Your tax refund is a big deal. If you're like many, tax season is a time to look forward to getting extra cash. But, is it possible that you'd have a smaller tax refund or that you might owe this year?
If you're questioning "Why is my tax refund so low?" There's a reason for it. It's the combination of several changes that will affect your overall outcome. We'll go into the details in this post, just read on, and we'll discuss the potential reasons for your low tax refund in 2019 (and 2020).
Tax refund season is well underway, and those lucky enough to achieve a sizable refund will be rubbing their hands together and dreaming of the extravagant holidays, enormous TVs and extra credit card repayments the money will enable.
But those who end up with a smaller refund than expected or, worse, owing to the ATO money, will be left scratching their heads and wondering what went wrong.
Around eight out of every ten Australians who lodge a tax return get a 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 common question our clients ask. So in this post, we cover off 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.
How do tax refunds work in Australia?
Around 14 million people lodge a tax return each year in Australia and of those who receive a refund (about two-thirds) on average they receive just over $4,000 each, resulting in a collective refund of more than $3 billion. So it pays to make sure you're doing everything you can to maximise your refund.
You need to lodge your tax return by the 31st October (or you may be eligible for an extension beyond this date if you are registered with a tax accountant by 31st October). The return will take approximately two weeks to process – your agent can track the progress of your return for you.
COVID-19 will not change these dates or the standard procedure for lodging your tax return. This year, you may receive a larger tax refund this due to the Low and Middle-Income Tax offset, available to many taxpayers.
Will I get the $1080 tax offset, and how does it work?
Last year, the Australian government introduced a new tax offset to boost the incomes of low and middle-income Australians. The offset is still around this year, meaning that millions of eligible taxpayers across the country will receive between $255 and $1080 as an offset against their taxable income this year. For many, that will flow through into a larger tax refund than they were expecting.
The offset amount depends on how much you earn (you need to earn less than $126k to qualify), and you don't have to do anything to receive it – it will automatically be calculated as part of your tax return, so the sooner you get it done, the better.
To start, let's break it down into two areas first, why your refund might go down from one year to the next, second, why your expected refund might shrink between lodgement of your return and the ATO sending your final refund.
Why has my tax refund gone down from last year?
Double Claiming the Tax-Free Threshold
This is the most 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.
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
This is a really common trap that many sole traders or those with a side job like driving for Uber fall into. "Assessable income" is all of your income from all jobs. The includes regular employment through a large employer or small jobs on the side. 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.
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 get a nasty bill at tax time. Check out our small business tax tips for more information.
If you're in Melbourne, you contact us for a free small-business strategy session. If you're Perth based, we would recommend Equitas Accounting’s sole trader services.
Your Income Went Up
This happens to a lot of students or those working part-time jobs. 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, and 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 your tax accountant. They 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 are $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 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.
A second job has blown out their taxable income
This is most common when someone does work under their ABN as a sole trader or has picked up a side job in the sharing economy, such as Uber, Deliveroo, Airbnb or Airtasker.
Those coming from a traditional employment arrangement, where tax is automatically deducted from their salary, may not realise that they need to set money aside to pay tax on their second job too. Further, the additional income can sometimes push them into a higher tax bracket, which means they'll have to pay a higher percentage of their overall earnings as tax.
An employer is withholding too little from an employee's wage
This often occurs when an employer is not withholding enough tax proportionate to their income, especially if they receive a bonus or their overtime pushes them into a higher tax bracket or over the HELP repayment threshold.
The ATO has "tax withheld calculators" on its website that indicate how much tax should be withheld from salary payments, taking into account things like student loans, tax offsets and Medicare levy exemptions.
Existing government debts
If you have an existing Centrelink, ATO or family assistance debt your tax refund will be used to pay off any amount outstanding.
This is done automatically, and the leftover money - if any - is what you'll then have transferred to your bank account.
Claiming the tax-free threshold for two or more jobs
If you are an Australian resident for tax purposes, the first $18,200 of your yearly income is not taxed. This is usually set when you complete your tax file number declaration when you commence employment.
However, people run into problems if they earn more than $18,200 during the year, and they work two jobs while claiming the tax-free threshold on both. Come tax time it's likely they haven't paid enough tax during the year, and they'll end up with a much smaller refund than expected and in some cases even owe the ATO money.
Making mistakes on the tax return
There are a variety of errors that taxpayers can commit when filling out their tax return - whether mistakenly or otherwise. This includes failing to declare assessable income (which includes allowances, bank interest and income earned overseas), claiming deductions they're not eligible for and lacking the necessary documentation to substantiate work-related deductions.
The consequence is that any erroneous claims are fixed by the ATO, meaning the taxpayer has to repay any overpayments. In some instances, the ATO can also charge interest and other financial penalties for incorrect lodgements.
If you are unsure about why you owe money, or you haven't received the refund you expected, contact a tax agent as soon as possible.
A tax agent can fully analyse your personal circumstances, and if something has gone wrong, they'll also speak with the ATO on your behalf.
"This will not only lead to a solution, but if you owe money, it shows the ATO that you are willing to co-operate, which will often prevent the incursion of further penalties. On the other hand, if you don't act, debts can start accruing interest and, in certain cases, be forwarded to a debt collection agency."
You can't bank on a sizeable refund every year.
There are various reasons why you may have ended up with only a modest amount from the 2016-17 financial year even if you had a big refund last year. This includes a pay rise or second job kicking you into a higher tax bracket, having existing government debt automatically taken out of your tax refund, or erroneously claiming the tax-free threshold on two or more jobs."
And a small tax refund isn't always a bad thing.
"A big tax refund usually means you paid for work-related expenses out of pocket or you paid too much tax through the year.
"On the other hand, if you have a smaller tax refund it usually means you had lower out-of-pocket expenses and you paid the right amount of tax.
"Ultimately, a lower tax refund can often mean you've got more money in your pocket year-round, and that can be a good thing."