If there’s one question I’m expecting to get a long this year, it’s that question - ‘why is my tax refund so much lower this year?’
It’s understandable - for the last few years, you may have received a refund of about $1,000, perhaps more - but whatever value it is, if you earn between $37,000 and $126,000 your refund is probably lower this year than it has been the last few years. If you’re unlucky, it may even be a tax payable!
I promise, the reason isn’t ‘because Jen, the accountant, is suddenly crap at their job’.
What happened is this is the first financial year in a while where the Low and Middle Income Tax Offset isn’t in place - it has ended.
WHAT HAPPENED - THE START
The Low and Middle Income Tax Offset - otherwise known as the LMITO and colloquially known as the ‘Lamington Offset’ (insert cute picture of a lamington), was originally introduced in the 2019 financial year (that’s 4 tax returns with this offset - no wonder you got used to it!).
The offset was originally introduced to ‘bring forward’ a tax cut. Back in 2018 (that’s pre-COVID) legislation was passed to change the 19% tax bracket from $37,000 to $45,000 - but only from the 2021 financial year onwards. The offset was introduced so that the dollar value benefit of that ‘tax cut’ was essentially given to taxpayers from the 2019 financial year onwards (that’s two years early).
It was introduced to be a ‘tax return only’ offset, so you didn’t see any change in your pay packet - you just got a bonus of up to $1,080 when you lodged your tax return.
WHAT HAPPENED - THE EXTENSION
Two years later in the 2021 financial year, the tax brackets actually changed, so everyone now received a few extra dollars in their pay packet each fortnight - but now COVID was a huge thing, and suddenly giving extra cash to your taxpayers to boost the economy was the thing to do. The offset was extended for the 2021 financial year, and you not only got a week-to-week tax cut, you also got a tax return bonus of $1,080. Essentially you got the tax cut twice over, and the offset went from being a shift in the timing of the tax cut to being a genuine ‘gift’ of just over $1,000.
WHAT HAPPENED - THE ENDING
Cut to March 2022 and the Morrison government handing down their pre-election budget.
They said hey, the economy is starting to shift, and we can’t keep throwing money around forever. BUT we’ll give you one last offset on your 2022 tax return, AND we’ll up it to $1,500. Legislation was passed before the election, and this legislation boosted the offset as a one-off final payment of $1,500 in the 2022 financial year (that’s last year), and then ended the offset, so that it would not apply in the 2023 financial year (that’s where we are now).
WHAT’S HAPPENING - THE AFTERMATH
The current government has elected not to reintroduce the offset (but remember, it was already legislated to end this financial year by the previous government).
What this means is that for the last four years, you’ve probably become used to seeing a nice healthy refund of perhaps $1,000 or more. Now, the cost of living is high and you might have been relying on that refund which you’ve started to think of as ‘your standard refund’ - but unfortunately it was only ever a temporary, ‘gift’ refund.
For more than a year, the writing has been on the wall - no offset this year. It was around just long enough for you to get used to it! Now, unfortunately, you need to get used to life without it.
WHAT’S THE WORST THAT CAN HAPPEN?
If you’re unlucky, or if you have slightly more complicated tax affairs (eg a HECS debt, multiple jobs, high income without private hospital cover etc) you may even be looking at a tax payable.
For many people, the offset over the last few years has been a bit of a ‘saviour’ - pulling people out of a tax payable hole and into a refund instead. Without that safety net, you may need to pay the ATO instead of vice versa!
If that’s the case for you this year, I will do my best to give you a more detailed breakdown of ‘where the payable comes from’ so that if there are any changes you can make to improve your tax position, we can make sure you’re working on those. The specifics of this change for each person, so what works for someone else may not work for you.
WHAT’S ONE THING I CAN DO RIGHT NOW?
One of the best ways to guarantee yourself a decent tax refund is to get your employer to take extra tax out of your pay. This effectively builds you up your own tax buffer - think of it as a forced savings plan (this isn’t financial advice, btw).
If you get paid weekly, and you ask your employer to take an extra $20/week of tax out of your pay, by the end of the year you will have paid an extra $1,040 in tax. (The equivalent would be $40/fortnight or $85/month if you’re paid on those cycles).
At the end of the year that extra tax gets brought into your calculations, and it becomes like your own self-made Lamington Offset! This means even if you have complications like the ones above, you’ll hopefully cover any little tax payables, and you’ll be more likely to end up with a decent tax refund instead!
