Understanding Smaller Tax Returns

Tax refunds have long been a source of anticipation and excitement for Australians, but in recent times, many have noticed a significant reduction in the size of their refunds. This phenomenon has raised questions and concerns among taxpayers, prompting them to explore the reasons behind these smaller returns. We will delve into the intricacies of Australia’s tax system and its impact on tax refunds. Additionally, we’ll explore the growing trend of individuals taking on second jobs to supplement their income and shed light on the tax implications of such endeavours.

The Psychology of Tax Refunds
As a nation heavily reliant on personal and corporate income tax, Australia’s tax system plays a pivotal role in shaping its revenue structure. Approximately 40% of Australia’s tax revenue is generated through personal income tax, including capital gains taxes. This places Australia as the fourth highest taxing nation for personal tax among OECD countries, highlighting the significant role of taxation in the country’s economy.

Tax refunds are a key component of the taxation system, designed to offer rewards to taxpayers through tax deductions and offsets. These mechanisms serve to reduce the net income subject to taxation and minimise the amount of tax payable, ultimately leading to potential refunds. The positive impact of refunds on tax compliance is evident, as they incentivise individuals to accurately report their income and deductions.

The Evolution of Tax Offsets
In recent years, the Australian Government introduced low and middle-income tax offsets aimed at flattening the progressive individual income tax system. Originally introduced as a time-limited measure, this offset was extended multiple times, including as a response to the COVID-19 pandemic. It provided eligible individuals with refunds of up to $1,080 from 2018-19 to 2020-21, and up to $1,500 in 2021-22 for those earning up to $126,000. This initiative significantly boosted the tax returns of many Australians, contributing to larger refunds during those years. However, the conclusion of this offset has led to smaller tax refunds for numerous taxpayers.

Australia’s Tax Landscape Compared to Other Nations
While Australia ranks among the higher taxing nations, a deeper examination reveals a nuanced perspective. Australia’s heavy reliance on income tax, constituting 40% of tax revenue, places it among the highest personal tax contributors within the OECD. Despite this, the nation’s progressive tax system results in higher-income earners contributing a substantial share of the tax revenue. In fact, the top 11.6% of income earners contribute over half of the revenue from personal income tax.

Comparing take-home pay, Australia fares reasonably well when considering both the gross wage and the final pay after tax and family benefits. The Australian take-home pay averages 77% of gross wage for single workers and 84.1% for families, closely aligning with the OECD averages. Additionally, unlike other nations, Australia lacks social security contributions, ensuring a significant portion of tax revenue is redirected into means-tested benefits.

The Impact of Upcoming Tax Cuts
Anticipating a shift in the tax landscape, Australia’s upcoming income tax cuts, scheduled for July 1, 2024, are set to reduce the nation’s reliance on personal income tax. This adjustment aims to strike a balance between personal and corporate taxes, diversifying the revenue streams and potentially altering the tax refund dynamics.

The Rise of Second Jobs
In response to changing economic circumstances, an increasing number of Australians are turning to second jobs to supplement their income. The Australian Bureau of Statistics reports a 2.1% increase in the number of individuals holding multiple jobs since December 2022, with 6.6% of the working population now engaged in multiple roles.

Various factors drive individuals to take on second jobs. Some seek to manage rising costs, while others aspire to establish new ventures while maintaining a steady primary income. However, the decision to take on a second job should be accompanied by a thorough understanding of the potential tax implications.

Navigating the Tax Landscape of Second Jobs
Australia’s progressive income tax system entails higher tax rates for higher-income earners. Individuals considering second jobs must consider not only their potential earnings but also the associated costs and overall financial implications. An additional consideration is the status of these roles as independent contractor positions, which necessitates personal tax management. For instance, Uber drivers must hold an Australian Business Number (ABN) and be registered for Goods and Services Tax (GST), which requires compliance with related regulations and the proper allocation of funds for future tax payments.

While second jobs in the gig economy may require additional tax responsibilities, they also present opportunities for expense deductions related to the job. To optimise the tax benefits, individuals should strategically plan their financials, segregating funds for GST remittance and income tax obligations.

Moreover, individuals engaged in second jobs should ensure that their tax-free threshold aligns with their highest-paying job in terms of PAYG withholding, avoiding potential complications in tax calculations.

The landscape of Australian taxation and its impact on tax refunds is a complex tapestry that reflects the nation’s economic priorities and values. While recent reductions in tax refunds have raised concerns, understanding the underlying dynamics of the tax system and the intricacies of second jobs can empower individuals to make informed financial decisions. As Australia continues to evolve its tax policies, individuals are encouraged to engage with tax professionals and stay informed about tax changes that may affect their financial well-being.

If you’d like help with your individual or business tax returns this financial year, get in touch with the team at MB Accounting and Business Services. Our expert accountants are based in Ormeau and can help you to set up your business for success when it comes to business tax.