ATO Offsetting - What Happens When Your Refund Pays Off Other Tax Debts?

If you're expecting a tax refund from the ATO, you might assume it will land in your bank account. But if you have outstanding tax debts or amounts owed to other government agencies, the ATO may automatically offset your refund to cover those liabilities. This process can sometimes catch businesses off guard, so it’s important to understand how it works.

How ATO Offsetting Works

Many businesses have multiple tax accounts, such as GST, PAYG withholding, and income tax. If the ATO owes you money, they will first check whether you have any outstanding debts. Instead of issuing a refund, they may apply your credit to reduce or clear other liabilities.

Offsetting can occur in several scenarios, including:

• Outstanding ATO tax debts – For example, if you are due for a BAS refund but have an unpaid income tax debt, the refund may be used to reduce the debt.

• Previously held debts – If you had a tax debt placed on hold, the ATO may use any new credits to reduce it.

• Debts with other government agencies – The ATO may offset tax refunds against debts owed to agencies like Services Australia (e.g., Centrelink).

Even if a debt is not yet payable, the ATO can still apply credits against it if the amount is legally considered ‘due.’

How This Works in Practice

Let’s say your business lodges its BAS and is due for a $800 GST refund. However, you also have a $2,000 income tax debt that isn’t payable for another month. Instead of receiving the refund, the ATO offsets the $800 against the income tax debt—so you only owe the remaining $1,200 when the due date arrives.

For some businesses, this is helpful, as it automatically reduces their tax bill. But for others, particularly those relying on a refund for cash flow, it can create unexpected financial strain.

Can You Prevent an Offset?

In some cases, yes. If offsetting your refund would cause financial hardship, you (or your registered bookkeeper) can lodge a request with the ATO to have the funds released instead. The ATO also has discretion to reverse an offset after it has occurred, depending on the circumstances.

What You Can Do Before Lodging Your BAS

To avoid surprises, it’s always a good idea to check whether you have any outstanding debts before lodging your BAS.

If you're unsure how offsetting might impact your refund, let’s chat before you lodge. We can help you plan and make sure there are no unexpected deductions from your refund.