Compliance
Compliance Essentials for Small Businesses with New Deduction & Withholding Rules
Starting 1 July 2025, Australian small businesses need to adapt to changes in deductions for ATO interest charges, BAS refund retention, and mandatory notification periods—this guide helps you stay compliant and avoid penalties.
By NomadicTax Research Team • 5-8 min read • November 20, 2025
## Overview of Legislative Changes
A legislative package effective **1 July 2025** introduces key changes for businesses: you can no longer claim **income tax deductions** for **ATO interest charges**; the **notification period for BAS refunds** is extended from 14 to 30 days; and stronger rules around **refund offsets against debts on hold** empower the ATO to withhold credits or refunds. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/changes-to-australia-s-offshore-banking-unit-regime?utm_source=openai)) These are part of broader reforms aimed at improving tax system fairness and reducing avoidance. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/strengthen-penalty-and-shortfall-interest-charge-provisions?utm_source=openai))
## Why These Changes Matter
- **Cash flow implications**: Loss of deductibility for ATO interest could increase taxable income, leading to unexpected tax burdens for small businesses.
- **Delayed access to refunds**: Refund retention extension means any refund the business expects might take more than a month to arrive under certain conditions.
- **Stricter offsetting**: Credits and refunds may be reduced if there are outstanding obligations or “debts on hold.” This may catch some businesses off guard if they assume refunds will be paid in full.
## Practical Checklist For Staying Compliant
1. **Budget for nondeductibility**: Estimate the effect of removing interest deductions—review past interest expense write-offs and anticipate higher taxable income.
2. **Review and track debts**: Keep clear records of any ATO debts, including those under dispute or on hold. Resolve or identify strategies to manage them to avoid surprises at refund time.
3. **Monitor BAS refunds**: Be aware that with the extended retention period, your cash flow may lag by up to 30 days. Plan reserve cash accordingly.
4. **Adjust bookkeeping and software**: Ensure your systems flag interest on tax debt separately; update how refunds and credits are handled in your AR/AP systems.
5. **Professional advice**: Discuss with your accountant whether restructuring your debt or paying down high-interest obligations now would save more long-term in tax.
## Example Scenario
**ABC Carpentry Pty Ltd.**, a small business, received a refund for overpaid GST of **AU$10,000** in August 2025. Historically, refunds were processed within two weeks, but now with 30-day retention, ABC Carpentry faces a cash flow shortfall. Additionally, ABC had been claiming deductions for interest charged by the ATO in prior years; now, these are no longer deductible, increasing their expected tax liability by approximately AU$2,500 this year. Recognizing this, they have adjusted invoicing terms and reduced discretionary expenses to cover that liability.
## Key Mitigation Strategies
- **Maintain adequate cash reserves** to buffer delays in receiving refunds.
- **Make proactive payments on ATO debts** where possible to minimize interest accrual.
- **Communicate with the ATO** if you believe amounts are wrongly withheld or used for offset; resolving disputes early may help.
- **Stay updated**: The ATO website’s “Businesses – new legislation” pages will publish full text of laws and detailed guidance. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/changes-to-australia-s-offshore-banking-unit-regime?utm_source=openai))
**Bottom line**: These changes shift both timing and expense burdens toward businesses. Effective forecasting, strict debt management, and aligned accounting practices will be essential to stay compliant and protect cash flow.