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Tax refunds to shrink: Here’s why and what to do about it

The new refund-denting tax rules are "complicated, regressive and unfair".

Compilation image of people walking in the street and a pile of notes and coins to represent a tax refund
The ATO has already warned that many Aussies will get a lower tax refund this year. (Source: Getty) (Samantha Menzies)

Interest rates are still on an upward trajectory, fuel prices are headed for record highs, energy prices are about to skyrocket and the cost of basic foods is soaring - it’s a time when many people will be relying on their tax refund to provide some much-needed relief from the cost of living. But they could be disappointed.

The government and the Australian Taxation Office (ATO) have, between them, made a number of changes to the tax system this year which will pile downward pressure on the size of your refund come tax time. Here are two key things which have changed this year, and how the updates will affect your tax return.

Read more from Mark Chapman:

1. The low- and middle-income tax offset (LMITO) has ended

Firstly, and most dramatically, is the end of the LMITO. This tax offset, which delivered a tax break of up to $1,500 for people earning up to $126,000, expired at the end of the last tax year on June 30, 2022. As a result of its abolition, low-to-middle income earners may see their tax refunds reduced this year by between $675 and $1,500.

2. The ATO tinkers with working from home claims… and not in a good way

The ATO has taken action against taxpayers working from home and claiming working from home expenses as a tax deduction. Of course, they don’t phrase it that way – instead they talk about simplifying the system and making it easier for taxpayers to claim. But the effect is clear – many taxpayers will struggle to make a claim this year and of those that do, the majority will see far smaller claims.

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In mid-February 2023, the ATO announced the details of a new fixed rate of 67 cents per hour to replace the old “shortcut” rate of 80 cents per hour and the old “fixed rate” of 52 cents per hour.

The new 67-cent fixed rate no longer covers depreciation of assets and therefore will need to make separate claims for this. But the fixed rate does now include mobile phone and internet expenses (it previously had to go under a separate claim). So if you use your mobile phone extensively for work you will be penalised because the additional deduction you could have claimed will now be swallowed up into the fixed rate. You can’t claim any separate deductions for items covered by the fixed rate and that means that if you want to claim actual mobile phone expenses, you must claim actual costs for all of the expenses covered by the fixed rate. Do you have sufficient records to claim actual costs? Probably not – so you’re forced to use the 67-cent fixed rate.

Taxpayers need to be aware that they must keep a record of all hours worked from home from March 1, 2023 (they also need a four week diary covering the period worked from home from July, 1 2022 to February, 28 2023) and they need a copy of one bill for each of the working from home expenses for which they are claiming.

In short, these new rules are complicated, regressive and unfair – and retrospective, since they apply from July 1, 2022, nearly eight months before the ATO finalised their guidance on their application.

What can I do to get the best possible tax refund?

Given the impact of the above measures, it makes sense to claim everything you are entitled to in order to counteract the effect of the loss of the LMITO and the changes to working from home expenses. Do you know and understand everything that you can claim as part of your job? Probably not, which is why it makes sense to use a tax accountant this year.

An experienced tax accountant will usually be good at sniffing out those obscure tax deductions you didn’t know you could claim so they can often pay for themselves several times over. Best of all, the fee is also tax deductible.

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