Why your tax refund could be a lot leaner than past years

Some cash back from the tax man is always welcome. But many Australians are likely to be disappointed when they see this year’s refund. It’s likely to be leaner than last year’s, or worst case scenario,  you may find yourself owing a tax debt. 

Most people are in the dark about their refund 

A LinkedIn poll conducted by accounting body CPA Australia asked more than 1,000 followers if they could predict the outcome of their tax return before lodgment. 

More than one in five respondents had no idea what to expect. Overall, more than half (59%) were unclear. Only 16% said they were ‘crystal clear’ about the size of their potential tax refund. 

The risk here is that people may over-estimate how much they’ll get back at tax time. Tax refunds are often used to pay off bills or other things we’ve put on hold including outstanding credit card balances. Having some certainty around your refund can be helpful when it comes to planning ahead. 

If you use a registered tax agent, they can explain what your tax refund will be after completing your return. If you take a do-it-yourself approach, the website of the Australian Taxation Office (ATO) has an online calculator that shows your likely refund. 

Why are tax refunds smaller this year? 

This time a year ago, when we were starting to receive tax refunds for the 2021/22 financial year, the average refund was about $2,900. 

However, CPA Australia says it is hearing many reports from people who aren’t happy with their tax refund, or finding out they actually owe money to the Australian Taxation Office (ATO) for the first time.  

There are three main reasons why this year could see more of us experiencing refund disappointment.  

• The LMITO has ended 

One key change that will have a hefty impact on refunds for the 2022/23 tax year, is the absence of the Low and Middle Income Tax Offset (LMITO). 

The LMITO was canned on 30 June 2022, and as it was worth up to $1,500, its absence will be sorely missed. Not only is the ending of the LMITO the biggest refund killer this year, it will also affect a massive slice of the population. 

The name “low to middle income offset” was a bit misleading as it was available for taxpayers earning up to $120,000. So even those entering higher income territory are set to be impacted by the end of LMITO. 

Here’s a simple table which shows the impact that removing the LMITO has had on various income levels – assuming you earned the same income in 2021/22 as you did in 2022/23. 

• Changes to work from home claims 

The other factor that could impact your tax refund for the 2022/23 year – though not to the same extent – are changes the ATO has made to work from home claims this year.  

By rolling expenses like mobile phone and internet into the ‘cents per hour’ rate we can claim for working from home – and increasing the evidence requirements – fewer people will be able to claim home office costs in their tax return.  

For those who can still claim work from home costs, the size of the tax deduction may be smaller.  

At one stage through the pandemic including the 2021/22 year, we were able to claim the shortcut method that allowed a claim equal to $0.80 per hour. However, the ATO has revised the fixed rate that can be claimed to $0.67 per work hour. 

• A 7% hike in student debt 

It’s extraordinary to think that three million Australians owe a student debt. All up, the outstanding balance is $74 billion*, and while HECS HELP debt is technically ‘interest-free’, it is indexed to keep up with inflation. And this year, the debt ticked up by a whopping 7.1%. 

In a quirk of the system, student debt is indexed on June 1 – just in time to hike the balance before the end of the financial year. This means many Aussies with a HECS HELP debt could be hit with a nightmare tax bill instead of the nice cash refund they have pocketed in previous years. 

Anyone with a student debt who also has a salary sacrifice arrangement in place could face a double whammy. That’s because salary sacrifice reduces your taxable income. This in turn means your employer may have withheld less (or no) tax towards your HECS debt, leaving you dipping into your pocket to pay the debt owed. 

How to manage a tax debt 

Right now, as Australians juggle rising living costs and considerably higher home loan rates, the last thing many of us need is a tax debt. 

If you suspect you will owe money to the ATO, rather than receiving a refund (remember, the ATO tax calculator can help here), you can elect to lodge your tax return through a registered tax agent. This won’t eliminate the debt, but it can buy you time. 

To help tax agents spread their workload throughout the year, the ATO provides agents with special lodgment timeframes. For their clients, it means being able to lodge a tax return after the usual 31 October deadline. That said, you need to be on a tax agent’s books before 31 October to be eligible for an extension of time. 

If you are up for a tax debt, you can request a payment plan that lets you break down the money owed into smaller amounts made via instalments over a fixed period of time. You need to pay at least 10% of your debt within 7 days from the start date of your payment plan. From there, instalments can be paid weekly, fortnightly or monthly until the balance is cleared. It’s usually possible to set up a payment plan online by linking your myGov account to the ATO.  

The catch is that interest is applied to tax debts until the balance is cleared. The ATO charges a punishing 10.9% on outstanding tax debts, so it is worth paying the debt off as quickly as possible.  

The bottom line is that it can be worth getting professional help with your tax return. It should mean you are able to claim every deduction you’re entitled to, so you’re not paying more tax than necessary. Yes, you will pay a fee to use a registered tax agent, but this fee can usually be claimed in next year’s tax return.  

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*https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Library/FlagPost/2023/June/HELP-debt#:~:text=HELP debt - the evolution of higher education contributions&text=On 1 June 2023 some,(derived from Table 6).