Reasons why your tax refund is low
If you are an Australian resident for income tax purposes and you pay tax on your taxable income, you may be eligible for both the:
- low-income tax offset
- low and middle-income tax offset.
You don’t need to complete a section in your tax return to get these tax offsets. We work out your tax offset for you once you lodge your tax return. If you are entitled to any offset, it is added to your tax return, and you can see the amount on your notice of assessment (you won’t receive the offset as a separate payment).
With Australia now in a recession following the devastating coronavirus pandemic, the promise of a looming tax refund is even more tantalising in 2020.
But an Aussie tax expert has warned there are several reasons why those eligible for refunds this year could end up with less in their pockets than expected.
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.
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.
2020 has been a difficult year for many Australians, with significant job losses and changes in working conditions impacting people across the country. It’s understandable many people are hoping for a bit of relief and wondering if this might come in the form of a bigger tax refund this 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 definitely 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 due to the Low and Middle-Income Tax offset, available to many taxpayers.
Why Is My Tax Return Lower?
A lot of people have started getting their tax refunds based on the latest ATO schedule. But one question that keeps coming up is why it is so low? Or more precisely, why is the refund payment so much lower than expected compared to past years. In fact, the ATO has published figures that refunds are down 8% to 10% from prior years.
There are a number of things that might make your tax refund lower from one year to the next. If your income changed or you’re no longer entitled to a tax credit or deduction, it can lead to a lower tax refund. There’s no need to panic – a lower tax refund can actually be a good thing. Although you might treat your tax refund like “found money,” a tax refund is like lending your money to the government interest-free. A lot of taxpayers are caught off guard when their tax refund drops a lot from one year to the next. If your tax situation recently changed, it can lead to a lower refund next year. It’s important to be prepared ahead of time, so you’re not in for a shock.
Reasons Your Tax Refund Was Lower Than You Expected
If the question “Why was my tax refund so low when I filed my 2018 tax return in 2019?” crossed your mind, it’s likely correlated with tax reform. Tax reform meant new tax brackets, changes to itemised deductions, and an increased standard deduction, and thus, confused many taxpayers.
Due to withholding changes in early 2018, some taxpayers began receiving larger paychecks, meaning they were paying less in tax as the year went on. For those taxpayers, that change could result in a smaller tax refund than expected—even if they paid less in tax overall.
Also, because tax reform passed in late 2017, the ATO changed the information employers use to calculate how much tax to withhold from their employees’ paychecks after the start of the year. That meant part of the year; some employees’ withholding was based on outdated tax laws, making some refunds and balances due different from previous years.
Each year, millions of tax filers eagerly await a refund, and 2020 is no exception. Since the ATO began accepting tax returns in late January, taxpayers who got theirs in early are already starting to see their money.
But early data from the ATO reveals that so far, refunds are coming in smaller this year compared to 2019. As of a few days ago, the average refund was $3,125, compared to $3,143 at the same time last year. And while smaller refunds are a good thing, in theory, they could be troubling for those Americans who count them on the most.
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.
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 and 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 cooperate, 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.
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.
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.
The Impact Of Lower Refunds
Contrary to a common misconception, a tax refund isn’t free money. Rather, it’s earned income that was never collected upfront.
Still, a large number of Australian households depend on tax refunds to cover major bills, pay off debt, or address expenses they’ve been putting off, like medical care. For these families, a lower refund than expected could be hugely problematic.
Again, a lower refund shouldn’t be a bad thing in theory — it means you gave the government less of an interest-free loan, and instead received more of your wages as you earned them. But if you’re banking on a specific refund amount and it ends up being less, your financial plans could get thrown for a loop.