Why Do I Owe Tax This Year On My Tax Return?
Written by: Krystine Canny-Smith l Accounting Team
I’ve been completing tax returns for over 26 years and I’ve never had to tell so many people that they owe tax as I had in the last financial year.
Over that time, I have seen a lot of things come and go. There has been the spouse rebate (gone), Family Tax Benefit (moved across to Services Australia), medical expenses rebate (gone, and as a parent of three kids who all had braces – sorely missed!), education rebate (gone) and most recently the low-to-middle income offset (gone).
We have had Medicare Levy Surcharge (added) and HELP repayment threshold (changed). I could go on forever but what I really want to talk about is why so many people have been owing tax over the last two years, when they normally expect a refund.
Preparing for Tax Season
Last year we saw more people owe tax when their income tax returns were complete than we have ever seen. Here are the top seven reasons why we believe that happened:
Removing The Low To Middle Tax Offset (LMITO or “Lamington”) Rebate
This lovely rebate reduced tax by a minimum of $675 for those earning up to $37,000 and between $675 and $1,500 for those earning between $37,001 and $126,000.
It was introduced in the 2019 financial year, which means we had five years to get used to it. The problem with it being removed so suddenly is that we had become used to it! We took it for granted and presumed it would continue forever.
When it was introduced, if you had an income of $80,000 your refund would have been $1,080 higher in 2019 as the rebate was $1,080 in that year. By the 2022 financial year, you would have had a refund that was higher than usual by $1,500. What we didn’t realise, is that in the background people who were receiving allowances from Centrelink, or who had bank interest or second jobs had been getting the rebate and it had been masking the fact that they were undertaxed.
For example, if you had income of $80,000 during the 2022 financial year and your refund was $1,000, that meant that when the rebate was removed you would owe $500 to the Australian Tax Office (ATO). For others, who simply had one job and no other income, it meant their refunds were very small or non-existent.
A lot of people were caught off guard by this offset being removed.
HELP Debt Repayments – Two Jobs
This one can be tricky because of the way the repayments are calculated.
To explain the difference, with income tax each person can expect to receive the first $18,200 they earn, tax-free. The next $26,800 is taxed at 16% plus Medicare Levy (up to $45,000) and the $90,000 after that at 30% Medicare Levy (up to $135,000). You can expect then that if you earn $45,001 it is only the last $1 that is taxed at 30% as the other amounts are taxed at the lower amount of 0% for the first $18,200 and 16% for the next $26,800.
HELP debt repayments are different!
The way they are structured is that if you have a taxable income of $54,435 or less you repay nothing toward your debt, but if your income is higher than that you pay a flat rate on your entire income.
Let’s give you an example:
John has one job and earns $89,000. Based on that income he is required to 4.5% of his income toward his HELP debt. This means when we lodge his income tax return, $4,005 will be repaid to his debt.
Let’s imagine John has a second job during the year. It is a small casual job that only earns him $1,000 in total. Once we add this to John’s taxable income, he then has an income of $90,000 and is required to pay 5% of his income towards his HELP debt. That makes the repayment required when we lodge his return, $4,500. For John’s additional $1,000 income he is not only paying tax of $320 (including Medicare Levy) but he is also paying $495 extra on his HELP debt.
As a more extreme example, assume John earned $12,000 from his causal work. This would increase his taxable income to $101,000 and his HELP repayment level to 6%, equating to $6,060 repayable. John now finds for his additional $12,000 income he is paying tax including Medicare Levy of $3,840 and additional HELP repayments of $2,055. As it is likely John’s employer would have deducted a lot less than the $5,895 he is paying when we lodge his income tax return, we can expect he will owe tax.
On the plus side, he is reducing his HELP debt at a faster rate, however, it can be a shock when we lodge his income tax return.
HELP Debt Repayments – Salary Packaging
This is similar to the above but involves people salary packaging or salary sacrificing.
We usually see this with people working in hospitals and charities, but it can also happen to those who have employer provided cards that come under the Fringe Benefits Tax rules, or for those salary sacrificing to super.
Let’s give you an example:
Jenny works at a hospital and has a HELP debt. She can salary package expenses with her employer and packages the maximum amount. That means that when her payroll information is completed at the end of the year, she not only has income of $89,000 but also fringe benefits from her employer of $17,000 and salary sacrifice to superannuation of $15,000.
Jenny’s employer may have deducted tax correctly, however, their software package would likely calculate the HELP repayment as $4,005, the same as John’s above. However, the ATO add back the salary packaging and salary sacrifice, making her income for HELP repayment purposes $121,000. The HELP repayment would therefore be 7.5% of her income, of $9,075, meaning Jenny has been undertaxed by $5,070.
Of course, salary packaging has its own benefits, as does salary sacrificing, so Jenny shouldn’t make her decision based solely on her HELP repayments but should check with her employer’s salary packaging agent to see how much extra tax she should get deducted to offset this and once again on the plus side, Jenny will pay off her HELP debt sooner.
Centrelink Benefits with No Tax Deducted
Centrelink benefits, if that is all you receive as income, work out tax-free.
If they are not below the $18,200 tax-free threshold, then the amount over that has a rebate that will make it tax-free. The problem arises when you receive them for part of the year and work for part of the year.
Let’s give you an example:
Consider Bill. He received JobSeeker of $9,580 for six months of the year. He then commences employment and earned $60,000 for the balance of the year. His JobSeeker wouldn’t have been a problem previously, but because he then earned more than the tax-free threshold, he now has a problem because no tax was deducted from his Centrelink income.
Paid Parent Leave Is Taken As A Smaller Block of Payment
This is a new one that we have only come across this year and doesn’t appear to affect those who take their entire Paid Parental Leave when they give birth.
Based on our experience, when someone chooses to return to work before the entirety of their 20 or 22-week paid parental leave (depending on when you give birth) are taken in their entirety they can run into a problem with their tax. The reason is that Centrelink allows parents to take the balance of parental leave pay as payments while they are working again.
Again, based on our experience, they deduct 15% tax on these payments. This will be fine if the person receiving the payment has taxable income at the end of the year below $45,000. However, it can be a problem for a parent returning to work with a higher income.
Let’s give you an example:
Consider Susan who usually earns $89,000 per year.
Susan has six weeks of paid parental leave and then chooses to keep the balance of her parental leave to be paid by Centrelink whilst she is working. She has not shared paid parental leave with her partner, so she has a balance of 20 weeks less six weeks = 14 weeks pay to receive.
Susan receives this from Centrelink while she works, and it amounts to $12,821.20 gross paid by Centrelink to top up her ways and pay out her paid parental leave. Centrelink has deducted 15% tax, which is $1,923. When we complete Susan’s tax return the Centrelink income is added to her employment income and it is subject to tax at the rate of 32% including Medicare Levy. Susan now finds she has been undertaxed by $2,179.
There is plenty of information that is available on the Parental Leave Pay, we recommend reading about it here.
Medicare Levy Surcharge
This is something most people are aware of, however, for those who experience it for the first time it can be painful.
The Medicare Levy Surcharge is an additional amount of Medicare Levy that is payable by those who earn income over the threshold Medicare Levy Surcharge Threshold.
For the 2025 year, the threshold is $97,000 for singles and $194,000 for families. If you earn above those amounts and don’t have private hospital cover you will find yourself paying an extra Medicare Levy of between 1% and 1.5% of your income, on top of the 2% Medicare Levy everyone pays.
Let’s give you an example:
Len is a single person who earns $90,000 and salary sacrifices $10,000 to superannuation.
As the ATO adds back the salary sacrifice, Len is considered to have income for Medicare Levy Surcharge purposes of $100,000 and will have to pay an additional $1,000 Medicare Levy Surcharge if he does not have private health cover.
There is plenty of information. that is available on the Medicare Levy Surcharge, we recommend reading about it here.
Private Health Insurance Rebate
Last but not least is the private health insurance rebate.
This is an amount that the Government pays towards your private health insurance and is generally given in the form of a reduction in premiums. If you have received too great a reduction in premiums from your health fund during the year, you will be required to repay it from your tax refund, and this is calculated when we finalise your income tax return.
What we see happen frequently is that people receive too great a reduction in premiums because they provided their income details to their health fund years ago. Imagine if you took our private health insurance ten years ago. You would have been requested to provide your income so the insurer could calculate your premium reduction. In the ten years since you joined, you may have had pay rises and your income has increased. Now, when you complete your return, you will likely have to repay the reductions received during the year to your fund.
A quick financial plan…
We have pointed out the common things that we are finding that lead to people owing tax.
Forewarned is forearmed, so you may be happy just to know why you are owning. If you do want to act and make sure it doesn’t happen again, here’s what you can do about it:
- If you have two jobs and have a HELP debt, ask your employer to take additional tax out;
- If you salary package with a hospital or charity, speak to your salary packaging company. They can likely calculate how much additional tax to take out and let you know the net benefit of salary packaging. It may still be worth it even with the higher HELP repayments;
- If you are on Centrelink benefits and also working, get some tax deducted from your Centrelink benefits. While this is very hard to calculate, it provides a buffer, and if you don’t end up being taxable, you will get it as a refund at the end of the year;
- Paid Parental Leave that is paid by Centrelink after you return to work needs care around how much it is taxed. You should request Centrelink tax it at your marginal rate to ensure that you aren’t undertaxed when it is added to your income at the end of the financial year;
- Medicare Levy Surcharge, we always say to people not to get private hospital cover for this reason alone. Why we say that is you could be spending $2,000 on private hospital cover to remove the $1,000 you were paying in Medicare Levy Surcharge. On this one it is more important that you are aware of it and make an informed decision around what is best for you and your family; and
- Private Health Insurance Rebate – this one is again, up to you. We know that some of us prefer to pay the premiums in full and receive the rebate we’re entitled to when lodging our own tax returns. It is simpler and nicer to get this additional amount in my refund. If you repay some of your health insurance rebate when we lodge your income tax return you may be happy to leave it as is, however, if you prefer not to have your refund reduced then call your health fund and let them know your updated income details. They will adjust it to the correct rebate.
Canny Accounting + Your Income Tax Returns
We have covered a lot of ground in this article.
For some of the items above, you will end up with the same amount in your pocket at the end of the day. The purpose of these action items is to allow you to plan for your tax payment and adjust it in advance if you want to ensure you receive a refund, rather than owing tax.
Get in touch with our accounting team today so we can get you on top of your income tax return lodgements, and look at bettering your refund into the future.
