Reasons why your tax refund is less this year, and why you might even have a tax bill.

A tax refund is not an automatic entitlement but rather a result of individual circumstances and tax deductions.

Every year, Australians eagerly await their tax refunds, hoping for a pleasant financial boost. However, it can be disheartening to discover that this year's refund, in the 2023 tax return, is lower than expected, especially if it's considerably lower than previous years.

Various factors can contribute to a reduced tax refund, leaving individuals wondering why they're not receiving as much back from the taxman as before. In this article, we'll delve into:

  • the concept of tax refunds, how they come about, and why they are not an automatic entitlement.
  • why your tax return might be lower this year compared to the last four years (2019 - 2022 financial years) and
  • the common factors that can cause a tax bill in your tax return

The concept of a tax refund and what drives a tax refund

First, let’s look at what exactly is a tax refund and why it might differ from year to year.

A tax refund is the amount of money returned to you, the taxpayer, when you have efectively overpaid your taxes throughout the year.

In Australia, taxes are typically withheld from your wages by your employer, based on the information you provided in the Tax File Number Declaration. This withholding is designed to be roughly equivalent to the income tax levied on your particular annual income, ensuring that come tax time, you won't have a large sum to pay.

If the exact amount of tax you owe is withheld from your salary, you'll neither owe money nor receive a refund. If your employer or employers, happen to withhold more tax from your wages than what is legally required, the difference will be returned as a tax refund. To further increase your tax refund, or reduce a tax liability, tax deductible expenses can be included to reduce your taxable income. Whenever your taxable income decreases, the amount of tax withheld becomes more than what was necessary to withhold and the excess is refunded as a tax refund. Your eligibility for various tax offsets can further increase your tax refund or decrease your tax liability.

Some taxpayers are surprised to learn that a tax refund is not guaranteed. The amount of tax withheld from your wages isn't some arbitrary figure and nor is it designed to result in a refund of tax each year. Rather, it's calculated to align with your expected tax obligation based on factors such as your tax residency, total taxable income, and a number of other personal and financial factors.

The following factors are just some that can influence your tax refund, or liability.

Removal of the Low and Middle Income Tax Offset

The removal of the Low and Middle Income Tax Offset (LMITO), from the 2023 financial year onward, has had a significant impact on tax refunds in Australia.

The LMITO was introduced as a temporary tax reduction measure aimed at providing relief to individuals with lower to middle incomes. Its removal has brought changes to the individual tax return, impacting the amount of tax refund that individuals may receive.

Before the removal of LMITO, eligible taxpayers could benefit from a reduction in their tax liability, effectively resulting in a larger tax refund or a reduced amount of tax owed. The offset provided a maximum benefit of $1,080 in financial years 2019 and 2020, and $1,500 in financial years 2021 and 2022 for individuals earning between certain income thresholds. This additional amount could significantly contribute to a taxpayer's overall refund, making a positive difference in their financial position.

With the removal of LMITO, taxpayers in the affected income brackets no longer have access to this offset, as of the 2023 financial year. As a result, the tax calculation has reverted to its pre-LMITO structure. For many taxpayers, this change has lead to a reduction in the potential tax refund for those who were previously eligible for the offset. Additionally, individuals who have come to expect a certain level of refund due to LMITO may find their refunds are smaller than they were in previous four years.

HECS-HELP debt and other student loans

Having a HELP (Higher Education Loan Program) or HECS debt (Higher Education Contribution Scheme) or other student loan (such as VSL, SFSS, SSL and TSL) can impact the outcome your individual tax return in Australia.

When your income reaches a certain level, you are required to start repaying your HELP or HECS debt. The income threshold varies each year, so it's important to check the current threshold. If your income surpasses the threshold, an additional amount, known as the "HELP or HECS repayment," is withheld from your salary by your employer. This is similar to the way income tax is withheld.

It is your responsibility to inform you employer of your student loan by correctly filling out your Tax File Number Declaration form. If not declared and managed correctly, a HECS or HELP debt can result in a tax bill for an Australian taxpayer in several situations. We cover these situations in our article How Does HECS Withholding Work.

Insufficient tax withholding - Multiple jobs and income statements

If you have multiple employers during a financial year, each employer withholds tax based on their individual assessment of your income. Sometimes, this withholding might not accurately reflect your overall tax liability, especially if your combined income from all sources pushes you into a higher tax bracket. This could lead to insufficient tax being withheld, and you might owe additional taxes when you lodge your tax return.

If you have mulitple employers throughout the financial year - at the same time or following one after the other - we recommend you read our article Two or more income sources? Beware a potential Tax Trap.

Incorrect tax withholding

Based on our experience as Registered Tax Agents, it's uncommon for employers to under-tax an employee's wages. Still, it occasionally occurs, and there's limited recourse once the financial year concludes. To make sure you're taxed accurately and avoid under-taxation, we suggest:

  • Submit a properly filled out TFN declaration to your employer, updating it when necessary.
  • Regularly review your payslips to ensure the right tax amount is withheld. You can cross-reference this using the ATO’s tax tables or a reputable online tax calculator.
  • If you expect to juggle multiple jobs or have various income sources within a year, it might be beneficial to seek advice from a tax expert.

Medicare Levy Surcharge

The Medicare Levy Surcharge (MLS) is an additional tax that can result in a reduced tax refund or tax bill for an Australian taxpayer if they don't have eligible private health insurance and their income exceeds certain thresholds. We cover this topic in greater detail in our article Do I need Private Health Insurance for Tax Purposes.

Excess private health insurance entitlement

When a taxpayer has claimed too much government rebate on their private health insurance policy, certain adjustments need to be made when they file their tax return.

The government provides a rebate to help Australians cover the cost of their private health insurance premiums. This rebate can be claimed in advance, which means it's applied directly to the insurance premium to reduce the upfront cost.

However, if a taxpayer overestimates their entitlement and claims a larger rebate than they are eligible for, the excess rebate must be reconciled during the tax return process. The amount of excess rebate that was claimed during the financial year, by way of reduced private health insurane premiums, will be added back in the tax return to reduce any tax refundable to you, or increase any tax payable by you.

It's important for taxpayers to accurately assess their eligibility for the government rebate and claim the correct amount. Overclaiming can lead to unexpected tax liabilities during the tax return process.

Whether you claim the private health insurance rebate through the year, or wait for it to be reconciled and calculated in your tax return, it will cost you the same. That is, you will be 'out of pocket' either through the financial year or at the time you prepare your tax return. For more details about this please read our article Are you over-claiming rebate on your private health insurance?

Division 293 tax

If your income and concessional super contributions total more than $250,000 you might have to pay an additonal tax called Division 293 tax. To determine whether you’re liable to pay Division 293 tax, the ATO will use the information contained in your tax return together with your superannuation contribution information that has been reported to the ATO.

There can be timing differences between the ATO receiving your tax return and the information from your super fund. Therefore, your Division 293 tax assessment may be calculated by the ATO at the time you lodge your tax return, or some time later when all data has been received. The good news is that Division 293 tax can be paid by releasing money from your super fund, so long as it is not a defined benefit fund.

Untaxed Government payments

Certain government payments, while essential for financial support, can also influence your tax refund. If the payment is taxable, it contributes to your total income and may affect your final tax position. You will receive a Centrelink payment summary if you receive any of these taxable Centrelink payments, however it is usually your responsibility to ask Centrelink to deduct tax from these payments. Having tax withheld from these payments will help to reduce the amount of tax you may have to pay in your tax return.

  • ABSTUDY Living Allowance, if you’re 16 or older
  • Age Pension
  • Austudy
  • Carer Payment, if you or the care receiver is Age Pension age
  • Dad and Partner Pay
  • Disability Support Pension, if you’re Age Pension age
  • Disaster Recovery Allowance
  • Farm Household Allowance
  • JobSeeker Payment
  • Parental Leave Pay from Centrelink
  • Parenting Payment
  • Special Benefit
  • Youth Allowance, if you’re 16 or older.

Untaxed income sources

In Australia, the PAYG (Pay As You Go) withholding system places the responsibility on employers, businesses, and other payers to deduct taxes from specific payments made to individual taxpayers.

As an employee, your wage and salary earnings are typically subject to PAYG Withholding, ensuring the correct amount of tax is withheld. However, it's important to note that many individual taxpayers also receive income from sources that aren't subject to immediate taxation. Some of these sources of untaxed income can include:

  • Interest income
  • Self-employment or business income (ABN), including earnings from partnerships
  • Rental income
  • Dividend income
  • Employee Share Schemes
  • Capital gains
  • Superannuation pensions
  • Foreign income

Since these income sources have not already been “taxed at the source” when received, their inclusion in your tax return can lead to a reduced tax refund or even result in a tax liability.

Lump Sum E backpayments

Lump Sum E backpayments are one-time payments that you receive from your employer. These payments are usually made when there has been an error or a delay in your regular pay, and your employer needs to catch up on what you should have been paid.

Why Lump Sum E Payments Might Cause a Tax Bill

When you receive a Lump Sum E backpayment, it can sometimes push you into a higher tax bracket for that financial year. This means that the extra money you received can be taxed at a higher rate than your usual income.

For example, let's say your regular income keeps you in a lower tax bracket, but the lump sum payment bumps up your overall income for the year. You might end up owing additional tax because the lump sum payment is taxed at a higher rate.

The Lump Sum E Tax Offset

The good news is that the Australian tax system recognises that lump sum backpayments can create a tax challenge for individuals. To help with this, there's something called the "Lump Sum E tax offset." This offset is designed to reduce the additional tax that you might owe due to the lump sum payment. Your tax accountant can assist you with this calculation.

Personal Circumstances

Changes in your personal circumstances, like getting married, having children, or supporting dependents, can impact your tax position. These changes can make you eligible for specific tax offsets or deductions, further affecting your tax refund.

Tax debt and other government debts

Besides factors that directly reduce your tax refund, there are also other considerations that might not decrease your refund but could prevent you from receiving the full amount. These involve any pre-existing debts you may owe to various government agencies, such as:

  • The Australian Taxation Office (ATO)
  • Child Support Agency
  • Centrelink / Services Australia
  • Family Assistance
  • Bankruptcy Act

The Australian government possesses the legal authority to intercept an individual taxpayer's tax refund and allocate it towards settling other outstanding government debts. This process is commonly referred to as "tax refund garnishment."

Final Thoughts

In wrapping up, remember that a tax refund is not guaranteed each year. Its presence or amount is driven by the various financial factors we've outlined above.

While receiving a tax refund can certainly feel rewarding, you should exercise caution and not bank on this tax refund each year. In our experience, reliance on a tax refund highlights potential personal financial management concerns.

It's important to approach finances with foresight, planning and knowledge, to ensure financial stability regardless of a tax outcome.

Please note that the information provided in this blog post is for general guidance and should not be considered professional financial or tax advice. It's recommended to seek advice from a qualified professional regarding your specific situation. Please contact our office on (03) 9746 6479 for tax advice suitable to your circumstances.