Why your 2023 tax return will be lower

As tax time approaches, many Australians are preparing for the usual anticipation of receiving a tax return. However, some may find themselves disappointed with a lower-than-expected refund or even a tax bill payable from the ATO.

Several factors could contribute to this situation. Let’s explore the key reasons why your tax return might be lower this year.

Discontinuation of the Low and Middle Income Tax Offset (LMITO)

The most significant factor impacting tax returns this year is the discontinuation of the Low and Middle Income Tax Offset (LMITO). The LMITO was introduced in the 2018/19 budget and provided tax benefits to individuals earning between $37,000 and $126,000, with a potential benefit of up to $1,080, depending on their income. During the 2021/22 financial year, those earning between $48,001 and $90,000 received the full $1,500 offset.

However, the LMITO expired on 30 June 2022, leaving many taxpayers without this additional benefit. Consequently, if you notice a discrepancy of approximately $1,500 in your 2022/23 return refund or find yourself owing the ATO around $1,500, the missing LMITO could be the primary cause.

Higher income pushes you into a new tax bracket

Earning more money is undoubtedly commendable, but it could also lead to a tax bill, especially if you have a HECS/HELP debt. The way compulsory HECS/HELP payments work is that you inform your employer about your loan, and a portion of your income is deducted from your paychecks based on your earnings.

However, these accumulated payments are held by your employer and not applied to your loan debt until tax time. If you end up earning above your annual salary, you may be pushed into the next compulsory repayment threshold, resulting in a higher repayment amount. If you didn’t inform your employer about your HECS/HELP loan, no money would have been withheld throughout the year, and you’ll be liable for the full compulsory repayment at tax time.

Increased Medicare contributions

Medicare levy is a mandatory income tax for all Australians, amounting to 2% of taxable income. However, for single individuals earning over $90,000 without appropriate private health care insurance, there is an additional Medicare levy surcharge of up to 1.5% on top of the standard 2% levy.

The Medicare surcharge levy increases with higher income levels and has different thresholds for individuals with families. If your income has increased, and you fall into the category requiring the Medicare levy surcharge, you may see a decrease in your tax return or owe money to the ATO.

It’s important to note that while these are some of the major reasons for a lower tax refund or a tax bill, there are other factors that could also impact your tax return. Changes in your personal circumstances, discrepancies in your tax return details, or other offset changes might also come into play.

To ensure you maximise your tax return and avoid potential tax bills, it’s crucial to stay informed about the latest tax rules and deductions available to you. The ATO website is an excellent resource for detailed information, and seeking advice from a tax professional at KMT Partners can also prove beneficial.

In conclusion, as the LMITO has expired and your income and tax liabilities might have changed, it’s not uncommon for tax returns to be lower or result in a bill this year. Understanding the reasons behind the changes can help you plan better for future tax seasons and take advantage of available deductions to minimise your tax burden. Remember, staying informed and seeking professional advice for your tax planning when needed is key to navigating the complexities of the tax system.

The sooner you start your tax planning, the better prepared you’ll be to maximise deductions, minimise tax liabilities, and ensure a smoother and more rewarding financial outcome during the tax season.

Contact KMT tax experts today to learn more about how we can support you and your business to optimise your tax position.

About our adviserChrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. Chrisanthe’s passion lies in process improvement, as she combines her analytical prowess with adaptability to explore avenues for business sustainability. By deeply understanding her clients’ businesses and goals, Chrisanthe empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Please do not hesitate to reach out if you need assistance.

Reference: https://www.ato.gov.au/Individuals/Your-tax-return/Check-the-progress-of-your-tax-return/Why-you-may-receive-a-tax-bill/

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.