 March).

Under the amendments, the Commissioner will still have the discretion to remit interest charges where it is fair and reasonable to do so, taking into consideration the circumstances which led to the delayed payment of tax liabilities or the tax shortfall.

Labor has previously said the changes will enhance incentives for all entities “to correctly self-assess their tax liabilities and pay on time, and level the playing field for individuals and businesses who already do so”.

The changes to GIC and SIC deductions have raised major concerns among accounting bodies and business advocacy groups, who warn the removal of the deductions could have significant consequences for businesses and the wider economy.

"Increased financial pressure may force businesses to divert resources from critical operations such as payroll or purchasing inventory, putting their long-term viability at risk," The Tax Institute said during consultation on the measure.

CPA Australia said denying GIC and SIC deductions was an excessive measure given the ATO’s firm approach to debt recovery efforts.

“With interest rates as high as they are, this will disproportionately affect businesses with cash issues, particularly sole traders on the highest marginal tax rate,” CPA Australia tax lead Jenny Wong said.

“You have to question if this really is about repaying outstanding tax debt, or just a penalty on taxpayers struggling to do the right thing and meet their obligations. The impact on existing tax debt is very concerning.”

The Council of Small Business Organisations Australia (COSBOA) has also previously slammed the changes, stating that the move was a “punitive and radical departure from current practice”.

“The overwhelming majority of small businesses are doing the right thing and seek to pay their tax on time and pay it correctly," said COSBOA chief executive Luke Achterstraat said.

“Targeted measures to deal with high-debt accounts would be more appropriate and equitable to encourage voluntary compliance across the tax system.”

Chartered Accountants ANZ previously warned that the denial of GIC and SIC deductions would cause the cost of tax debt to soar in the 2025-26 income year.

CA ANZ senior tax adviser Susan Franks said that many clients will be looking to their accountant for help refinancing their business ahead of the changes.

Franks said the change is likely to see many small businesses looking to pivot their financing to traditional institutions whose interest charges will be deductible and therefore potentially cheaper, she explained.

She warned that not all businesses would be able to find alternative tax-deductible finance.

“Many of the tax debts that the ATO will be left with will be for businesses whose viability is questionable,” she said.

This policy may therefore result in the ATO holding a larger proportion of tax debts that may not be recoverable, she warned.