In the year to June 30, 2023, tax refunds were down or wiped out completely. Some clients were faced with HECS repayments of unprecedented magnitude, and others were caught by the capital gains net. Most taxpayers lodge individual tax returns, that can leave them exposed to inadequate payg deductions and and other surprises when it is all totalled up at year end. A tax refund is not the predictable outcome that it was, for most tax payers in Australia. I will explain the reasons in this post.
Thats not the worst of it. According to recently released data, as discussed by ABC’s David Taylor Tax share increasing, we are all paying more tax than ever, and this is having a more significant impact on our living standards, than rising interest rates.
As Davids graph above shows, 22% of our disposable income goes on tax, and 11% on interest payments. Any which way you cut it, our tax bill has risen significantly in recent times, and our savings have taken a huge hit.
Negotiate a better deal on your home loan and you can alleviate some of the pain caused by increased interest rates. Pay attention to tax savings measures and you may be surprised how much you can increase your refund.
Knowing your tax status is critical in a world of fluctuating financial fortunes and increasing regulation from government. You can predict a tax outcome up to 12 months in advance. Let me explain how to predict your tax status, by analysing the components of taxable income and the tax laws that determine how much tax that you pay on taxable income. It is worth stretching your mind to understand a little about the tax fundamentals and how you can create options at tax time.
My previous posts have explored taxable income, including capital v revenue, capital gains tax, tax rates, HECS, rental properties and allowable deductions. Go back and check these posts for more detail in your quest to reduce your tax bill. Also read my book “Lifes Equation - Decide For A Better Outcome” Cox 2021. It could change your life.
Why has your refund shrunk and what can you do about it?
The mathematical reason why your refund is down, is due to the removal of the LMITO tax offset, and that because we earned more, tax bracket creep has increased tax for many households by 28%. You cannot directly influence these changes to the law but you can legally bring your taxable income down and pay less tax.
The other main reason is that if you have HECS debt, the hit was severe this year as you probably earned more and the government applied a 7% surcharge by way of cost of living adjustment (interest) on any outstanding balances. For those who did not advise payroll to adjust for HECS, it was a big surprise.
What can I do about it?
Firstly, keep an eye on your HECS and make sure that payroll is deducting an amount in expectation of a HECS bill at tax time.
The most effective and readily available long term tax reduction measure is Superannuation. If you can afford to salary sacrifice up to the super contributions cap of $27,500, you are on your way to massive tax savings. I detail this in my book.
The second most accessable method of tax reduction is to negatively gear a rental property. Whether you own your home (or buying) or not, invest in a new rental property which has been quantity surveyed and has associated taxation benefits. I give full details in my book. In principal, you can offset losses from the rental property against tax paid from your salary or other income. Additionally if you live in it for 6 months, and declare it as your primary residence, it is exempt from capital gains tax on the sale of the property for 6 years. (rules apply).
The third and most common tax reduction measure is to ensure that you claim for all allowable deductions. Get an accountant to help you.
Saving tax is not magic. Call me at Harbour Accounting if you need help.
I wish you all the best for Christmas 2023, and a prosperous and less taxing 2024.
Peter