The anticipated tax refunds for many Australians have significantly diminished
We delve into the reasons why.
As a nation, Australia heavily relies on personal and corporate income taxes. Personal income tax, which includes capital gains taxes, contributes to 40% of revenue, whereas the OECD average stands at 24%. Given the substantial contributions we make, we naturally anticipate a form of compensation.
This compensation takes the shape of tax deductions that reduce the portion of net income subject to taxation and tax offsets that lower the tax payable, often leading to refunds. These refunds also play a positive role in enhancing tax compliance.
To streamline the progressive individual income tax system, the preceding government introduced a time-limited low and middle income tax offset (LMITO). The duration of LMITO was extended twice, partly in response to COVID-19 as a stimulus measure. The offset provided up to $1,080 between 2018-19 and 2020-21, and up to $1,500 in 2021-22 for individuals earning up to $126,000.
Impact of LMITO on tax returns
The LMITO ‘boost’ significantly improved the tax returns of numerous individuals during each tax season, but the discontinuation of this offset has resulted in a considerable reduction in tax refunds for many, compared to previous years.
In previous years and this year, you may have incurred a Medicare Levy Surcharge, depending on your income and if you have no private health insurance. A single person can earn up to $90,000 or a couple $180,000 – the extra levy can then range from 1% to 1.5% extra tax depending on your final income. You may have not ‘felt’ this surcharge in prior years due to the LMITO.
Similarly, if you have a HECS or Trade Loan Debt and have changed jobs within the year. The overall amount withheld by your employer might not be sufficient when all your income is added together – again in previous years the LMITO may have softened this impact for you.
Do we contribute more tax compared to other nations?
For high-income earners, the answer is likely affirmative. For others, the answer tends to be negative.
Due to Australia’s progressive tax system, higher-income earners experience a more pronounced tax burden. The top 11.6% of Australian income earners contribute 55.3% of the revenue from personal income tax.
But the perspective varies based on how the statistics are examined.
Australia heavily relies on income tax, securing 40% of tax revenue from personal income. This places us as the fourth highest tax nation for personal taxes in the OECD; however, in 2019, we held the second position, which might offer some consolation.
Nevertheless, a separate gauge exists for take-home pay. The OECD’s Employee Tax On Labour Income assesses our net earnings after tax deductions and added benefits. This reveals that the average single worker’s take-home pay is 77% of their gross wage, surpassing the OECD average of 75.4%. For an average worker with a family (married with two children), Australian take-home pay averages 84.1%, while the OECD average is 85.9%. These figures signify that Australia indeed imposes high taxes but counterbalances this with means-tested benefits.
Unlike other nations, Australia doesn’t impose social security contributions, which constitute an average of 27% of the overall tax revenue for OECD countries.
With the final instalment of legislated income tax reductions set to begin in July 2024, the overall reliance on personal income tax in relation to corporate and other taxes should decrease.
Is having a second job worthwhile?
From a tax perspective, Australia operates on a progressive income tax model, where higher earnings translate to greater tax payments, and access to social benefits diminishes. When considering a second job, understanding your overall financial position is crucial—assessing potential earnings, income generation costs and the implications of this income level.
One challenge for many taking on gig economy second jobs is their status as independent contractors. They are responsible for their tax affairs. For instance, all Uber drivers must possess an ABN and register for GST. This involves compliance costs, and 1/11th of the fees collected must be remitted to the Tax Office quarterly. Properly setting aside both GST owed and income tax is essential to ensure funds are available when taxes are due. On the positive side, expenses tied to the second job can be claimed.
If you’re pursuing a second job, it’s vital to ensure that your tax-free threshold pertains to your highest-paying job based on PAYG withholding.
How to optimise your tax deductions
Please refer to our Individual Tax Checklist to ensure you are considering all your possible tax deductions and contact Carrick Aland in Dalby, Toowoomba or Chinchilla on 07 4669 9800 for personalised tax assistance.