If you have ever spent a lot of money on tax-deductible items, but not received the big tax refund you expected, this article is for you.

There is a common misunderstanding in Australia that when you purchase a deductible item you will get all the money you spent back at tax time. While this would be nice, it is unfortunately not the way tax deductions work.


how is your tax refund [or payable] calculated?

Your final tax position [your refund or payable amount] is not determined by how many tax deductions you have, but by a holistic calculation that determines your refund or payable based on your taxable income.

To figure out your taxable income, you start by adding together all your income amounts and then subtracting all of your tax deductions. This net amount is your taxable income, and it is this net amount that determines how much total tax you must pay for the year.

Lots of things impact how your total tax amount is calculated, including your tax bracket [more on that below]. Once your total tax amount is calculated, any tax already paid during the year is subtracted and the difference is your final refund or payable amount.

For employees, your employer will deduct PAYG withholding from your salary and pay this directly to the ATO, so your tax has been paid progressively throughout the income year. If you are self-employed, you may pay tax in quarterly instalments. However, it is important to note – in your first year of operations, paying in instalments is not available to you, so you will need to budget for your tax bill at the end of the year.

If we use an example of someone with $80,000 gross income, that had $18,000 in tax withheld, let’s say they also had $5,000 in allowable tax deductions, then their refund calculation would look a bit like this[1]:

taxable income:

gross income: $80,000
less deductions: $5,000
taxable income: $75,000

tax refund/payable amount:

tax on taxable income: $16,500
less tax paid during the year: $18,000
net tax refund $1,500

From this example, you can see that it’s not just the deduction amount that determines your final tax position, but it is your taxable income and the tax already paid that also contributes to the amount of money that ends up in your pocket at tax time.


what is a tax bracket and how does it impact my refund?

In Australia, individuals are taxed via marginal tax rates – this means tax is paid at different rates on different stages of income. The current Australian resident[2] tax rates are:

taxable income tax on this income
0 – $18,200 nil
$18,201 – $45,000 19 cents for each $1 over $18,200
$45,001 – $120,000 $5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000 $29,467 plus 37 cents for each $1 over $120,000
$180,001 and over $51,667 plus 45 cents for each $1 over $180,000

In addition to the above rates of tax, your final tax amount may include additional items including Medicare levy, Medicare levy surcharge and student loan repayments.

You may also be eligible for tax offsets including low and middle-income earners offset, and the private health insurance rebate, amongst others. These items will reduce the amount of tax you need to pay on your taxable income.


what sort of tax deductions can I claim?

There are many types of deductions you can claim in your tax return with the more common items being:

  1. Work-related expenses such as:
    • Motor vehicle and car expenses
    • Travel expenses
    • Clothing and laundry expenses
    • Self-education expenses
    • Working from home expenses
    • Phone, data and internet expenses
    • Union fees
    • Tools and equipment
  2. Other expenses such as:
    • Cost of managing tax affairs
    • Gifts and donations
    • Interest and other investment income deductions
    • Income protection insurance

There are also several occupation-specific deductions that are in ATO guides that you can access here for more detail.


what do I need to do to make sure I get the maximum tax refund?

To ensure that you are claiming as many deductions as allowable, ensure that you keep good records. Records are evidence of your deductions which can be kept in paper or electronic format.

For most deductions, a receipt detailing the expense item, the date and the cost is the best type of record.

Specifically for work-related deductions, you must meet the ATO’s 3 golden rules:

  1. You must have spent the money yourself and weren’t reimbursed
  2. The expenses must directly relate to earning your income
  3. You must have a record to prove it [usually a receipt]

If you are claiming motor vehicle expenses, you may also have to keep a logbook.

In most circumstances, you need to keep these records for 5 years from the date that you lodge your tax return. There are plenty of applications and software that can help you keep your tax records safe and handy. For employees, the ATO app has a specific myDeductions section you can read about here.

If you are a sole trader or running a business and use online accounting software to track your income and expenses, such as Xero, you can also use the Xero app to keep your receipts safe.


need help with your tax return?

If you need help preparing and lodging your tax return this tax season, the team at businessDEPOT are here to help! Give us a buzz on 1300BDEPOT or shoot us a message at oneplace@businessdepot.com.au and we’ll get back to you in no time.



[1] This example is for illustration purposes only. The final tax on taxable income of $75,000 will be calculated based on your personal circumstances and will vary from the example.

[2] Non-residents and working holiday makers are taxed using different rates.


general advice disclaimer

The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.