Why your tax refund is lower than expected

Many taxpayers make their holiday plans or other special events hoping they will receive handsome amount for their tax returns. However, this often ends up in disappointment after receiving the actual notice of assessment. There are scenarios when taxpayers end up paying more tax than expected. Let us see what may cause these scenarios.

1. You had a supplementary income

If you derive supplementary income (e.g. Uber, Airbnb or other small business income not deriving from employment activity), you are likely to have more tax payable due to increased taxable income. Any business income apart from what is considered a personal hobby will form as your supplementary income and will require ABN registration to operate. This supplementary income from business has not yet been taxed unlike your employment income which is taxed on PAYG basis. Therefore, the net business income adds to your taxable income and tax payable on taxable income is determined with the tax rate and your income threshold. Let us assume that your taxable income from employment is $36,000 and additional net business income is $8,000. Total taxable income is $44,000 and tax payable is $5,847. If PAYG withholding tax for your employment income was $4,000, there will be further tax payable of $1,847 as a result. (*excluding Medicare levy)

• PAYG withholding tax

Your employer withholds tax based on your salary which is later remitted to ATO. This withheld amount is the tax you have paid to ATO based on your income. If the tax withheld is greater than tax payable on your taxable income, there will be a refund for the difference. If the tax withheld is less than tax payable on your taxable income, there will be a tax payable for the difference.

If your employer does not withhold enough tax for your income, you have an obligation to pay for the shortage amount by lodging your tax return. This may be due to the bonus or commission received, or simply caused by a mistake. Otherwise, you may have tax payable amount due to HELP/HECS repayment if your income is above certain thresholds. 

• Government debt

If you have existing debt with ATO, Centrelink or Family Assistance, your tax refund will be prioritised to pay off the existing debt and remaining amount, if any, will be refunded to you.

• If you have more than one employer

If you are a resident for tax purpose, you are entitled for tax-free threshold for $18,200. That is, you do not have to pay any tax for first $18,200 of your income. You can claim tax-free threshold on your TFN declaration form when you sign the employment contract. By doing so, your employer is likely to only withhold tax for your income above $18,200.

If you have two employers and again claim tax-free threshold for both employments, you are likely to pay additional tax as your total tax payable is based on the income from both employments. This is because your employer will withhold tax for income above $18,200 and does not consider other income arising from different employment. Therefore, you can choose not to claim tax-free threshold for the second employer to avoid paying tax.

• Tax return errors

There are many ways a taxpayer can make mistake while lodging a tax return. For example, a part or whole assessable income is omitted, and later amended by ATO will cause tax payable situation. Or, a bank interest or other investment income may have been omitted, and later amended by ATO. Any ATO-initiated amendments will result tax payable, and often subject to general interest charges or penalty.

• Bank interest

Other income such as bank interest income is also included as part of your taxable income. As your tax payable is determined by taxable income, it is important to understand how high bank interest income can affect your tax return outcome. If you have a spouse who is currently unemployed, you may change the ownership of interest earning account or term deposit account to your spouse’s name, otherwise will be tax ineffective as the income is portioned equally for both of you. You can speak to our experienced staffs who can advise whether there will be tax saving option available.

We have looked through a list of reasons why your tax refund may have been reduced. There can be various factors affecting the situation and we always recommend that you seek a professional advice from a tax agent or an accountant for the best tax planning strategy. Please contact us and our experienced staffs will be able to provide the best result.

*Note that above information is for general use only and is not intended to substitute for a professional tax advice. You must always seek a professional advice from an accountant to avoid unlawful acts.