It noted the penalties are not insignificant, and quite appropriately, are not tax deductible.

“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 to meet their obligations,” it said.

It continued that many of these small businesses were 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.

“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,” it said.

“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.”

The SMSFA also said the 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 act as a deterrent for taxpayers to amend an assessment where they discover an error or an omission in a previous year’s return.”

“While we understand the Commissioner will still have the discretion to remit the interest charges where it is fair and reasonable to do so, the circumstances where this will be considered are very limited. It is therefore unlikely to be an option for many impacted taxpayers.”

Furthermore, the association said it could drive an increase in demand for Commissioner discretion, which may negatively impact ATO resources, leading to poor outcomes and taxpayer experiences.

“We are concerned by the reference to the use of ‘free loans’ by taxpayers in the explanatory materials. The majority of taxpayers strive to do the right thing and ensure they are complying with their obligations.”

“However, tax laws are complex and nuanced, with the application of the law often dependent on the taxpayer’s individual circumstances. Denying the ability to claim a deduction will only be seen as a penalty being imposed for trying to do the right thing.”

It said this would likely discourage early and open conversations with the ATO where the taxpayer identified an issue.

“Taxpayers should be encouraged to continue to actively engage with the Commissioner, with the current policy settings retained to support the integrity of the tax system. It is our recommendation that these proposed amendments do not proceed,” it said.