A large tax refund may feel like free money, but it isn’t.
During 2015-16, ATO has refunded close to $28b to individuals.
Many tax refund recipients are putting that money to work.
Some taxpayers getting a refund expect to save or invest the money, while others may use the money to pay down the debt.
Here’s the bad news:
If the ATO sends you a huge check, it means you’ve likely overpaid on taxes throughout the year.
A large refund from the ATO may seem like an advantage, but it isn’t the best or most effective use of your cash flow. It’s basically like giving an interest free loan to ATO.
Know your withholding
If you’re an employee, you must make sure that your employer is withholding right amount of taxes from your salary. You can use our tax calculator for this purpose. If excess amount is being deducted then you need to apply to ATO to get a PAYG withholding variation.
Calculating your withholding is complicated if you have multiple sources of income: interests, dividends, distributions from retirement accounts or income/(loss) from a rental property. Work with your Accountant to do a projection and figure out what your tax liability will be at the end of the year. In a perfect scenario, you’ll have a balance due when you file your return, but not one that’s large enough to create a penalty.
Optimise your tax withholdings
Here’s how to evaluate your withholding and make sure it’s just right for you.
Review your income and deductions:
Striking a balance for withholding will be based on your salary, your other incomes or losses, the tax bracket you’re in and the deductions you take. If you decide to withhold less for taxes, be smart with your money and put it to good use rather than splurging on holidays.
Compare your tax returns:
How did your tax load shape up last year, and how does it compare to this year? Unless you’ve had a major change in your life, your deductions are similar year to year.
If your effective tax rate was 20 percent on average last year, check your allowances to make sure you’re close to 20 percent now.
Talk to your accountant:
The right amount of tax to withhold will vary from one family to the next.
For example, if you are a high earner and have no mortgage, it might make sense to withhold more for taxes. Conversely, a working couple earning less than $160,000 with a mortgage may be able to withhold less, due to the credits and deductions they can take.
Avoid tax arbitrage:
If you withhold less in taxes because you have bigger plans with your paycheck, bear in mind that you’ll owe ATO next year.
Make sure not to underpay ATO deliberately by varying your PAYG withholding unreasonably, as ATO might not take it kindly.
What is a PAYG withholding variation?
The Commissioner of Taxation may vary the amount a payer is required to withhold from a withholding payment, to meet the special circumstances of a particular case.
The main purpose of varying your rate or amount of withholding is to ensure that the amounts withheld during the income year best meet your end-of-year tax liability. An example is where the normal rate or amount of withholding would lead to a large credit at the end of the income year because your tax-deductible expenses are higher than normal.
You can request ATO to vary the rate or amount of withholding by lodging the requisite form.
If you believe your circumstances warrant a variation of the rate or amount of withholding, you will need to determine whether the variation is upwards or downwards.
The granting of a variation does not mean that ATO has accepted the tax treatment of the income and deductions in your application – your actual tax liability will be determined when you lodge your income tax return. Under tax law, you must keep records of your relevant income and expenditure for a minimum of five years.
If you think, you need to vary your PAYG withholding, we can help you with this. Please contact us on 0288244363
If you have any questions, feel free to ask them in the comments section. We will be happy to answer all your queries
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