Why is my Australian tax return so low?
While tax time isn’t exactly the most exciting time of the year, everyone looks forward to that little boost in their bank accounts from their tax refunds. Maybe they can plan a holiday, fix their car, catch up on bills, or throw it all on their savings accounts. Those plans can easily be thrown out of the window when we find less than expected in the bank when we get our payment from the ATO. There are many reasons why your tax return can be lower than expected, so we’ve listed a few for you to look out for.
But first of all…
How do tax refunds work in Australia?
In Australia, our tax is deducted straight from our paycheck by our employer. But the government does not take into account any work expenses that we may incur throughout the financial year. So, at the end of the day, they are taxing you for more than you actually earn. By filing/lodging our tax return each year, we are telling the government about the expenses that we have had to pay for our work. Then the ATO is able to take your original income, deduct your work expenses from it, and recalculate how much tax you should have paid. Often after these deductions are taken into account and recalculated, we have overpaid our taxes – this is where we get our refunds from.
So, why was your tax return so low?
1. You got a pay raise/your income increased.
Congratulations! You got a pay raise, or your income increased in other ways, throughout the financial year – which is always a good thing. But the more that you earn, the higher the rate of tax that you are required to pay. So, the increase of income may have bumped you into a higher tax bracket, meaning you owe more tax, and you get less on your refund.
How to avoid this next financial year:
There’s not much you can do to get around being bumped into a higher tax bracket. But if you’re looking to maximize your refund, be sure to track all of your work expenses and get a good accountant to help you avoid any mistakes on your tax documents.
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2. Second job/side income increasing your taxable income.
Unlike those in traditional employment who have an employer taking out their tax each week for them, sole traders and side hustlers may not realize that they need to pay tax on their second job. Things like Uber, Airbnb, and Fiverr income are not excluded from being taxed – so if you’re doing these things on the side, you may need to account for the extra tax you will need to pay.
How to avoid this next financial year:
If your sole trader business or side hustle is making you a decent income, it may be time to start setting aside a percentage of your earnings from these gigs every time that you are paid. The recommended figure to save for tax is 30-40%, but a tax expert or accountant can help you figure this out more accurately, and help you avoid a bill from the ATO come tax time.
3. Employer not withholding enough from your wage.
There can be situations where an employer is not withholding enough from your weekly wage to cover the tax you will owe. This can be either a simple mistake within payroll, a missed bonus, or overtime that has pushed you into a higher tax bracket. While there is nothing you can do to remedy this after the financial year has ended, it is something that you can keep an eye on for the following years to come.
How to avoid this next financial year:
Ask your employer to adjust your weekly tax deductions/withholding as necessary. A simple heads up to the payroll team may be all it takes to ensure that you are not underpaying.
4. Existing government debt.
Existing government debts are paid automatically out of your tax return money, and the remaining is deposited into your bank account. So, if you have outstanding fees owed to government agencies (Centrelink, ATO, family assistance, etc.), your refund will be used to pay off this debt. The ATO and all other government agencies communicate when it comes to tax refunds, and they often get first shot at your refund if you are in their debt.
How to avoid this next financial year:
It’s important to know what debts you have and keep track of money you may owe. If you’re in the position to pay these off throughout the year, you will be better off come tax time.
5. You’ve claimed the tax-free threshold for two or more jobs
For Australian residents, the first $18,200 of income is not taxed. When you fill out your tax file declaration at the beginning of any new employment, you have the option to claim the tax-free threshold on the income from this job. If you have more than one job and have tried to claim the tax-free threshold on both forms, the first $18,200 from both jobs will have been calculated as tax free – and you will not have paid enough tax for how much income you have earned throughout the financial year.
This can result in a much smaller refund, and in some cases – a tax bill from the ATO.
How to avoid this next financial year:
You may need to speak to your employer and adjust your tax declaration forms if you work two or more jobs. Make sure that you are only claiming the tax-free threshold for one, usually, it is best to claim the threshold on your highest income source.
6. Mistakes made on tax return
It can be easy to make errors, or accidentally overlook mistakes, made on your tax forms. This can include failing to declare taxable/assessable income (such as bonuses, allowances, bank interest, foreign income), or claiming deductions which you are not eligible for. Certain deductions can also be rejected by the ATO if you lack the documents or evidence to support these deductions. Because of this, the ATO may amend these claims and as a result, reduce your expenses and raise your tax debt, and end up lowering the return you receive.
How to avoid this next financial year:
Keep an eye out for common sources of income that people leave off their tax return forms, such as: bank interest earnings, allowances or bonuses, dividends, foreign income, side income, or government payments (Youth Allowance, Newstart, etc.).
Double check both your income and your expenses, and keep track of anything you are looking to claim as a deduction on your tax return.
It’s good practice to not expect your refund to be the same each year. Small changes in income or circumstances can alter your tax obligations drastically. As a whole, the ATO has reported that the amount of money received by residents in their tax returns have been between 8-10% lower than previous years. There have also been updates in tax withholding standards which leave employees with slightly bigger paychecks, but lower tax returns.
A good accountant can help you navigate these issues, avoid any nasty surprises or bills from the ATO, and help you get the most from your tax return.
