CPA calls for alternative strategies for reducing ATO tax debt

CPA Australian has urged the government to reconsider proposed legislation to deny deductions for the general interest charge (GIC).

The professional body said applying more targeted measures when addressing high-debt accounts would be a more equitable approach that would mitigate the risk of financial hardship and encourage voluntary compliance across the tax system.

In a submission to the Senate Economics Legislation Committee, CPA Australia urge the government to scrap the proposed GIC measures to contained in Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024.

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

CPA said it was also concerned about the measure due to the long delays in service delivery by the ATO and uncertain and inconsistent outcomes with GIC remission requests.

The operational challenges the ATO is experiencing “add fuel to the argument” that the proposal to deny deductions for GIC/SIC unfairly penalised taxpayers who were facing delays in accessing Tax Office support and assistance, CPA said.

CPA Australia tax lead Jenny Wong said introducing a blanket policy instead of a targeted measure to address accounts with high levels of tax debt was indiscriminate and punitive.

“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,” 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.”

CPA Australia said the bill would have a “devastating” impact on small businesses that were already struggling to manage cash flow and access affordable finance options.

This was attributed to the fact that the proposal to deny deductions for GIC and SIC would impact generally compliant individuals and businesses, though collectable debt issues were concentrated within a small segment of the taxpayer base.

This would mean the denial of the deductions would disproportionally harm smaller taxpayers who relied on the deductions to help manage cash flow while failing to fix structural issues associated with large debt holders.

Wong noted the government and ATO’s past sentiments to delay tax payments during the COVID-19 pandemic may not have been taken on by SME owners if they knew GIC would later become non-deductible.

The proposed non-deductibility of GIC would effectively raise the penalty rate by 25 per cent and up to 47 per cent for sole traders depending on the marginal tax rate.

“This significant increase could put additional financial pressure on businesses already struggling, and it may force directors to question the viability of their operations,” Wong said.

“By making these interest costs on tax debts non-deductible, the proposal risks accelerating the accumulation of tax liabilities of small businesses to unsustainable levels, potentially threatening the viability of many small businesses.”

In September last year, another submission containing amendments to the exposure draft was made by CPA, which Wong said was ignored.

“It’s very disappointing that our submission in September containing amendments to the Exposure Draft to address these critical issues has simply been ignored.”

“All submissions were effectively ignored by Treasury and the government has decided to go with this indiscriminative policy of denying GIC/SIC deductions for everyone, rather than targeting those with high tax debt accounts.”

“In the interest of transparency and fairness to taxpayers, repayments should be encouraged through a higher GIC/SIC margin rather than hidden costs that are realised through tax assessments.”