Why is my Tax Refund so Low? (And How To Fix it)

Your tax refund is a significant amount of money. Tax time is a time that many people look forwards to since it means they will receive additional cash. Is it feasible that you will get a lesser tax return or that you will end up owing money to the government this year?

If you're wondering, "Why is my tax refund so little?" you're not alone. There is a justification behind it. The combination of multiple such shifts is what will ultimately determine the result of your experiment. Continue reading this post, and we'll get into the specifics, as well as analyse some of the possible explanations for why your tax refund was so low in 2019. (and 2020).

The time of year when individuals can expect to receive their tax refunds is well underway, and those individuals who are fortunate enough to receive a sizeable refund will be rubbing their hands together and daydreaming about the luxurious vacations, enormous televisions, and additional credit card repayments that the money will enable.

Those individuals, however, who wind up receiving a tax return that is less than they anticipated or, even worse, who end up owing money to the ATO, will be left scratching their heads and wondering what went wrong.

About eight out of every ten people in Australia who file tax returns are eligible for a cash return. However, for some of us, the amount of the refund that we are entitled to receive is significantly lower than what we had anticipated. The issue "Why has my tax refund decreased?" is one that is frequently asked by our customers. Therefore, in this piece, we will discuss the most prevalent factors that may cause your tax return to be lower. After that, we'll offer a little piece of advice on how to steer clear of a scenario like this the next year.

How do tax refunds work in Australia?

Each year, around 14 million people in Australia fill out their tax returns. Of those who are eligible for a refund, approximately two-thirds receive one, and the average amount they receive is little more than $4,000. This results in a total refund of more than $3 billion. Therefore, it is in your best interest to ensure that you are doing everything in your power to obtain the largest possible return.

You have until October 31 to file your tax return in order to avoid penalties (or you may be eligible for an extension beyond this date if you are registered with a tax accountant by 31st October). The processing of the return will take roughly two weeks; however, your agent can keep you updated on the status of your return at any time.

These dates will not change, nor will the regular method for submitting your tax return be altered by COVID-19. You may be eligible for a higher tax refund this year as a result of the Low and Middle-Income Tax Offset, which is made accessible to a large number of taxpayers.

Will I get the $1080 tax offset, and how does it work?

A new tax offset was implemented by the Australian government in the previous year with the purpose of increasing the incomes of Australians with low and intermediate incomes.

Because the offset will still be in effect this year, millions of taxpayers across the country who are qualified for it will receive a reduction of between $255 and $1080 in the amount of their taxable income that they must pay this year. This will result in a tax refund that is higher than many people had anticipated receiving for themselves.

You don't have to do anything to receive the offset amount; it will be automatically calculated as part of your tax return, so the sooner you get it done, the better. The amount of the offset depends on how much you earn (to qualify, your annual income must be less than $126k), and you don't have to earn less than that to qualify.

To begin, let's divide it up into two categories: first, the reasons why your refund might be smaller from one year to the next, and second, the reasons why your anticipated refund might be smaller between the time you file your return and the time the ATO sends you your final refund.

Why has my tax refund gone down from last year?

Double Claiming the Tax-Free Threshold

This is the response that we provide most frequently in response to the enquiry, "why has my tax refund decreased?" It is necessary for an individual to fill out new paperwork for each job they hold, whether they switch employment during the year or start a second one. There is a question concerning whether or not you want to claim the tax-free threshold from this job on the documentation that you have been given.

If you check the box indicating that you do and you have already claimed it from your first job, then the first $18,200 of your income from BOTH occupations will be considered tax-free.

This indicates that you won't be paying the appropriate amount of tax each week. When it comes time to file your taxes, you'll need to make up the difference.

Obviously, if you have neglected to claim the amount that is exempt from tax in any way, then you are likely to receive a larger refund than you anticipated.

To avoid this problem in the following year, make sure that you only claim the tax-free threshold from one of your occupations if you work more than one job during the year. If you're not sure, ask your employer. In most cases, you will claim the tax-free level based on the employment that brings in the most money for you.

Employer Issues

If you look at your most recent payslip, you'll notice that a portion of your paycheck goes towards paying taxes on a weekly basis. When you file your tax return, the amount of your tax refund is determined by comparing the total amount of tax that was withheld from your wages during the year to the amount of tax that should have been withheld based on the sum of all of your earnings for the year.

Your tax refund can be thought of as the amount of additional tax that you paid on a weekly basis but did not need to pay. On the other hand, receiving a tax bill indicates that your weekly tax payments during the year were insufficient.

Consider the following scenario: you switched jobs, and your new company deducted $10 less in taxes from your paycheck each week. That comes out to $10 per week, multiplied by 52 weeks, which is equal to $520 in unpaid tax for the year. When it comes time to file your taxes, rather than receiving the $1,000 you regularly do, you wind up receiving only $480.

In the event that this occurs on your tax return, you should ask your employer to alter the amount of tax that you pay on a weekly basis. Simply having a conversation with your payroll team is all that is required to have them deduct an additional $10 or $20 in tax each week from your paycheck.

Freelance, Sole Trader Or Side Gigs

This is a pretty typical pitfall that many people who run their own businesses on their own or who have a secondary job such as driving for Uber fall into. Your total revenue from all of your occupations is what's referred to as your "assessable income."

This can be full-time work for a significant company or part-time work for a variety of employers on the side. At the end of the year, the total amount of tax that you are responsible for paying will be determined based on this amount.

As was just discussed, if you are an employee, a portion of each of your weekly wages goes towards paying taxes. On the other hand, if you operate your business as a sole proprietorship and conduct freelance work or if you have a side job driving for Uber, you do not have to pay taxes on that revenue right away. Instead, you will have to make the necessary tax payment when you file your tax return for that income. For instance, during tax season, a person who drives for Uber and earns $10,000 in a year may be required to pay taxes up to $3,000 or even more.

If you perform a significant amount of work on the side or as a sole proprietor, you should consider saving aside at least 30–40 per cent of your income each time you are paid to avoid receiving an unpleasant tax bill at the end of the year. For additional information, take a look at our tax advice for small businesses.

If you are in the Melbourne area and are interested in a cost-free consultation on your small business, please get in touch with us. We would highly recommend the single trader services offered by Equitas Accounting if you are located in the Perth area.

Your Income Went Up

This is something that happens to a significant number of people who are either students or who work part-time employment. If you make less than $18,200 per year, you are exempt from paying any income tax at all. You will receive a full refund of the taxes that you paid throughout the year. However, once you begin making a little more money and your income increases above the threshold at which you are no longer exempt from paying taxes, you will no longer get the full amount of tax that you paid back when you file your return.

The same thing is true if you obtain a new job that pays higher money or if you get a promotion at your current work. If you make more money, your tax rate will be higher, and you will have to pay more in total taxes. Therefore, if you see an increase in your income from one year to the next, it may cause you to move into a higher tax bracket, which may result in a lower tax refund.

How to avoid this situation the next year: if your income increases, pay special attention to any potential deductions to which you may be entitled. Keep a close eye on the deductions you are able to claim in order to maximise the amount of money that you get back from your taxes.

Why has my tax refund gone down from the estimate I received?

Other Government Agency Debts

Consider the following typical situation: A tax return with an anticipated refund of $2,500 is submitted by an individual taxpayer. Following the processing of their return by the ATO, they will receive a total of $800 in their bank account as a refund. Naturally, the first question that comes to mind is why my tax refund has decreased; this makes perfect sense.

The response to this question is frequently that they have an outstanding debt with one of the other government agencies. When it comes to processing tax returns, the ATO and a number of other government departments collaborate. Before you ever have a chance to apply for your refund, every other government department will get their hands on it first. If you have an outstanding debt with Centrelink or the Family Assistance Office money, the ATO will not give you your refund because the explanation for this is straightforward, and it does not make much sense for the ATO to give you your refund. You won't be able to avoid paying that back, though.

Instead, they will settle your debt with the other organisation and send you the balance that is owed to you. According to the above example, the Family Assistance Office was owing a total of $1,700 by that taxpayer. Following the processing of the taxpayer's tax return, the ATO forwarded $1,700 to the family aid office while returning the remaining $800 to the taxpayer.

How to avoid this the following year: Find out what your debts are and make it a priority to pay them off. If you owe money to another organisation, you shouldn't bury your head in the sand and try to ignore the problem. In that case, you run the risk of having a sizeable portion of your tax return reclaimed by the government.

Existing ATO debts

If you already owe money to the ATO, the identical thing that happened in the instance above will happen to you. The ATO will not give you your complete refund; rather, it will first determine how much money you owe and then send you the remaining balance.

It is important to keep in mind that the ATO will still apply any tax refund you get towards the reduction of any balance owed to them, even if you already have a payment arrangement in place with them.

Pay any amounts that are still owing before the end of this year to prevent having to do so next year. Simply see your tax preparer if the whole amount that you owe is difficult for you to manage. They are able to negotiate a payment plan on your behalf with the ATO, which will make your obligations more bearable.

Simple Tax Return Mistakes

The Australian Taxation Office (ATO) will typically make the necessary adjustments to your tax return in the event that you forget to include a PAYG or some bank interest. This indicates that the estimate of your tax refund that you receive when you file your return may not always be accurate. Here's a simple example:

John had a taxable income of $10,150 after having a taxable income of $49,990 during the year. When he sends in his return, the estimated amount of his tax refund is $1606.60.

When the ATO processes John's return, they discover that he failed to report earning $742 worth of bank interest on his return, despite the fact that he earned that money.

When the ATO factors in John's bank interest, his tax refund, which was original $1339.48, is now just $1339.48, a $267.12 decrease. Everything stems from that one basic error.

How to avoid this the following year: By following this advice, you can spare yourself the agony of wondering "why has my tax refund decreased?" Check to see if there are any additional forms of income that are not included on your return. The following are the items that people most frequently forget to include on their tax return by mistake:

• bank interest
• an extra PAYG – did you have more than one job during the year?
• allowances
• dividends from shares
• government payments like Newstart or Youth Allowance

You should not anticipate that your tax refund would be the same from one year to the next. Because of the complexity of taxes, even a seemingly minor alteration in your situation can have a significant impact on the amount of your return. Our recommendation is that you always consult your accountant, who will explain to you the reasons for a significant change in your return from one year to the next, whether it be a decrease or an increase.

Their taxable income has increased due to a second employment

When someone works under their own ABN as a single trader or has picked up a side job in the sharing economy through a platform like Uber, Deliveroo, Airbnb, or Airtasker, this scenario occurs the majority of the time.

People who are accustomed to working under standard employment arrangements, in which taxes are withheld from their wages on a regular basis, may not be aware that they need to set some money aside in order to pay taxes on their second job as well. This is because taxes are withheld from their wages on a regular basis under these standard employment arrangements. In addition, the larger income may push them into a higher tax band, which means that they will be obliged to pay a greater percentage of their total earnings as tax. This is due to the fact that they will be earning more money overall. In addition to this, in general, they will receive an increase in the amount of money that is coming in.

Too little is being deducted from an employee's pay by the company

This is the normal result of an employer failing to deduct an adequate amount of tax from an employee's paycheck in relation to the employee's income. This is especially relevant in circumstances in which the worker is awarded a bonus, in which their overtime hours force them to enter a higher tax bracket, or in which they cross the threshold for HELP repayment and become eligible for the programme.

On its website, the ATO provides users with "tax withheld calculators," which suggest how much tax should be withheld from salary payments. These calculators take into consideration a variety of factors, including student loans, tax offsets, and exclusions from the Medicare levy.

Current governmental debt

In the event that you have an outstanding balance with Centrelink, the ATO, or family assistance, your tax refund will be applied towards the settlement of that balance.

An automatic system will take care of this for you, and if there is any money left over after that, it will be paid into your bank account at the same time.

Claiming the two- or more-job tax-free threshold

For the purposes of calculating your income tax liability, if you are regarded to be a resident of Australia, the first $18,200 of your yearly income is not subject to taxation. Whenever you begin a new position, you will often be required to complete a declaration for your individual taxpayer identification number (ITIN). You will be able to configure this as a result of this.

However, individuals will run into problems if they make more than $18,200 during the year and claim the tax-free level on both of their employments, as this will cause them to be subject to double taxes on both of their incomes. This is because they will be subject to the tax threshold on both of their employments. It is likely that by the end of the year, they will not have paid an adequate amount of tax throughout the year; consequently, they will receive a tax refund that is significantly less than they anticipated, and in some circumstances, they may even owe money to the ATO. The likelihood of this happening is high because of the nature of the situation.

Submitting a tax return with errors

People have the opportunity to make a variety of mistakes when filing their tax returns, some of which may be inadvertent while others may be. This includes neglecting to declare assessable income (which includes allowances, bank interest, and money received abroad), claiming deductions for which they are ineligible, and lacking the required paperwork to support work-related deductions, among other things. Failing to declare assessable income is one of the offences included in this group.

The Australian Taxation Office (ATO) will correct any incorrect claims, which means that the taxpayer will be responsible for repaying any overpayments. For late or erroneous tax returns, the ATO may, in some circumstances, levy interest charges and/or other types of financial penalties.

If you are uncertain about the reason why you owe money or if you haven't received the return that you were expected, you should get in touch with a tax professional as soon as you are able to do so.

Your individual circumstances can be thoroughly evaluated by a tax agent, and in the event that something is incorrect, they will also communicate with the ATO on your behalf.

This will not only result in a resolution, but it also signals to the ATO that you are willing to cooperate, which frequently avoids the imposition of further fines if you owe money. This will not only result in a solution, but it will also demonstrate to the ATO your willingness to cooperate if you owe money. On the other hand, if you don't pay off your obligations, interest may start to be charged to them and, in some cases, a collection agency may even be contacted to take over the collection of your debts.

You can't always rely on the government to provide you a sizable payout.

Even if you received a sizable tax refund the previous year, there are a number of potential explanations as to why you may have received a much smaller amount for the 2016–2017 fiscal year. This can occur if, for example, you get a pay raise or a second job that puts you into a higher tax bracket, if your current government debt causes a portion of your tax refund to be withheld automatically, or if you incorrectly claim the tax-free threshold on two or more jobs.

Additionally, a little tax refund is not necessarily a cause for alarm.

Receiving a substantial tax refund typically means that you paid for work-related expenses out of pocket or that you overpaid taxes for the entire year.

On the other hand, if you had less out-of-pocket expenses and paid the appropriate amount of tax, it is likely that you will receive a smaller tax refund.

A smaller tax refund may ultimately mean that you have more money in your pocket all during the year, which is something that can be considered a positive outcome.