8 possible reasons and how to avoid next year
Many Australians have been disappointed by their lower-than-expected tax refunds this year, despite the common expectation of receiving a refund. It is important to understand the factors that contribute to a reduced refund in order to avoid a similar situation next year.
Common explainations for a low refund (or tax payable)
1. Increased Income
If your income exceeds the tax-free threshold of $18,200, you won’t receive a full tax refund. With higher income comes higher taxes. Promotions or new jobs can lead to higher tax rates, reducing your refund. Often your deductions will also increase as income increases so you need to know what the all are.
Tip: Be aware of potential deductions and consider asking your employer to withhold extra tax throughout the year. Learn about other tax saving strategies such as salary sacrifice.
2. Freelance or Side Income
Income from freelance work or side gigs is added to your total assessable income, which could push you into a higher tax bracket. This means you might owe more at tax time.
Tip: Set aside 15-40% of your side income (depending on your usual wage rate) for taxes to avoid surprises later.
3. Employer Withholding Issues
Check your payslip to see how much tax is withheld. If your employer deducts too little, you may end up with a smaller refund. For instance, if your employer withholds $50 under what they should each week, that adds up to $2600 over a year. It happens more often then you think!
Tip: Discuss your withholding with your payroll department to adjust your tax deductions as needed.
4. Existing Debts
If you owe money to another government agency, such as child support or HECS / Help loans, they may deduct this from your tax refund. The same applies to any existing ATO debts.
Tip: Stay informed about your debts and pay them off proactively to avoid losing part of your refund.
5. Removal of the Low-Middle Income Tax Offset (LMITO)
This is the big one for this year. In 2023, the government eliminated the LMITO, which previously provided significant tax relief for low-to-average income earners. This change has led to refunds being smaller by $1,000 or more.
Tip: To mitigate this, ensure you claim all eligible tax deductions and keep receipts as proof of your expenses.
6. Doubleclaiming the TaxFree Threshold
If you switch jobs or take on a second job and claim the tax-free threshold at both, you may underpay taxes. This can result in a lower refund when tax time arrives.
Tip: Claim the tax-free threshold from only one job, preferably the one with the higher income.
7. Medicare Levy Surcharge
The Medicare Levy Surcharge (MLS) is an extra tax that may lead to a lower tax refund or a higher tax bill for Australian taxpayers who do not hold eligible private health insurance and whose income surpasses specific thresholds. Consult the ATO website for further details.
Tip: Research whether or not you need private health insurance to minimise your tax liability each year. We can help with that!
8. You are getting poor advice (or doing your own tax!)
Omitting income (getting caught our by the ATO) and not claiming everything you are entitled to when you lodge your tax return can significantly affect your refund. People who have even a tiny bit of complexity in their tax return will always be in front good advice – and advice is tax deductible!
Tip: Get help from tax experts that have been working in the field for 5 years or more and have broad experience from lodging hundreds of tax returns.
The bottom line!
Tax refunds can vary due to numerous factors including tax rates and thresholds. To maximize your refund, keep up to date, stay organized, claim all eligible deductions, and monitor your income and tax withholdings. If you’re unsure, consulting a tax professional like Accountants Direct can provide valuable insights tailored to your situation.
Book here today, chat online or call us on 1300 TAX SHOP (1300 829 746) and you’ll be sure to avoid the above issues and you’ll pay only the tax you are required to legally.
Also check out our recent article ‘will stage 3 tax cuts give you get a better 2025 tax refund?’ which the government is delivering now.
