The ATO charges the general interest charge (the GIC) on most unpaid tax debts.
There is legislation that sets out how to calculate the rate of the general interest rate. You can read more about that here.
The rate determined under the law is an annual rate. However, the general interest charge imposed by the ATO is calculated on a daily compounding basis.
The daily rate is worked out by dividing the annual rate for a particular quarter by the number of days in the year. The table below shows how this has worked out in recent quarters.
|Quarter||Annual rate||Daily rate|
|July – September 2020||7.10%||0.01939891%|
|April – June 2020||7.89%||0.02155738%|
|January – March 2020||7.91%||0.02161202%|
|October – December 2019||7.98%||0.02186301%|
|July – September 2019||8.54%||0.02339726%|
How compounding interest works
The compounding of the interest is important, because it means you are paying interest on interest. It is perhaps best demonstrated with an example.
Let’s take a general interest rate of 10%, applied to a debt of $20,000 over 1 year. No payments are made in that year. By year end, the $20,000 debt is now $22,103.12. This means the total interest charge is $2,103.12. Each time more interest is added, it is calculated on the base debt and the accumulated interest.
If the above scenario continues for 5 years, then the $20,000 debt ends up being $32,972.17. Of this, $12,972.17 is the general interest charge.
As you can see, an unpaid tax debt can get out of control the longer it is left unaddressed.
Reducing the effects of the compounding GIC
There are very few ways to reduce the effect of the daily compounding of the general interest charge.
The obvious way is to pay the debt as quickly as possible. The lower the debt, the lower the interest.
You may be able to reduce your overall costs by obtaining a loan from a bank that charges a lower interest rate, and using that money to pay the ATO.
About Hartigan Law
I am a specialist tax disputes lawyer with over a decade of experience in dealing with the ATO.
I work with clients all over Australia. I can do this because the tax issues I deal with are Federal – the tax law is the same no matter where in Australia you live.