And How Do I Avoid It Happening Again?
Around eight out of every ten Australians who lodge a tax return get a tax refund. But for some of us, the refund that we get isn’t quite as big as we expect.
“Why has my tax refund gone down?” is a very common question. Let’s cover the most common reasons your tax refund might go down. Then, we’ll give you a quick tip on how to avoid a similar situation next year.
To start, let’s discuss why your refund might go down from one year to the next. Then we’ll examine why your expected tax refund might shrink between lodgement of your return and the ATO sending your final refund.
The #1 Reason for a Smaller Tax Refund:
The Low-Middle Income Tax Offset (LMITO) is Gone
Many Australians will receive a smaller tax refund than they are used to, because the Government removed the “LMITO” tax cut in 2023. As a result, many people’s tax refunds will be smaller by $1,000 or more.
LMITO was a boost that the Government gave to people making low-to-average incomes, during the past several years. This boost made us all grow accustomed to some nice tax refunds. However, now, that boost is gone; it is being replaced with a tax benefit that only applies to the very highest income earners. Starting in 2023, low and middle income people pay more tax generally, and get less money back in their tax refunds.
How to avoid: The best way to counter-balance this drop in your tax refund is to make sure you claim all the tax deductions you deserve, and be sure you have proof of your expenses so the ATO can’t refuse your claim or just cancel your deductions. Using Etax makes it a lot easier to find the deductions you are entitled to, makes it easier to claim them, and it also shows you exactly how your deductions affect your tax refund.
If you’re not sure about your estimated tax refund this year, just ask us! Our refund calculator is the most accurate in Australia and it’s our job to get you the best possible refund. If you’re ready to get started, just click below to begin.
Reason #2 for a Smaller Tax Refund:
Double-Claiming the Tax-Free Threshold
This is a common answer we give to the “why has my tax refund gone down?” question. When someone switches jobs during the year or starts a second job, they need to fill out new paperwork for that job. On that paperwork, there’s a question about whether you wish to claim the tax free threshold from this job. If you tick yes and you already claim it from your first job, that means your first $18,200 from BOTH jobs is calculated as tax free.
This means you won’t be paying enough tax each week. Come tax time you’ll have to make up the difference.
Of course, if you’ve forgotten to claim the tax-free threshold at all, then your refund is going to be higher than you thought!
How to avoid next year: If you work two jobs (or more) during the year, make sure you only claim the tax free threshold from one. If you’re not sure, ask your employer. Usually, you claim the tax free threshold on your highest income earning job.
Employer Issues That Can Reduce Your Tax Refund
Check your most recent payslip and you’ll see that you pay tax each week out of your salary. When you do your tax return your tax refund is calculated based on the total amount of tax you paid during the year out of your salary versus how much tax you should have paid based on your total yearly income. Your tax refund is essentially the extra tax you paid each week that you didn’t need to pay. On the other hand, a tax bill means you didn’t pay enough tax each week during the year.
For example, say you changed jobs and your new employer took out $10 too little tax each week. That’s $10 x 52 weeks = $520 worth of tax you didn’t pay during the year. At tax time instead of getting the $1,000 you normally get, instead you only end up with $480.
How to avoid next year: If this happens on your tax return, ask your employer to adjust your weekly tax. A quick chat to your payroll team is all it takes to have them withhold an extra $10 or $20 tax each week.
Freelance, Sole Trader Or Side-Gigs Can Lead To A Smaller Tax Refund
This is a really common trap for many sole traders or those with a side job like driving for Uber. “Assessable income” is all of your income from all jobs. The includes regular employment through a large employer, or small jobs on the side. Your income is all added together. This amount is used to work out how much tax you have to pay at the end of the year.
As we mentioned above, if you are an employee, you pay tax out of your salary each week. However, if you work as a sole trader doing freelance work or have a side job driving Uber you don’t pay tax on that income right away. Instead, when you do your tax return you’ll have to pay tax on that income then. For example, someone who earns $10,000 from Uber driving in a year, might need to pay $3,000 or more in tax at tax time.
On top of all that, your main employer takes out the right amount of tax for the money you earn. If your income increases, you may start having to pay a higher percentage in tax, and your employer would adjust for this. But if your income goes up because of a side-gig, then your employer is not calculating your tax based on your “real” total income, and neither is your side-gig. At the end of the year, this can mean you are behind in your tax and have to pay more back to the ATO.
How to avoid next year: If you do a decent amount of work on the side or as a sole trader we recommend setting aside at least 30-40% of your income every time you are paid so you don’t fall behind at tax time; you might have to pay some tax to the ATO, so your best self-defence is to save some money and be ready.
Another Common Cause for Small Tax Refunds: Your Income Went Up
This happens to a lot of students, people working part time jobs and people just starting their career. As a rule, if you earn less than $18,200 you pay zero tax. All of the tax you paid during the year is refunded to you. However, once you start earning a little more and your income moves above the tax free threshold, you’ll no longer get all of your tax back on your return.
The same thing applies if you get a promotion or a new job that earns more money. The more you earn, the higher your rate of tax is and the more tax you pay. So if your income goes up from one year to the next it might push you into a higher tax bracket which could drop your refund.
How to avoid next year: If your income goes up, pay close attention to the deductions you might be entitled to. Deductions help improve your tax refund, so keep a close eye on what you are eligible to claim.
Why has my tax refund gone down from the estimate I received?
Other Government Agency Debts
Here’s a common scenario: A taxpayer lodges their tax return and has a refund estimate of $2,500. The ATO processed their return and they only get a refund of $800 in their bank account. Naturally the first question that springs to mind is: why has my tax refund gone down?
The answer is often that they have an existing debt with another government agency. The ATO and other government agencies work together when it comes to tax returns. Every other government agency gets first shot at your refund before you do. The reason for this is simple, it doesn’t make much sense for the ATO to give you your refund if you have an outstanding debt with Centrelink or the Family Assistance Office money. You’ll just have to repay that anyway.
Instead, they’ll clear off your debt with the other agency and send you the remainder. So in our example above, that taxpayer owed the Family Assistance Office $1,700. When the ATO processed their tax return, they sent $1,700 to the family assistance office and the remaining $800 to the taxpayer.
How to avoid next year: Know what debts you have and pay them off. If you have a debt with another agency, don’t bury your head in the sand. Otherwise at tax time you could end up losing a large chunk of your refund.
Existing ATO debts
The same scenario above is true if you already have a debt with the ATO. Rather than give you your full refund, the ATO will simply deduct how much you owe before it sends you the rest.
It’s also worth noting that even if you already have a payment arrangement with the ATO, your refund will still be used to pay down any amount you owe.
How to avoid next year: Pay your outstanding amount off now. If your amount owing is hard to manage, just talk to Etax. We can set up a payment plan at the ATO on your behalf to make your payments more manageable.
Simple Tax Return Mistakes
If you forget a PAYG or some bank interest on your tax return, the ATO will often add it on when they process your return. That means your tax refund can often change from the estimate you get when lodging. Here’s a simple example:
John earned $49,990 during the year and paid $10,150 worth of tax. His tax refund estimate when he lodges is $1606.60.
When the ATO process John’s return they notice he earned $742 worth of bank interest that John forgot to include on his return.
The ATO adds the bank interest to John’s return, and his tax refund drops by $267.12 to only $1339.48. All from that one simple mistake.
How to avoid next year: Save yourself the stress of asking “why has my tax refund gone down” with this tip: Double check for other income items missing on your return. The most common items people mistakenly leave off of their tax return are,
- bank interest
- an extra PAYG – did you have more than one job during the year?
- dividends from shares
- Government payments like JobKeeper, Newstart or Youth Allowance
You shouldn’t expect your tax refund to be the same year after year. Tax is complicated; one change in your circumstances can have a big effect on your refund. Our advice is, always ask your accountant who will explain to you the reasons behind a big refund drop or increase from one year to the next.
At Etax you can ask questions about your refund by phone or live chat, no appointments needed