Lodging tax returns is often done with a sense of expectation, knowing that it could lead to a tax refund. In 2021, for example, the average tax refund for Australian taxpayers amounted to $2800. However, this year, there’s a possibility this figure could be notably reduced, or even lead to taxpayers owing the Australian Tax Office (ATO) money.
Amid ongoing cost-of-living pressures and an increasingly price-conscious consumer environment, it’s worth knowing about the nuanced changes that will impact taxpayers with their lodgements for this year's tax returns.
Ann Kayis-Kumar, Associate Professor in the School of Accounting, Auditing and Taxation at UNSW Business School and Founding Director of the UNSW Tax and Business Advisory Clinic, says: “The scaling back of temporary COVID measures such as reducing the amount of days you are working from home has played a role in the smaller refunds we’re seeing this year.
“As the economic landscape gradually returns to pre-pandemic norms, the impact on tax refunds becomes more pronounced, emphasising the need for individuals to proactively seek guidance to get the most of tax time,” says A/Prof. Kayis-Kumar.
What are the changes – and how can they impact your income tax assessment? And what are the common pitfalls taxpayers may miss when lodging tax returns?
The lapsing of the low and middle income tax offset
Helen Lam, a supervisor at the UNSW Tax and Business Advisory Clinic, explains that this year, there are two main changes that could lead to your tax refund being lower than anticipated or even leave you with a tax liability. The main change is the repeal of the low and middle income tax offset (LMITO).
“The LMITO was a temporary tax offset that reduced the amount taxpayers had to pay to the ATO based on their income. It was designed to provide some financial relief to people with lower to middle incomes due to bracket creep.
“This tax offset applied to people who earned up to $126,000 and the offset varied based on how much you earned. For example, taxpayers earning between $37,000 and $90,000, the offset was $1500, which meant the amount of tax payable for the financial year for such taxpayers was reduced by $1500,” says Ms Lam.
The low income tax offset (LITO) remains in place for people on annual incomes of up to $66,667. Ms Lam says it provides some support to taxpayers, since the median taxable income is around $50,980.
Less working from home means less to claim
The other significant change relates to calculating working from home expenses.
Ms Lam says that there used to be two methods to claim ‘working from home’ expenses before COVID – the ‘fixed rate method’ pricing at $0.52 per work hour and the ‘actual cost method’.
“As COVID happened and more taxpayers moved to remote working from home, the ATO introduced the $0.80 ‘shortcut’ method to cover all costs including energy use, mobile phone, internet, depreciation on furniture and computer equipment, and stationery,” she says.
For the 2022-23 year, the ATO introduced a new $0.67 per work-from-home hour claim method, and the difference from the two previous claims was that this new method does not include furniture and computer equipment depreciation.
It is not clear how the ATO reached this year’s claim figure, but Ms Lam explains that this method offers a simple way for taxpayers to easily claim their work-from-home costs rather than using the actual cost method.
“The actual cost method of calculating working from home expenses might provide a better deduction than the $0.67 method, but the record-keeping required can be onerous on the taxpayer as they need to keep a logbook of their home internet and mobile phone use,” says Ms Lam.
Common pitfalls when lodging a tax return
“It might sound counterintuitive but getting a tax refund isn’t necessarily a good thing – it means the ATO has been holding onto your money over the year. On the other hand, needing to pay the ATO money isn’t necessarily a bad thing – it means you’re earning more money than most other Australians,” says A/Prof. Kayis-Kumar.
Ms Lam says one thing taxpayers forget is to let their private health insurance provider know when their income changes. The private health insurance rebate, which they receive through reduced premiums, is based on how much income they earn. If they are in the wrong income tier, they may need to pay back the rebate when they do their tax return.
“This does mean they will pay higher premiums each month though - if they change their rebate percentage with the private health insurance provider,” she says.
Another common mishap seen among taxpayers with two jobs is that they claim the tax-free threshold on the Tax File Number (TFN) declaration for their second employer when they shouldn't. When taxpayers do this, they may end up having a higher tax bill at the end of the year as their second employer hasn't withheld enough tax during the year.
From a broader perspective, A/Prof. Kayis-Kumar says: “Being up to date on your taxes is key, too – because it means the ATO won’t charge you interest and penalties. Especially if you’re a few years behind on your taxes it might seem overwhelming to get back on top of things.
“That’s where seeing a registered tax agent can be hugely helpful. They can help you navigate things like keeping and gathering records and receipts, informing you of the Medicare Levy Surcharge and how to not pay it, navigating having multiple jobs and what that means for TFN declarations, the list goes on.
“What is worrying is that every year around 75,000 Australians are in serious hardship and need but can’t afford professional help to complete and lodge their long-term overdue tax returns.
“This highlights the vital importance of ensuring that free tax clinics remain open, providing essential support to those who lack the financial means to lodge their tax returns.
“The clinics provide a lifeline for those grappling with financial hardship - and also serve as a platform for grassroots research on systemic issues faced by the most disadvantaged. This is tangible proof that research and education can affect positive social change," says A/Prof. Kayis-Kumar.