In the 2022-2023 financial year, the average tax refund for individuals filing a self-assessment tax return was $2,576, and the average for tax agent clients was $3,550.
Every dollar counts, and it can make a substantial difference for small businesses that are struggling with Australia’s current inflation rates. Although it’s so important, it seems many Australians are unaware of the deductions and offsets they are eligible for.
A survey conducted by Ecommerce found that two-thirds of small businesses don’t fully understand tax returns. Tax simply isn’t there, but with 2024’s changes in the tax code, you have new opportunities to optimise your tax return.
This comprehensive guide will provide expert tips, strategic planning, and best practices to help you navigate tax season efficiently and effectively. Whether you’re an experienced filer or handling your taxes for the first time, these insights will equip you with the knowledge to maximise your refund.
Ready to get the most out of your tax return? Let’s begin by understanding what tax refunds are and addressing some common misconceptions.
Understanding Tax Refunds
Before we explain some strategies to maximise your tax refund, it’s essential to comprehend what a tax refund is. Factors such as income tax, business expenses, deductible expenses, and many other factors affect how much of a refund you’ll enjoy or end up being the one who has to pay tax.
What is a Tax Refund?
A tax refund occurs when the amount of tax you’ve paid during the financial year exceeds your actual tax liability. This can happen for several reasons, including overestimation of your taxable income or eligibility for various tax deductions and offsets. In Australia, the financial year runs from July 1 to June 30, and tax returns must be lodged with the ATO by October 31.
Common Misconceptions about Tax Refunds
A Refund means you overpaid taxes: It’s not necessary that receiving a refund means you have overpaid taxes throughout the year. Tax credits and offsets that reduce your tax liability can also influence the mere fact that you’re receiving a return.
Higher Refunds Mean Better Financial Management: A large refund might feel like a financial windfall, but it can also indicate that you’ve provided the ATO with an interest-free loan over the year. Adjusting your tax withholding can help manage your cash flow more effectively.
Everyone Receives The Same Deductions: Simply untrue, as individual variables such as income levels employment types, expenses, and unique deductions applicable to you as an individual or business will affect overall numbers.
Example Scenario
Imagine you are a Graphic Designer from Sydney. Throughout the year, you have paid taxes on your income but realise there are opportunities to claim deductions for work-related expenses. Software subscriptions and home office costs enabled you to claim a greater return, along with your eligibility for the Low and Middle Tax Offset (LMITO), which resulted in a sizable tax refund!
Start Early
Never delay preparing for your tax refund, especially as a business. You need ample time to identify eligible deductions and ensure a smooth tax year. After analysing some key factors, we recommend the following.
Gather Your Documents
Whether it’s an electricity bill or your allowable expenses, the sooner you collate these documents, the better.
Income Statements: Ensure you have all PAYG payment summaries, bank statements showing interest earned, and any other income documents.
Receipts and Invoices: Collect receipts for work-related expenses, charitable donations, and any other deductible expenses.
Investment Records: Keep track of any dividends received and records of capital gains or losses from investments.
Always collect your invoices and receipts from the start of each new financial year in an organised folder. The last thing you need is scrambling to find these essential documents and being unable to locate them at the last minute!
Not only will you avoid saving time and stress, but you are also best positioned to ensure total compliance and maximise your tax return. Many smartphone applications, like Expensify or Wave, allow users to scan and categorise their receipts.
This way, you can maintain peace of mind knowing that all documents are digitally available during the tax year.
Make Use of Tax Preparation Software
Freelancers and small businesses commonly utilise tax preparation software if they prefer completing everything in-house. These tools can help you identify deductions and offsets to ensure you don’t miss out on any potential refunds.
Popular Tax Software in Australia:
myTax: The ATO’s free online tax return lodgment service is suitable for most individuals and small businesses.
H&R Block: Offers both online tax filing and in-person consultation services.
Etax: A popular online tax return service that provides a guided experience to help you maximise your refund.
The bottom line is to start early, have an organised collection of your documents, and utilise software or an agency.
Key Tax Deductions to Maximise Refunds
Maximising your tax refund in Australia starts with knowing which deductions apply to you. Numerous tax deductions are available for both individuals and businesses and claiming the right ones can significantly lower your taxable income.
If you’ve skipped right to this section, here are some key deductions to watch out for.
Standard Deduction vs. Itemised Deductions
Some countries have a structure known as a “standard deduction; ” however, this doesn’t exist in Australia, and taxpayers can alternatively claim a range of specific refunds based on eligibility.
When you itemise deductions, you’re claiming specific expenses from the financial year instead of taking a standard deduction. Here’s a look at some common deductions that are often missed.
Commonly Overlooked Deductions
Work-Related Expenses
Vehicle and Travel: Do you frequently use your car for work purposes? If travelling is a common expense, individuals can claim expenses using the cents per kilometre or logbook method, excluding commuting.
Home Office: Remote workers who haven’t received any funding to assist in setting up their home office can claim deductions. Running expenses such as internet, keyboards, monitors, pens, chairs, and depreciation of other office equipment can be claimed.
Clothing: Some occupations require uniforms and protective gear; this can be claimed.
Tools and Equipment: Any tools or equipment for work can be claimed, but remember to have receipts for any items worth more than $200-$300. Expensive items may require spreading the depreciation over several years, but this is best confirmed with your tax agent or software.
Self-Education Expenses
Courses directly related to your current job, including tuition fees, textbooks, and travel expenses to and from your place of education, can be deductible. This can be great for individuals wanting to upskill themselves!
Memberships to trade unions or professional associations related to your work can be deducted.
Gifts and Donations
- Donations of $2 or more to approved charities are tax-deductible, provided you have a receipt.
Maximising Charitable Contributions
Charitable donations can provide substantial tax benefits. Ensure that the organisation is a Deductible Gift Recipient (DGR) and keep receipts for all donations.
Example: Alex donates $500 to a registered charity and claims this amount on his tax return. This deduction reduces his taxable income by $500, thereby reducing the amount of tax he owes.
Key Tax Offsets to Explore
Offsets directly reduce the amount of tax payable, which can significantly impact your refund.
Low and Middle Income Tax Offset (LMITO)
- Available to individuals earning up to $126,000. The amount of the offset depends on your income level.
Private Health Insurance Rebate
- If you have private health insurance, you may be eligible for a rebate based on your income.
Medical Expenses Offset
- This offset has been phased out, but previously incurred expenses may still be claimed in some cases.
Specific Deductions for Businesses
Depreciation of Assets
- Businesses can claim depreciation on assets over their useful life. Immediate write-off may be available for assets costing less than a specific threshold under the instant asset write-off scheme.
Business Travel Expenses
- Travel costs incurred for business purposes, including accommodation, meals, and transport.
Home-Based Business Expenses
- If you run a business from home, you can claim deductions for a portion of household expenses, such as utilities and mortgage interest.
Professional Services
- Fees paid to accountants, lawyers, or other professionals for business-related advice or services.
Marketing and Advertising
- Costs associated with promoting your business, including online advertising, print media, and event sponsorships.
Example Scenario
Emma, an IT consultant, works from home and incurs various expenses related to her work. She keeps detailed records and receipts for her internet usage, electricity, and office equipment purchases. At tax time, Emma claims these expenses as deductions, significantly reducing her taxable income and increasing her refund.
Leveraging Tax Credits
Tax credits are one of the most powerful tools in the tax literacy arsenal. Unlike deductions, which only reduce your taxable income, tax credits reduce your tax liability dollar for dollar, making them a natural boost to your tax refund. So it’s important to know the difference.
If you make deductions, you’re only subtracting your taxable income, but credits are applied dollar for dollar to your tax liability. There are a number of tax credits (also known as tax offsets) that are available in Australia, each one catering to different situations and all are able to boost your tax refund if you understand and claim them properly. Here are some of the most common ones claimed by Australians each year:
Low and Middle Income Tax Offset (LMITO)
We hinted at this one earlier, the Low and Middle-Income Tax Offset (LMITO) is one of the biggest tax credits available. If your taxable income is less than $126,000 then this offset goes through your tax return!
There’s no action required on your part and the ATO will calculate the offset and apply it for you when you lodge. The maximum amount is usually $1,500.
Low-Income Tax Offset (LITO)
In the same vein, the Low Income Tax Offset (LITO) is another tax measures designed to help low income earners. If your taxable income is less than $66,667 then you may be eligible for the LITO. The maximum amount you can receive is $700. And like LMITO, LITO is also applied by the ATO automatically. Say your taxable income for the year is $35,000; the LITO will reduce your tax liability (and, therefore, your tax bill) and boost your tax refund. Simple!
Private Health Insurance Rebate
Private Health Insurance Rebates will also reduce the cost of your premiums. The amount you receive depends on your age and income; say you’re 40 years old with an income of $80,000 per year, you can expect a rebate of about 16%.
All in all, it means cheaper health insurance and bigger tax refunds! Win-win.
Senior Australians and Pensioners Tax Offset (SAPTO)
The Senior Australians and Pensioners Tax Offset (SAPTO) is for older Australians and eligible pensioners. There are specific age and income requirements, but this offset can cut your tax payable quite substantially depending on your individual situation. Say you’re a self-funded retiree, 67 years old with a modest income; SAPTO will reduce your tax liability (and therefore your tax bill) and boost your tax refund. Again, it’s an automatic process so you won’t need to do anything.
Spouse Superannuation Tax Offset
You can even get the tax benefit when you contribute to your spouse’s superannuation! If your spouse has a low income, you may be entitled to the Spouse Superannuation Tax Offset which offers up to $540. This tax offset encourages couples to help each other get to retirement as easily as possible. For example, say your spouse’s income is under $37,000 and you contribute $5,000 to their super; by claiming this tax offset, your tax liability (and therefore your tax bill) will reduce.
Medical Expenses Tax Offset
The general medical expenses offset has recently been phased out; however, if the expenses are in relation to disability aids, attendant care or aged care, you can still claim an offset. This one can be a little tricky, but if you have high medical expenses in any of these areas, it can be extremely beneficial. For example, if you spend over $2,000 on disability aids or attend care services for your parent, you can claim a percentage of this expense and reduce your tax payable, boosting your refund. Simple!
Keeping Up with Tax Law Changes
The key to maximising your tax refund is to be proactive from the beginning of the financial year and throughout the year by keeping proper records of your financial affairs. You must understand the deductions and offsets you are entitled to, claim tax credits where appropriate and generally minimise your tax liability by making smart financial decisions.
The final ingredient is to keep abreast of the latest tax changes; this can be done by using good information sources, talking to your accountant or tax agent and using technology to keep you up to date with changes that may benefit you.
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