Treasury tax deduction denial counter-productive

The Federal Treasury has been warned that its approach to denying deductions for the general interest charge and the shortfall interest charge may discourage openness on the part of taxpayers.

The approach of denying the ability to claim a deduction will only be seen as a penalty being imposed for trying to do the right thing, according to the SMSF Association.

It said that while Treasury’s explanatory materials inferred that the change in tax deductibility would encourage greater compliance by taxpayers under the self-assessment system “we are concerned that this measure may in fact act as a deterrent for taxpayers to amend an assessment where they discover an error or an omission in a previous year’s return”.

In a submission filed with the Personal Deductions and Fringe Benefits Unit within Treasury, the SMSF Association said it did not support denying deductions for the general interest charge and shortfall interest charge.

“We support the general obligation for all taxpayers to correctly self-assess their income tax liability and pay their tax on time. However, we are concerned that denying deductions for the general interest charge (GIC) and shortfall interest charge (SIC) will have significant and negative consequences on thousands of taxpayers already straining under cost-of-living pressures, including many small businesses struggling with cash flow and to meet their obligations,” the submission said.

“Many of these small businesses are still recovering from the financial impact of the COVID-19 pandemic, where notably during that time the Government and the ATO supported tax repayments being delayed or flexible payment arrangements,” it said.

“If these businesses understood it was the Government’s intention to remove the deduction in the near future, many of them may have made different financial decisions at that time.”

“Taxpayers who proactively and genuinely engage with the Commissioner to implement a formal payment arrangement are subject to general interest charges on their outstanding balances. This is despite a formal arrangement between the Commissioner and the taxpayer, and the taxpayer’s compliance with that arrangement. To deny the tax deductibility of these interest charges, given the circumstances is particularly harsh,” it said.

The SMSF Association said that apart from being seen to be imposing a penalty on taxpayers trying to do the right thing, the move would not encourage early and open conversations with the ATO, “rather, it will likely discourage it”.