Why Is My Tax Refund So Low?

And How Do I Avoid It Happening Again?

Approximately eight out of every ten Australians who lodge a tax return receive a tax refund. But for some of us, the refund that we get isn’t quite as big as we expect.

“Why is my tax refund so low?” is a very common question, especially in recent years. Let’s cover the most common reasons your tax refund might be lower than you expect. Then, we’ll give you some quick tips on how to avoid a similar situation next year.

To start, let’s discuss why your refund might go down from one year to the next. Then we’ll examine why your expected tax refund might shrink between when you lodge and when the ATO sends your final refund.

The Low-Middle Income Tax Offset (LMITO) is Gone

Many Australians will receive a smaller tax refund than they were once used to, because the Government removed the “LMITO” tax cut in 2023. As a result, many people’s tax refunds have been smaller by $1,000 or more.

LMITO was a boost that the Government gave to people making low-to-average incomes, and was in place between 2019 and 2023. This boost made us all grow accustomed to a healthy tax refund. However, since 2023, that boost at tax time is gone.

How to avoid:

The best way to balance out this drop in your tax refund is to make sure you claim all the tax deductions you are entitled to. Be sure you have proof of your expenses, so the ATO can’t refuse your claim. Using Etax makes it a lot easier to find and claim the deductions you’re entitled to, and it also shows you exactly how your deductions affect your tax refund.

If you’re not sure about your estimated tax refund this year, just ask us! Our refund calculator is the most accurate in Australia and it’s our job to get you the best possible refund. If you’re ready to get started, just click below to begin.

Double-Claiming the Tax-Free Threshold

This is a common answer we give to the question “why is my tax refund so low?” When someone switches jobs during the year or starts a second job, they need to fill out new tax paperwork. On that paperwork, there’s a question about whether you wish to claim the tax-free threshold from this job. If you tick “yes” and you have already claimed it from your first job, the first $18,200 from BOTH jobs is calculated incorrectly as “tax free”. This means you aren’t paying tax on $18,200 that you should be.

Unfortunately, because of your double-claiming, you won’t be paying enough tax each week. Come tax time, you’ll have to make up the difference.

If you’ve forgotten to claim the tax-free threshold at all, then your refund is going to be higher than you thought!

How to avoid next year:

If you have worked at least two jobs during the year, make sure you only claim the tax-free threshold from one. If you’re not sure, ask your employer. Usually, you should claim the tax-free threshold on your highest income earning job.

Employer Issues That Can Reduce Your Tax Refund

Check your most recent payslip to see how much is taken out of your pay each week. Your tax refund is calculated based on the total amount of tax you paid during the year, versus how much tax you should have paid, based on your total yearly income. Your tax refund is essentially the extra tax you paid each week that you didn’t need to pay. On the other hand, a tax bill/debt means you didn’t pay enough tax during the year.

For example, say you changed jobs, and your new employer took out $10 too little tax each week. That’s $10 x 52 weeks = $520 worth of tax you didn’t pay during the year. At tax time instead of getting the $1,000 you normally get, you will only end up with $480 instead.

How to avoid next year:

If this happens to you, ask your employer to adjust your weekly tax. A quick chat to your payroll team is all it takes to have them withhold an extra $10 or $20 tax each week.

Freelance, Sole Trader Or Side-Gigs Can Lead To A Smaller Tax Refund

This is a really common trap for many sole traders, or those with a side job, like driving for Uber. “Assessable income” is all of your income from all jobs combined. This includes regular employment through an employer, or small jobs on the side. All of your income is added together. This amount is used to work out how much tax you have to pay at the end of the financial year.

As mentioned above, if you are an employee, your employer deducts your tax from your salary each week. However, if you work as a sole trader and do freelance work or have a side job driving Uber, you don’t pay tax on that income right away. Instead, you’ll have to pay tax on that income when you do your tax return.

On top of that, your main employer takes out the right amount of tax for the money you earn. But they only know how much you earn in that job. If your income increases with them, you may need to pay a higher tax rate, which your employer would adjust. But if your income goes up because of a side-gig, your employer wouldn’t know what your total “assessable income” is. This means they would not be able to correctly calculate your tax rate and you could now be falling in a higher tax bracket. At the end of the financial year, this can mean you are behind in the amount of tax you’ve paid and have to pay more back to the ATO.

How to avoid next year:

If you do any work on the side or as a sole trader, we recommend setting aside at least 30-40% of your income every time you are paid. This will ensure you don’t fall behind at tax time. You might have to pay tax to the ATO, so it’s best to save your money and be ready.

Another Common Cause for Lower Tax Refunds: Your Income Went Up

This happens to many students, part-time workers and people just starting their career. As a rule, if you earn less than $18,200 you pay zero tax. The ATO refund all the tax you pay during the year to you. However, once you start earning a little more and your income moves above the tax-free threshold, you’ll no longer get all of your tax back in your refund.

The same thing applies if you get a promotion or a new job that earns more money. The more you earn, the higher your tax rate is, and the more tax you pay. So, if your income goes up from one year to the next, it might push you into a higher tax bracket which could lower your refund.

How to avoid next year:

If your income goes up, pay close attention to any extra deductions you might be entitled to. Deductions help improve your tax refund, so keep a close eye on what you are eligible to claim.

You could also even ask your employer to start taking extra tax from your pay for the rest of the financial year. That way, you won’t have to pay as much at tax time, or you’ll receive a bigger refund than you were expecting.

Why has my tax refund gone down from the estimate I received?

Other Government Agency Debts

Here’s a common scenario: A taxpayer lodges their tax return and has a refund estimate of $2,500. The ATO processed their return, and they only get a refund of $800 in their bank account. Naturally the first question that springs to mind is: why has my tax refund gone down?

The answer is often the taxpayer in the scenario above has an existing debt with another government agency. The ATO and other government agencies work closely together when it comes to existing debts and tax refunds, but don’t acknowledge this until after you’ve lodged your tax return. Every other government agency gets first cut of your tax refund, even before you do. The reason for this is simple, the government wants to ensure you pay off your outstanding debts with them first. Then, you get whatever is left.

In our example above, that taxpayer owed the Family Assistance Office $1,700. When the ATO processed their tax return, they made sure the $1,700 was paid first and sent the remaining $800 to the taxpayer.

How to avoid next year:

Know what debts you have and pay them off. If you have a debt with another agency, don’t bury your head in the sand. Otherwise, at tax time you could end up losing a large chunk of your refund you were.

Existing ATO debts

The same scenario above is true if you already have a debt with the ATO. Rather than give you your full refund, the ATO will simply deduct the amount you owe before they send you the rest.

It’s also worth noting that even if you already have a payment arrangement with the ATO, they will still use your refund to pay down any amount you owe.

How to avoid next year:

Pay your outstanding debt off now. If the amount you owe is hard to manage, just talk to Etax. We can set up a payment plan with the ATO on your behalf, to make your payments more manageable. We can make sure that you pay off your debt before you lodge your next tax return with us.

Simple Tax Return Mistakes

If you forget to include some income or bank interest on your tax return, the ATO will usually add it on when they process your return. That means the tax refund you receive can often change from the estimate you saw when lodging. Here’s a simple example:

John earned $49,990 during the year and paid $10,150 worth of tax. At lodgement, his tax refund estimate is $1,606.60.

When the ATO processes John’s return, they notice he earned $742 worth of bank interest that he forgot to include on his return.

The ATO adds the bank interest to John’s return, and his tax refund drops by $267.12 to $1,339.48. All from that one simple mistake, it has changed his refund by a considerable amount.

How to avoid next year:

Save yourself the stress of asking why your tax refund is so low with this tip: Double check for other income items missing on your return. The most common items people forget on their tax return are:

• bank interest
• extra income – did you have more than one job during the year?
• allowances
• dividends from shares
• Government payments like JobSeeker, Newstart, Parenting payments or Youth Allowance

You shouldn’t expect your tax refund to be the same year after year. Tax is complicated; one change in your circumstances can have a big effect on your refund amount. Our advice is, always ask your accountant who will explain to you the reasons behind a big refund drop or increase from one year to the next.

Here’s how to get the most out of your tax return:

On top of the helpful tips we’ve shared here, there are other ways to get some more back on your tax refund. From saving your receipts, to claiming deductions, find out how you can save tax in Australia.

At Etax you can ask questions about your refund by phone or over Live Chat, no appointments needed.