ATO rule changes punch a big hole in 2022-23 tax refunds

A tax triple-whammy is hitting ATO refunds as a generous offset disappears, working from home weakens and interest income jumps.

It’s the tax slug surprise that is not really a surprise, and it’s catching out Australians who were hoping for a handy refund.

The end of the Low and Middle Income Tax Offset in 2021-22 is only now being felt by taxpayers doing their 2022-23 tax returns and discovering that up to $1500 is no longer there.

On top of the LMITO disappearance, people are now claiming fewer working-from-home tax deductions, and many will pay significant tax on interest earned on their bank deposits for the first time in years.

Labor confirmed it was not extending the LMITO in last year’s federal budget papers, and again in the recent May budget, but finance specialists say many people do not think about tax until tax time.

Chartered accountant and Mr Taxman founder Adrian Raftery said people who prepared their own tax returns might not be up to date with the rule changes and “may not have read about it or understand the impact”.

Tax refunds will be lower this year following the end of LMITO. Picture: iStock

People with lower incomes – the LMITO applied to those earning under $126,000 – were the most likely to lodge their returns now, Dr Raftery said.

“For the last three years they have received some generous refunds and probably believed it would happen again,” he said.

“Historically they have banked on their tax refunds to pay for a car rego, credit card debts or some presents. All of a sudden they’re getting a lot lower tax refund, if anything, this year.”

Dr Raftery said it was expected that the government would keep quiet about not giving back as much money as previously, and the Australian Taxation Office was following and enforcing the rules.

He said people were also facing higher tax on interest income after the Reserve Bank’s 12 rate rises since May 2022, and fewer hours were spent working at home as more people returned to the office.

“I have tried to forewarn my clients: hate the system, don’t hate your accountant.”

The ATO warned in May that tax refunds would be lower this year, and debts would be higher, and assistant commissioner Tim Loh said many refunds were expected to drop by the LMITO benefit amount – between $675 and $1500, depending on people’s incomes.

Mr Loh said people who found themselves with an unexpected tax debt should engage with the ATO early “so we can support and help them with a tailored payment plan”.

Last week the ATO issued a fresh warning about working from home, telling people not to copy and paste their 2021-22 deductions.

It said almost five million people claimed a working-from-home deduction last financial year, and noted that the claims methods changed on March 1, with full records of hours worked required since then.

“We know a lot of Aussies are back in the office or have hybrid arrangements, so it’s important to consider whether your claims reflect your working arrangements this year,” Mr Loh said.

KPMG tax partner Ursula Lepporoli said the ATO had scrapped its 80c-per-hour shortcut method for hours worked from home.

“As many are adopting a new, hybrid way of working, the ATO has instead opted to revise the fixed rate method,” she said.

“Effective 1 July 2022, taxpayers can claim a deduction of 67c per hour worked from home. This is an increase from the previous 52c per hour rate, but with some notable differences.

“In addition to the gas and electricity costs the old 52c rate covered, the 67c rate is now intended to be inclusive of internet, phone and stationery expenses, which could previously be deducted separately.”

Originally published as ATO rule changes punch a big hole in 2022-23 tax refunds