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Key Takeaways
- Double-claiming the tax-free threshold, a pay rise, or income from a side job can all lower your refund.
- Your refund can also shrink after lodgement, often due to debts with the ATO or another government agency.
- Small mistakes, like forgetting bank interest, can change your final refund amount.
- Understanding what affected your refund this year can help you avoid the same problem next year.
“Why is my tax refund so low?” is one of the most common questions Australians ask at tax time. Some of you might phrase it as “why is my tax return so low?” instead. Either way, let’s cover the most common reasons your tax refund (or return) might be lower than you expect. We’ll also show you how to avoid a similar situation next year.
Not sure if your refund estimate looks right? Just ask us! Our refund calculator is the most accurate in Australia and it’s our job to get you the best possible refund.
What Causes a Low Tax Refund?
Double-Claiming the Tax-Free Threshold
When you switch jobs during the year or start a second job, you need to fill out new tax paperwork. It will ask if you want to claim the tax-free threshold from this job. If you tick “yes” and you have already claimed it from your first job, the tax system incorrectly treats the first $18,200 from both jobs as tax-free.
This means you won’t be paying enough tax each week, and come tax time, you’ll have to make up the difference.
How to avoid next year:
If you have worked at least two jobs during the year, make sure you only claim the tax-free threshold from one. If you’re not sure, ask your employer. Usually, you should claim the tax-free threshold on your highest income earning job.
Employer Withholding Errors
Check your most recent payslip to see how much tax your employer takes out of your pay each week. Your tax refund is the total amount of tax you paid during the year, versus how much tax you should have paid, based on your total yearly income.
For example, say your 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 $1,000, you will end up with $480.
How to avoid next year:
If this happens to you, ask your employer to adjust your weekly tax. A quick chat to your payroll team is all it takes to have them withhold extra tax each week.
Freelance, Sole Trader Or Side-Gig Income
This is a common trap for sole traders and anyone with a side job, like driving for Uber or freelancing on weekends.
Your employer withholds tax from your regular pay each week, based on what they know about your income from that job. Side income works differently. If you freelance, run a small business, or drive for a rideshare app, nobody withholds tax for you along the way. You pay tax on that income later, when you lodge your tax return.
The ATO adds your side income to your regular wages to work out your total “assessable income” for the year, then taxes you on the combined amount. Your employer only sees the money they pay you, not your side income, so they can’t adjust your withholding to cover it. If the extra income pushes you into a higher tax bracket, you could end up owing the ATO rather than getting a refund.
How to avoid next year:
Set aside at least 30-40% of your income every time you are paid. This gives you a buffer to cover any tax owing at lodgement instead of being faced with a surprise bill you can’t pay.
Your Income Went Up
This happens to many students, part-time workers and people just starting their career. As a rule, if you earn less than $18,200 you pay zero tax. The ATO refunds all the tax you pay during the year 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 your tax back in your refund.
The same thing applies if you get a promotion or a new job that earns more money. The more you earn, the higher your tax rate 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 lower your refund.
How to avoid next year:
If your income goes up, pay close attention to any extra deductions you might be entitled to. Deductions help improve your tax refund, so keep a close eye on what you are eligible to claim.
You could even ask your employer to start taking extra tax from your pay for the rest of the financial year. That way, you won’t have to pay as much at tax time, or you’ll receive a bigger refund than you were expecting.
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Why Is My Tax Refund Less Than the Estimate I Received?
Debts with the ATO or Other Government Agencies
Debts with the ATO or Other Government Agencies
Here’s a common scenario: A taxpayer lodged their tax return with 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 is: why has my tax refund gone down?
The ATO works closely with other government agencies on debts and refunds, but the ATO won’t flag it to you until after you’ve lodged.
The reason for this is simple. The government wants to ensure you pay off your outstanding debts with them first. Then, you get whatever is left.
In our example above, that taxpayer owed the Family Assistance Office $1,700. When the ATO processed their tax return, they paid the $1,700 first and sent the remaining $800 to the taxpayer.
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 the amount you owe before they send you the rest.
Even if you already have a payment arrangement with the ATO, they’ll still use your refund pay down what you owe.
How to avoid next year:
Know what debts you have and pay them off. Otherwise, at tax time, you could end up losing a large chunk of your refund.
Simple Tax Return Mistakes
If you forget to include some income or bank interest on your tax return, the ATO will usually add it on when they process your return. That means the tax refund you receive can often change from the estimate you saw when lodging. Here’s a simple example:
John earned $49,990 during the year and paid $10,150 worth of tax. At lodgement, his tax refund estimate was $1,606.60.
When the ATO processed John’s return, it noticed he earned $742 worth of bank interest that he forgot to include on his return.
The ATO added the bank interest to John’s return, and his tax refund dropped by $237.44 to $1,369.16. That one simple mistake changed his refund by over $235.
How to avoid next year:
Double check for other income items missing on your return. The most common items people forget on their tax return are:
- bank interest
- extra income, such as a second job
- allowances
- dividends from shares
- Government payments like JobSeeker, parenting payments 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 amount. Our advice: if your refund jumps or drops a lot from last year, ask us to explain why (and what you can do next year to avoid the same thing happening again).
Here’s how to get the most out of your tax return:
On top of the helpful tips we’ve shared here, there are other ways to get some more back on your tax refund. From saving your receipts to claiming deductions, find outhow you can save tax in Australia.
At Etax, you can ask questions about your refund by phone or over Live Chat, no appointments needed.
Frequently Asked Questions
Your refund can drop for several reasons, including a pay rise, extra income from a side job, or double-claiming the tax-free threshold across two jobs. Employer withholding errors can also play a part.
“Tax return” and “tax refund” are often used to mean the same thing. If that’s what brought you here, the reasons above apply to you too. The most common are a pay rise, a side job, or double-claiming the tax-free threshold.
This usually happens because the ATO deducts any outstanding debts, either to them or another government agency, before paying out the rest of your refund. Missing income, like bank interest, can also change your final amount.
It happens when you claim the tax-free threshold on more than one job at the same time. This means you don’t pay enough tax during the year, which lowers your refund at tax time.
Yes. If you have an ATO debt that’s hard to manage, Etax can help set up a payment plan so it doesn’t affect your future refunds.
A higher income can push part of your earnings into a higher tax bracket. If you also claimed fewer deductions or didn’t have enough tax withheld during the year, your refund may be smaller than last year’s.
Yes. Compare your current tax return with last year’s and review your income, deductions, tax withheld and any government debts. If you use Etax, our accountants can explain what caused any major change to your refund.
