Why is my tax refund so small?
Tax time normally is something to look forward to but this year many Australians expected returns have dramatically reduced.
About 14 million Australians will be prepping their tax returns over the coming weeks and months. Changes in the 2022/23 financial year mean that many tax return refunds could be lower this year — with some actually having to owe the Australian Taxation Office (ATO) money.
There could be a few reasons your return refund doesn't look as robust as past years, according to the ATO.
The Low-Middle Income Tax Offset (LMITO) is gone
As part of the previous Government’s efforts to flatten out the progressive individual income tax system, a time-limited low and middle-income tax offset was introduced. The lifespan of the offset was extended twice, partly as a stimulus measure in response to COVID-19. The offset delivered up to $1,080 from 2018-19 to 2020-21, and up to $1,500 in 2021-22 for those earning up to $126,000. This was a significant boost for many people each tax time and bolstered the tax returns of millions of Australians. For many, the end of this offset has meant that their tax refund has reduced dramatically compared to previous years.
Changes to working-from-home deductions
During the pandemic, office workers who had to work from home were able to claim 80¢ an hour in a simplified working-from-home deduction. But that shortcut ended on June 30 last year, replaced with a 67¢-an-hour model for this financial year as more people returned to a hybrid work model.
Key rule changes brought in on March 1 this year also make claiming work-from-home expenses more difficult with stricter requirements around keeping a diary of home working hours.
Double Claiming the Tax-Free Threshold
When someone switches jobs during the year or starts a second job, they need to fill out a new TFN Declaration form. On that form, there’s a question about whether you wish to claim the tax-free threshold from this job. If you tick yes and you already claim it from your first job, that means your first $18,200 from both jobs is calculated as tax-free.
This means you won’t be paying enough tax each week and come tax time you will have to make up the difference.
Freelancing, side hustles, or a second job
The trap for many picking up a ‘gig economy’ second job is that they are often independent contractors. That is, you are responsible for managing your tax affairs. All Uber drivers, for example, are required to hold an ABN and be registered for GST. There is a compliance cost to this and from a cashflow perspective, 1/11th of the fee collected needs to be remitted to the Tax Office once a quarter.
It’s important to quarantine both the GST owing and income tax to ensure you have the cash flow to pay the tax when it is due. The upside is you can claim the expenses related to your second job.
If you are taking on a second job, ensure that your tax-free threshold applies to your highest-paying job from a PAYG withholding perspective.
If you're wanting support in maxmising your individual or business tax return, book a free consult here.