One of the most common questions we get asked as accountants is: “Why didn’t I get a bigger refund...I had all of these deductions, shouldn’t I get them back?"
While deductions are great and generally lead to a larger refund, the misconception is that the deduction will be refunded as well.
Here's how a tax refund is calculated, without actually going through the complication that is the Australian tax system.
A tax refund is exactly that, a refund of the tax which you paid throughout the year. Most of the time, you cannot get more tax refunded than what you paid (however there are circumstances where this does happen).
The actual calculation differs for each individual, due to individual circumstances. However, even though the figures and rates will change, the concept is the same for everyone. Tax is calculated using an individual’s taxable income.
TAXABLE INCOME = ASSESSABLE INCOME – ALLOWABLE DEDUCTIONS
Taxable Income is the assessable income less any allowable deductions. The Australian tax rates are applied to the taxable income and this is how the tax payable is calculated. The different rates which are used in these calculations depend on the income bracket you fall into. If your income is lower than the tax free threshold ($18,200) you will generally receive any tax you paid as a refund.
Assessable income is the sum of the income which you earnt throughout the financial year. There are some exemptions (like tax free pensions) but most income falls into this category. Examples of this would be Gross Wages, Interest income, Dividends income (even if you are part of a Dividend Reinvestment Plan), Capital Gain, Rental income, some Government Payments and Foreign income.
Allowable deductions are expenses which you can claim in relation to the income you earned. For example, if you used your car for work (not to travel to and from work) you can claim some of the car expenses as a deduction against your Gross Income. Similarly, if you earn rental income, you can claim interest on your investment loan against the income.
The benefit in claiming the deduction is in the reduction of the assessable income. As the tax calculation is worked out on taxable income, the more deductions that can be applied to the assessable income, the lower the taxable income will be. If your deductions cause your taxable income to go into a lower tax bracket, the tax refund could be substantial.
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.