Many Australians are wondering why their tax refunds have significantly decreased. In this article, we explore the reasons behind this phenomenon.
The Psychology of Tax Refunds
Tax refunds hold a special place in the hearts of Australians. Our nation heavily relies on personal and corporate income tax, with personal income tax, including capital gains taxes, contributing 40% of revenue, surpassing the OECD average of 24%. Given our substantial tax contributions, we naturally expect rewards.
These rewards come in the form of tax deductions that reduce our assessable income and tax offsets that lower the tax we owe, potentially generating a refund. Moreover, tax refunds have a positive impact on tax compliance.
During the previous government’s efforts to streamline the progressive individual-income tax system, a time-limited low and middle-income tax offset was introduced. This offset was extended twice, partly as a response to the COVID-19 pandemic, offering up to $1,080 from 2018-19 to 2020-21 and up to $1,500 in 2021-22 for earners up to $126,000. This boost significantly benefited millions of Australians during tax season. However, for many, the expiration of this offset has resulted in a substantial reduction in their tax refunds compared to previous years.
Comparing Taxation Across Nations
Whether Australians pay more taxes than citizens of other nations depends on the perspective.
Australia heavily relies on income tax, making us the fourth-highest taxing nation for personal tax in the OECD (although we were the second-highest in 2019).
However, a separate measure comes into play if we consider take-home pay. Employee tax on labour income considers take-home pay after taxes are deducted and benefits are added back. In this regard, the take-home pay of an average single worker in Australia is 77% of their gross wage, slightly exceeding the OECD average of 75.4%.
For an average worker with a family (one married earner with two children), the Australian take-home pay average is 84.1%, compared to the OECD average of 85.9%. This suggests that while Australia is a high-tax nation, it returns much of that in means-tested benefits.
It’s worth noting that Australia lacks social security contributions, which constitute an average of 27% of total tax revenue for OECD nations. Additionally, due to Australia’s progressive tax system, higher-income earners shoulder a significant portion of the tax burden. The top 11.6% of Australian income earners contribute 55.3% of the tax revenue from personal income tax.
Starting from 1 July 2024, the final round of legislated income tax cuts will reduce the overall dependence on personal income tax compared to corporate and other taxes.
So, whether Australians pay more tax than citizens of other nations largely depends on their income level.
As the saying attributed to Benjamin Disraeli goes, “…lies, damn lies, and statistics.”
Interpretation plays a significant role in understanding tax data.
Is a second job worth it?
In a recent Uber ride, the driver shared his story of taking on a second job to cover his second mortgage. With rising interest rates, he found this additional income necessary to hold onto his property. His “day job” ends at 3 p.m., after which he starts driving.
He’s not alone. According to the latest statistics from the Australian Bureau of Statistics, the number of workers with multiple jobs has increased by 2.1% since December 2022, totalling 947,300 individuals, or 6.6% of the working population.
People take on second jobs for various reasons. Some do it to manage increasing costs, while others use it as a financial safety net while pursuing new ventures.
Is It Worth It?
From a tax perspective, Australia employs a progressive income tax system, meaning that the more you earn, the more tax you pay, and access to social benefits tapers off.
When considering a second job, assessing your overall financial position, including potential earnings, income generation costs, and the implications of increased income, is crucial.
Many individuals entering the “gig economy” through a second job often become independent contractors responsible for managing their tax affairs. For instance, all Uber drivers must hold an Australian Business Number (ABN) and be registered for Goods and Services Tax (GST). This incurs compliance costs, and 1/11th of the collected fee must be remitted to the Tax Office quarterly.
To guarantee enough cash flow to meet tax obligations, it is vital to separate GST and income tax. However, on the bright side, you can claim expenses related to your second job.
If you’re considering a second job, make sure your tax-free threshold applies to your highest-paying job from a PAYG withholding perspective.
How can we help?
If you have any questions or would like further information or you are seeking tax advice, please feel free to contact our office via email info@cnaccountants.com.au or phone 02 9684 2011 to either speak with someone or arrange a time for a meeting so we can discuss your requirements in more detail.