Understanding the Decrease in My Tax Refund and Preventing Future Reductions
For a majority of Australians who file their tax returns, receiving a tax refund is a common occurrence. However, there are instances when the refund amount falls short of expectations.
“Why has my tax refund gone down?” is a frequently asked question. This article will explore the main reasons behind a reduction in your tax refund and provide guidance on avoiding similar situations in the future.
Let’s begin by examining why your tax refund might decrease from one year to the next. Subsequently, we’ll delve into the factors that can cause your expected tax refund to diminish between submitting your return and the Australian Taxation Office (ATO) finalizing your refund.
The Primary Cause for a Reduced Tax Refund:
The Removal of the Low-Middle Income Tax Offset (LMITO) A significant number of Australians are experiencing smaller tax refunds due to the Government’s removal of the “LMITO” tax cut in 2023. As a result, many individuals will receive tax refunds that are $1,000 or more less than they are accustomed to.
The LMITO was a supplemental benefit provided by the Government to individuals with moderate incomes over the past several years, resulting in more sizable tax refunds. Unfortunately, this boost has been eliminated and replaced with a tax benefit applicable only to the highest earners. Starting from 2023, individuals with low to middle incomes are subject to higher overall taxes, leading to reduced tax refunds.
Preventive Measure: To counterbalance the decline in your tax refund, it’s essential to ensure that you claim all eligible tax deductions and retain evidence of your expenses. This will prevent the ATO from rejecting your claims or revoking your deductions. Utilizing Accounts NextGen Services can simplify the identification and claiming of deductions, offering insight into how deductions impact your tax refund.
If uncertainty surrounds your anticipated tax refund this year, don’t hesitate to consult our refund calculator – the most accurate one in Australia. Our objective is to secure the best possible refund for you. When you’re prepared to begin, click below to initiate the process.
Reason #2 for a Diminished Tax Refund:
Overlapping Claims for the Tax-Free Threshold A common response to the question “Why has my tax refund gone down?” involves the situation where individuals change jobs or take on a second job within a year. When updating paperwork for the new job, there’s a query about claiming the tax-free threshold. If the threshold is claimed for both jobs, the initial $18,200 of income from BOTH positions is considered tax-free.
Consequently, inadequate tax payments are made each week. When tax season arrives, the shortfall needs to be compensated.
If, by chance, the tax-free threshold is overlooked altogether, the tax refund could be higher than expected.
Preventive Measure for Next Year: In cases of multiple jobs in a year, it’s crucial to claim the tax-free threshold for only one job. If unsure, consult your employer to clarify the appropriate job for which to claim the threshold. Typically, the tax-free threshold should be claimed for the job with the higher income.
Impact of Employer Matters on Your Tax Refund Upon reviewing your recent pay slip, you’ll observe weekly tax deductions from your salary. Your tax refund calculation is based on the total tax withheld from your salary throughout the year compared to the correct tax amount based on your annual income. The refund essentially reflects the excess tax paid weekly, while a tax bill signifies insufficient weekly tax payments.
Suppose you switch jobs and the new employer deducts $10 less tax each week than necessary. This accumulates to $10 x 52 weeks, resulting in $520 less tax paid for the year. Instead of the anticipated $1,000 refund, you’d receive only $480.
Preventive Measure for Next Year: In such situations, adjusting your weekly tax withholding is achievable by discussing the matter with your payroll team. This ensures that the appropriate amount of tax is withheld each week.
Effects of Freelancing, Sole Trading, or Side Gigs on Your Tax Refund Sole traders and individuals engaged in side jobs, like Uber driving, often encounter tax refund reductions due to the way “assessable income” is treated. This encompasses income from all sources, including standard employment and side gigs. For conventional employment, taxes are withheld weekly. In contrast, sole traders and side-gig workers pay taxes on this income during the tax return process.
If income rises due to side gigs, neither the primary employer nor the side gig accurately calculates tax, potentially resulting in a tax deficit at year’s end.
Preventive Measure for Next Year: For substantial side income, setting aside 30-40% of each payment can ensure you’re prepared for potential tax payments. Adequate saving will prevent unexpected tax burdens during the tax return process.
Another Reason for Fluctuating Tax Refunds: Income Increase Many individuals, like students and part-time workers, initially earn below the $18,200 tax threshold, leading to a full Tax Refund. However, as income grows beyond this threshold, the refund diminishes.
A similar scenario arises with promotions or new higher-paying jobs, where increased income raises the tax bracket and subsequently decreases the refund.
Preventive Measure for Next Year:
As income increases, focus on eligible deductions to improve the tax refund. Monitoring potential deductions can offset the impact of an income-related reduction.
Discrepancies Between Estimated and Final Tax Refunds Due to Other Government Agency Debts A common scenario unfolds: A taxpayer anticipates a $2,500 refund based on their estimate, yet only receives $800 in reality. The explanation often lies in existing debts with other government agencies. These agencies collaborate with the ATO during the refund process, prioritizing repayment of outstanding debts before issuing a refund.
To prevent repaying debts later, the ATO deducts owed amounts before transferring the remainder to the taxpayer.
Preventive Measure for Next Year: Prioritize repaying debts with other agencies to safeguard your refund. Ignoring these debts could lead to substantial reductions in your refund.
Existing ATO Debts Also Affect Refunds Akin to the aforementioned scenario, if you possess a debt with the ATO, the refund is reduced by the outstanding amount before being disbursed.
Furthermore, even with existing payment arrangements, the ATO deducts owed sums from the refund.
Preventive Measure for Next Year:
Clear any outstanding ATO debts promptly to ensure the maximum refund is received.
Simple Errors in Tax Returns Overlooking income sources, like PAYG or bank interest, can lead to changes in the tax refund. The ATO often incorporates these omissions during return processing, altering the expected refund.
For example, if John fails to include $742 of bank interest in his return, his estimated $1,606.60 refund may diminish to $1,339.48 due to the ATO’s adjustment.
Preventive Measure for Next Year:
Avoid refund discrepancies caused by overlooking income sources. Double-check your return for omitted items such as bank interest, additional PAYG, allowances, share dividends, and government payments.
Expecting consistent tax refunds year after year is unrealistic due to the intricate nature of taxation. Even minor life changes can substantially impact refunds. If perplexed about significant fluctuations, consult an accountant who can elucidate the reasons behind fluctuations from one year to the next.