Tax refund season is well under way, and those lucky enough to achieve a sizeable refund will be rubbing their hands together and dreaming of the extravagant holidays, enormous TVs and extra credit card repayments the money will enable.
But those who end up with a smaller refund than expected or, worse, owing the ATO money, will be left scratching their heads and wondering what went wrong.
Liz Russell, senior tax agent at etax.com.au, says there are five main reasons people receive a smaller refund than expected or find themselves with an unexpected debt to the ATO.
1. A second job has blown out their taxable income
Those coming from a traditional employment arrangement, where tax is automatically deducted from their salary, may not realise that they need to set money aside to pay tax on their second job too. Further, the additional income can sometimes push them into a higher tax bracket, which means they’ll have to pay a higher percentage of their overall earnings as tax.
2. An employer is withholding too little from an employee’s wage
This often occurs when an employer is not withholding enough tax proportionate to their income, especially if they receive a bonus or their overtime pushes them into a higher tax bracket or over the HELP repayment threshold.
The ATO has “tax withheld calculators” on its website that indicate how much tax should be withheld from salary payments, taking into account things like student loans, tax offsets and Medicare levy exemptions.
3. Existing government debts
If you have an existing Centrelink, ATO or family assistance debt your tax refund will be used to pay off any amount outstanding.
This is done automatically, and the leftover money – if any – is what you’ll then have transferred to your bank account.
4. Claiming the tax-free threshold for two or more jobs
If you are an Australian resident for tax purposes, the first $18,200 of your yearly income is not taxed. This is usually set when you complete your tax file number declaration when you commence employment.
However, people run into problems if they earn more than $18,200 during the year and they work two jobs while claiming the tax-free threshold on both. Come tax time it’s likely they haven’t paid enough tax during the year and they’ll end up with a much smaller refund than expected and in some cases even owe the ATO money.
5. Making mistakes on the tax return
There are a variety of errors that taxpayers can commit when filling out their tax return – whether mistakenly or otherwise. This includes failing to declare assessable income (which includes allowances, bank interest and income earned overseas), claiming deductions they’re not eligible for, and lacking the necessary documentation to substantiate work-related deductions.
The consequence is that any erroneous claims are fixed by the ATO, meaning the taxpayer has to repay any overpayments and in some instances the ATO can also charge interest and other financial penalties for incorrect lodgements.
If you are unsure about why you owe money, or you haven’t received the refund you expected, contact a tax agent as soon as possible, says Russell.
“A tax agent can fully analyse your personal circumstances and if something has gone wrong they’ll also speak with the ATO on your behalf,” she says.
“This will not only lead to a solution, but if you owe money it shows the ATO that you are willing to co-operate, which will often prevent the incursion of further penalties. On the other hand, if you don’t act, debts can start accruing interest and, in certain cases, be forwarded to a debt collection agency.”
You can’t bank on a sizeable refund every year.
“There are various reasons why you may have ended up with only a modest amount from the 2016-17 financial year even if you had a big refund last year,” says Russell. “This includes a pay rise or second job kicking you into a higher tax bracket, having existing government debt automatically taken out of your tax refund, or erroneously claiming the tax-free threshold on two or more jobs.”
And a small tax refund isn’t always a bad thing, she says.
“A big tax refund usually means you paid for work related expenses out of pocket or you paid too much tax through the year.
“On the other hand, if you have a smaller tax refund it usually means you had lower out-of-pocket expenses and you paid the right amount of tax.
“Ultimately, a lower tax refund can often mean you’ve got more money in your pocket year round and that can be a good thing.”