This article is not intended as professional advice. Please contact your accountant for advice relevant to your own circumstances.
One of the most common questions we get as Melbourne Accountants is why a client’s refund is lower than the previous year. The reasons can be as varied as the different stars in the sky, however we have narrowed down the top 5 most common reasons you got a lower refund than last year:
- Tax Withheld is lower than last year
- Higher Income Tax Bracket
- HECS/HELP repayment
- Salary Sacrifice
- ABN Income
The most common reason your tax refund wasn’t as high as last year is because your employer didn’t withhold the same amount of tax as the previous year, or you earned more income and your employer didn’t withhold extra tax. Although the Australian Tax Office provides guidelines on how much tax employers should withhold, this doesn’t always happen in practice.
What does this mean? Let’s meet Sally. Sally works as a nurse and makes $42 per hour. She works 38 hours per week, which gives her a total of $1,596 per week at the Alfred Hospital. But Sally only receives $1,207 in her bank account each week-the extra $389 is kept by her employer and paid to the Australian Tax Office every 3 months.
Sally changes jobs mid-way through the year and starts working for a small nursing home in Toorak. The nursing home doesn’t have the same accounting resources as the Alfred, and they only keep $370 per week and pay her an extra $19 per week into her bank account. Sally is happy about this and doesn’t think anything of it. Sally goes to her appointment with Accountancy Matters to complete her tax return, and receives $988 less than last year. Confused why her refund is so much lower, she calls the firm and asks why and finds out she didn’t have as much tax withheld as last year.
Higher Income Tax Bracket
Let’s pretend Sally only worked 10 weeks last year with the Alfred Hospital. It was her only job for the year and she had no other income. She earned $15,960 last year and received $3,890. But when she completes her tax return this year, after working full time, she claimed $500 in work expenses and only received $109.12! Why washer refund so big last year, but now her refund is only just over $100?
In the previous year, she was paying tax the whole year but ended up earning less than $18,200. This means she gets the whole $3,890 of tax back that was kept from her throughout the year. This year however she earned $82,490 and paid $20,228 in tax. Because she is in a higher tax bracket, she doesn’t get to keep all the tax she paid; she has to pay $20,313.88 in tax. Once we include her $500 in work related deductions, her refund comes to $109.12. Sometimes when a taxpayer receives more income, the tax withheld isn’t adjusted accordingly and they don’t receive as big a
Remember that University course you took 8 years ago that you put on HECS? Unfortunately, your studies weren’t for free and it’s time to pay your tuition fees back! For the 2015-16 year, once your repayment income exceeds $54,126, you will have to pay 4% of your repayment income back to the Tax Office, and this gets higher as your income increases. This can mean a refund of several thousand dollars can be reduced to a few hundred dollars, or even a tax bill! Unfortunately there is no way out of this extra bill; the best solution to this is to tell your employer you have a HECS-HELP debt and to withhold extra tax to cover the compulsory repayments.
If you work in the health field, there is a good chance you may received “Salary Sacrifice”. This is where you receive benefits from your employer which are paid with pre-tax dollars, as opposed to post-tax dollars. The salary sacrifice amounts are included in your tax return, in a section called “Reportable Fringe Benefits”. In some situations, this can increase your “Adjusted Taxable Income”, which will lead you to paying tax on a higher amount, which will lead to a lower refund.
If you’re a sole trader, or you earn some income on the side through an Australian Business Number, this will have a significant effect on your tax refund. If you are an employee and have a boss, they will pay tax on your behalf every 3 months for you. At the end of the year, you will receive back the extra tax you paid (which is why you receive a refund). If you earn money with an ABN however, there is no one “pre-paying” your tax for you; you will have to pay all of this yourself. This is why a sole-trader will often have a tax bill at the end of the year, or an employee who earns some income on the side will have a significantly reduced tax refund.