Can the ATO keep my tax refund to pay a debt?

How offsetting works

When you lodge a return or activity statement that produces a credit, the ATO's system checks whether you owe anything anywhere else on your account. If you do, the credit goes there first. The ATO calls this offsetting, and it is not a collection tactic it chooses to use. The law requires it, subject to limited exceptions.

It works across tax types. A GST refund on your BAS can be used against an income tax debt. A PAYG instalment credit can be used against unpaid GST. If you are a business, refunds on one account can be applied to another account under the same ABN.

You will see the offset as a line on your statement of account, and a notice explaining that your refund was reduced. If the figure does not match what you expected, our guide to why a refund was used for an old debt walks through reading it.

Debts on hold and payment plans

Two situations catch people out.

• Debts on hold. A debt the ATO decided years ago was uneconomical to pursue still exists. It may not show in your account balance, and the ATO will not chase it, but any refund is still applied to it. This is how many people discover an old ATO debt. Debts put on hold before 2017 have been written off; later ones are being re-raised.
• Payment plans. The ATO's payment plan terms say any refund or credit will be used to reduce the debt and will not replace the required instalment. So a $3,000 refund shortens the plan but you still pay next month's amount on time.

The ATO's offsetting rules do give it room not to offset where an amount is not yet payable, where recovery has been formally deferred, or for director penalty amounts. Those are decided case by case, not automatically.

The hardship exception

The ATO has a limited discretion not to offset a refund where doing so would leave you in serious hardship: unable to cover food, accommodation, medical care or other basics for yourself and your dependants. It is a request, not a right, and you need to ask before the refund is processed, with evidence of income and essential costs. It applies to individuals and sole traders rather than companies, in the same territory as serious hardship release.

For most people the better use of energy is the debt itself. The ATO's collection tools reach money before anything else, and a refund is the easiest money there is. Our guide to what the ATO can reach puts refund offsetting at the very start of the escalation ladder, well before bank garnishees or court.

What to do next

1. Before lodging a return that will produce a refund, check your ATO account for any debt, including debts on hold that may not show in the balance.
2. If losing the refund would leave you unable to pay for essentials, contact the ATO about a hardship request before the return is processed.
3. If you are on a payment plan, budget for the next instalment regardless of the offset, because it does not count.

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