Many Australians have noticed a significant reduction in their expected tax refunds for financial year 2023, prompting questions about what’s behind this change. This article will tell you why.

The Impact of the Missing Tax Offset

One of the key factors contributing to smaller tax refunds for many Australians is the discontinuation of a time-limited low and middle-income tax offset (LMITO). This offset was introduced as a response to the economic challenges posed by the COVID-19 pandemic. Over the years, it had provided substantial tax relief to individuals, making tax time a bit brighter. However, as it came to an end, its absence cast a shadow over tax returns, resulting in smaller refunds for those who had come to rely on it.

The low and middle-income tax offset delivered up to $1,080 from 2018-19 to 2020-21, and an even more generous $1,500 in 2021-22 for individuals earning up to $126,000. For many, this was a significant boost to their annual finances. Its discontinuation has left a noticeable dent in the pockets of taxpayers who had grown accustomed to these additional funds.

Australia’s Tax System: Complex but Balanced

To comprehend the full scope of these changes, we must first understand Australia’s tax system. Australia leans heavily on personal and corporate income tax to fund its government services. In fact, personal income tax, which includes capital gains tax, constitutes a substantial 40% of the country’s total revenue, a figure significantly higher than the OECD average of 24%.

While this may paint Australia as one of the highest taxing nations in the OECD for personal income tax, it’s crucial to consider the flip side. Australia also boasts a robust system of means-tested benefits that help alleviate the tax burden for many individuals. When factoring in these benefits, the discrepancy between Australia and other countries becomes clearer. The take-home pay of the average single worker is 77% of their gross wage in Australia, compared to the OECD average of 75.4%. For families, the Australian take-home pay average is 84.1%, nearly on par with the OECD average of 85.9%.

Progressive Taxation and the Road Ahead

Australia’s tax system is known for its progressive nature, meaning that the more you earn, the greater your share of the tax burden. The top 11.6% of Australian income earners shoulder a substantial 55.3% of the tax revenue from personal income tax. To address some of the challenges posed by this system, the government has enacted a series of legislated income tax cuts, with the final round set to commence on July 1, 2024. The goal is to reduce the nation’s reliance on personal income tax and shift toward other forms of taxation.

Considering a Second Job: A Financial Balancing Act

Turning our attention to second jobs, it’s clear that many Australians are exploring additional income streams, driven by various motivations. However, it’s crucial to navigate this terrain with a keen understanding of your overall financial position. When contemplating a second job, factors like your expected earnings, the expenses involved in generating that income, and the tax implications must be carefully considered.

For those venturing into the gig economy, where roles often entail independent contractor status, managing tax affairs becomes your responsibility. For instance, Uber drivers are required to hold an Australian Business Number (ABN) and register for GST. This introduces compliance costs, as you must remit a portion of your fees to the Tax Office quarterly, while also ensuring you have the necessary funds to cover GST and income tax obligations. On the bright side, you can claim expenses related to your second job, potentially offsetting some of your tax liabilities.

In this context, it’s essential to ensure that your tax-free threshold applies to your highest-paying job from a PAYG withholding perspective, optimizing your tax situation.

In Conclusion

The size of your tax refund, the decision to take on a second job, and your overall financial standing in the face of Australia’s tax system all depend on a multitude of factors. Australia’s progressive income tax system adds complexity, making it vital for individuals to assess their unique circumstances and obligations. By understanding these dynamics, we can make informed tax planning that align with your goals and aspirations while navigating the ever-changing tax landscape Down Under.

Should you please have any question in regards to above, please feel free to contact our friendly team in Pitt Martin Tax at 0292213345 or info@pittmartingroup.com.au.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

By Zoe Ma @ Pitt Martin Tax