The Australian Taxation Office (ATO) has slashed its tax penalty waiver approval from 90 to 70 per cent as it returns to “normal operations” following the pandemic. The tax office receives tens of thousands of requests each year to cancel or reduce tax penalties.

The ATO applies a general interest charge (GIC) if tax remains unpaid after the due date, which is currently 10.78 per cent annually, compounding daily, and means interest can become larger than the original debt. Taxpayers can apply for a remission of interest charges, and the ATO will look at things like what caused the delay and if it was outside of your control.

An ATO spokesperson said the agency had launched a review into its process for granting full or partial penalty waivers to ensure “consistency in decision making”.

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“Our approach to GIC remissions varied in line with our effort to support businesses through COVID, and as a result, on average during this time, over 90 per cent of remission requests resulted in either [a] full or partial remission of GIC that had accrued on tax debts,” the spokesperson told The Australian Financial Review.

“Over the last two years we have communicated to the market that we were returning to normal operations and accordingly, the rate of remission has now moved to around 70 per cent.”

The Tax Ombudsman will also be scrutinising the ATO’s approach to tax debt interest over this coming financial year to make sure decisions are “fair and reasonable and are made consistently for taxpayers in like circumstances”.

Tax debt and the ATO’s treatment of taxpayers with tax debt are a major source of complaints to the Ombudsman.

“The general interest charge is important to deter non-compliance and late payment, but it should not be used to penalise taxpayers with legitimate reasons for payment delays,” the Ombudsman Ruth Owen said.

“Our review will build on the work the ATO is already doing to find ways we can make this aspect of tax administration fairer and more transparent for all taxpayers.”

Interest on ATO debts no longer tax deductible

Interest charged by the ATO for late payments or underpayments is no longer tax deductible from July 1, 2025. This means it will cost more to carry a tax debt.

The change was first announced in December 2023 by the government as part of the Mid-Year Economic and Fiscal Outlook. It’s designed to ensure taxpayers who do the right thing and pay their taxes in full and on time aren’t disadvantaged.