Interest and penalties on late payments are a regular feature of Australian business bookkeeping that bookkeepers often handle inconsistently. The amounts may be small compared to the underlying debt, but the coding matters — both for accurate financial reporting and because some of these charges are deductible while others are explicitly not.
This guide covers the three main categories: General Interest Charge (GIC) from the ATO, late payment fees from suppliers, and bank overdraft and credit facility interest. Each has a different deductibility treatment and a different place in the Chart of Accounts.
General Interest Charge (GIC) from the ATO
The General Interest Charge (GIC) is the ATO's standard interest rate applied to overdue tax debts. It accrues daily on any outstanding tax liability — including unpaid income tax, GST, PAYG withholding, and superannuation charge — from the day the amount was due.
The GIC rate is set quarterly by the ATO. As at the September 2026 quarter, the GIC rate is published on the ATO website. It compounds daily and can add up quickly on large outstanding debts.
Is GIC tax-deductible?
Yes — with an important exception.
GIC on overdue income tax, GST, PAYG withholding, and most other tax debts is tax-deductible under s.25-5 of the ITAA 1997. This was a deliberate policy decision to encourage businesses to pay tax debts rather than simply avoid them.
The important exception: penalties are not deductible. There is a distinction between GIC (interest — deductible) and penalty units or administrative penalties imposed by the ATO (not deductible). An ATO audit that results in a penalty for a false and misleading statement, for example, generates a non-deductible penalty charge. The GIC that accrues on the unpaid penalty is also not deductible (because it is GIC on a non-deductible amount).
How to code GIC
- Account: Interest Expense — ATO General Interest Charge (separate from bank interest and supplier fees)
- GST code: N-T (GIC is not subject to GST — it is a government-imposed charge, not a commercial transaction)
- Deductible: Yes (for GIC on deductible tax debts; no for GIC on penalties)
When a client pays the ATO and the bank statement shows a single debit that covers both tax debt and GIC, split the transaction:
- The tax debt portion (e.g., unpaid GST) codes to the GST liability account
- The GIC portion codes to Interest Expense — ATO GIC
If you cannot determine the split from the client, request the ATO account balance statement from the client or their tax agent.
Shortfall Interest Charge (SIC)
The Shortfall Interest Charge (SIC) is a related but separate charge applied when an amended assessment reveals a tax shortfall — i.e., the client's original return understated their liability. Unlike GIC (which is forward-looking from the due date), SIC applies from the original due date of the return to the date of the amended assessment.
The SIC rate is lower than GIC (currently the base interest rate plus a percentage — check the ATO website for current figures). Like GIC, SIC on income tax shortfalls is tax-deductible. SIC is coded the same way as GIC: N-T, separate account, deductible.
Supplier late payment fees
When a supplier charges interest or a fee for a late invoice payment, this is a commercial transaction — not a government-imposed charge. The treatment differs in two important ways.
GST treatment
Supplier late payment fees may attract GST depending on the supplier's characterisation of the charge:
- If the supplier issues a tax invoice for the late payment fee and includes GST, you must code it as a taxable supply (GST code, with ITC claimable if the business is registered for GST)
- If the supplier's terms describe it as a "liquidated damages" or compensation charge (not a fee for a service), it may be treated as not subject to GST
- Absent a tax invoice with GST, default to N-T and query the supplier if the amount is material
In practice, most supplier late fees in Australian SME transactions are small (commonly 2–3% per month on overdue balances) and are issued with a tax invoice including GST. Check the document.
Deductibility
Supplier late payment fees are generally tax-deductible as a cost of running the business — the payment was late because of a business cash flow issue, and the fee is a consequence of that business activity. There is no specific legislative exclusion for supplier penalty interest (unlike the ATO penalty exclusion discussed above).
- Account: Interest Expense — Supplier Late Fees (or Accounts Payable Penalties — keep it separate from bank interest)
- GST code: GST (if a valid tax invoice is provided with GST); N-T otherwise
- Deductible: Generally yes
Bank overdraft and credit facility interest
Bank overdraft interest and interest on business credit facilities are the most straightforward category — well-settled in law and common in practice.
Deductibility
Bank interest is deductible where the underlying borrowing is used for income-producing purposes (s.8-1 ITAA 1997). For a business overdraft used to fund working capital, full deductibility is the standard position. Where a borrowing is used partly for private purposes (e.g., the business owner uses the overdraft for personal expenses), the interest must be apportioned.
GST treatment
Bank interest charges are input-taxed financial supplies — the bank does not charge GST on interest, and the business does not claim an ITC on the interest expense. Code as N-T.
- Account: Interest Expense — Bank (separate from supplier fees and ATO GIC)
- GST code: N-T
- Deductible: Yes (for business-use borrowings)
Bank fees vs interest
Note that bank account-keeping fees, dishonour fees, and similar bank charges are also N-T (financial supply) and deductible. They are not interest — code them to a Bank Fees expense account, not to Interest Expense. The distinction matters for financial reporting (interest is disclosed separately in financial statements) and for tax (specific provisions relate to interest deductibility).
Why separate accounts matter
It is tempting to code all of these charges to a single "Interest and Bank Charges" account. Resist the temptation. The reasons for separation are practical:
Tax return preparation: The tax agent needs to identify non-deductible penalties. If all ATO charges are in one account — GIC, penalties, and tax payments all together — the tax agent cannot efficiently extract the non-deductible portion.
Cash flow visibility: The practice or the client's management team cannot identify chronic late-payment problems if supplier penalty fees are buried in bank charges.
BAS reconciliation: ATO GIC transactions reconcile against the ATO account ledger. If they are mixed with bank interest they become harder to trace.
Audit trail: In an ATO review, being able to produce a clean ledger showing "GIC — $1,847 — deductible" versus "ATO penalties — $2,100 — non-deductible" demonstrates competent bookkeeping and reduces scrutiny.
Suggested Chart of Accounts structure
| Account | Type | GST | Deductible |
|---|---|---|---|
| Interest — Bank overdraft and facilities | Expense | N-T | Yes |
| Interest — ATO General Interest Charge | Expense | N-T | Yes (if on deductible debt) |
| Interest — ATO Shortfall Interest Charge | Expense | N-T | Yes |
| Penalties — ATO (non-deductible) | Expense | N-T | No |
| Late payment fees — suppliers | Expense | GST or N-T | Yes |
| Bank fees and charges | Expense | N-T | Yes |
Keeping these lines distinct — and coding each bank transaction to the correct account from the start — is far easier than trying to untangle a single mixed account at year-end. With ReconLink's statement import (CSV, Excel or PDF, or the per-client email inbox) and coding rules, you can set up vendor-specific rules that route ATO GIC payments directly to the correct account, eliminating a common source of manual error.
This article was last reviewed on 17 November 2026. GIC and SIC rates are updated quarterly by the ATO — always confirm current rates at ato.gov.au/gic. Deductibility determinations for specific transactions should be confirmed with a registered tax agent.