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Insights

Insights

A smaller refund than expected: the four real reasons

Tax time produces a predictable pattern of frustration each year, and this year is no exception. Someone lodges their return expecting a refund similar to last year's, or larger given a pay rise, and receives something smaller — sometimes considerably smaller. The instinctive reaction is to suspect an error, either theirs or the Tax Office's. In the overwhelming majority of cases, there is no error. There are four ordinary mechanics, each individually well understood, that compound quietly across a financial year and land together at lodgement.

(This month's companion Accounting and Taxation article looks at the other side of the ledger — what is, and isn't, deductible against a residential rental property, and how that affects what an investor actually keeps.)

Bracket creep

Australia's income tax brackets are fixed dollar amounts, reviewed only when the government legislates a change. Wages, meanwhile, tend to rise most years with inflation and promotions. When your income grows while the bracket thresholds stay fixed, a growing share of each pay rise is taxed at your highest marginal rate rather than your average rate — and if the rise pushes you across a threshold, the portion above that threshold is taxed at a materially higher rate than the portion below it.

For the 2025–26 financial year — the year most people are lodging for now — the resident tax brackets are nil to $18,200, 16 per cent from $18,201 to $45,000, 30 per cent from $45,001 to $135,000, 37 per cent from $135,001 to $190,000, and 45 per cent above that, plus the 2 per cent Medicare levy. Someone whose income moved from $60,000 to $70,000 did not have that $10,000 rise taxed at the 16 per cent rate they may have expected based on their average tax last year. All of it was taxed at 30 per cent. The pay rise was real. So was the tax on it.

The Low Income Tax Offset phases out at the same time

Running alongside the brackets, and often overlooked, is the Low Income Tax Offset — a benefit worth up to $700 for people with lower taxable incomes. For 2025–26, the full $700 applies up to $37,500 of taxable income, then reduces by 5 cents for every dollar between $37,500 and $45,000, and by a further 1.5 cents for every dollar between $45,000 and $66,667, reaching zero above that. A pay rise that moves someone through this range reduces the offset at the same time as it moves them up the rate scale — two separate mechanics working in the same direction, both invisible on a payslip, both landing together at tax time.

The HECS/HELP mechanic most people get backwards

A great deal of confusion each year involves HECS and HELP debts, and it generally runs together two entirely separate mechanics that have nothing to do with each other.

The first is indexation — the annual adjustment applied to your outstanding loan balance each 1 June, to preserve its value against inflation or wage growth. For 2026, that rate was 2.8 per cent, the lowest since 2021. Indexation changes what you owe. It has no effect whatsoever on your tax return, your refund, or your tax payable for the year. It is simply not part of this calculation.

What does affect your refund is the separate, compulsory HECS/HELP repayment — a component of your tax assessment calculated once your repayment income exceeds the minimum threshold, which for 2025–26 is $67,000. The repayment scales with income: 15 cents for every dollar of repayment income between $67,000 and $125,000, then $8,700 plus 17 cents for every dollar between $125,000 and $179,285, then 10 per cent of total repayment income above that. An employer generally withholds an estimate of this repayment through the year based on your salary alone. If your repayment income — which includes reportable fringe benefits, exempt foreign income, and other items beyond base salary — ends up higher than what your employer withheld against, the shortfall reduces your refund or adds to your bill. The debt holder who assumes "indexation went up, so that explains the smaller refund" has identified the wrong mechanic entirely.

Government super contributions help your super, not your refund

The government super co-contribution (up to $500, available between $47,488 and $62,488 of total income for 2025–26) and the Low Income Superannuation Tax Offset (up to $500, available below $37,000) are both worth having, and both are paid directly into your superannuation account, not into your tax refund. Someone who received a co-contribution last year and crosses above this year's upper threshold on the back of a pay rise does not lose a refund they were expecting; they simply become ineligible for a super benefit that was never going to appear in their bank account regardless.

A worked illustration

Consider Priya, who earned $60,000 in the 2024–25 year with no other income and no study debt complications worth noting. In 2025–26 she receives a promotion taking her salary to $70,000, and earns an additional $4,000 from freelance photography work on which no tax was withheld. She also carries a $22,000 HECS debt.

Her total taxable income for 2025–26 is $74,000. Her Low Income Tax Offset, which would have applied in part at her previous income, now reduces to nil, since $74,000 sits above the $66,667 cut-off. Her repayment income of $74,000 exceeds the $67,000 HECS threshold, producing a compulsory repayment of 15 per cent on the $7,000 above that threshold — $1,050 for the year. Her employer's withholding was calculated against her $70,000 salary alone; it did not, and could not, account for the extra $4,000 she earned outside the PAYG system, nor fully reconcile the HECS component against her true repayment income. The gap between what was withheld through the year and what is actually owed becomes visible only when she lodges — the ordinary consequence of four separate, correctly functioning mechanics operating at once, rather than any error.

The principle

None of these four mechanics is new, hidden, or evidence of a system working against the taxpayer. Each is published, consistent, and calculable in advance. The investor — or in this case, the employee — who understands bracket creep, the LITO phase-out, the distinction between HECS indexation and HECS repayment, and the separate treatment of government super contributions, can estimate their likely tax position well before lodgement, rather than discovering it at lodgement. Cost and tax are the certainties of investment and of ordinary employment income alike. The mechanics are worth knowing before the return is lodged.

If you would like to review your expected tax position for the current year — before it becomes this year's surprise — we welcome the conversation.

Corinne Kirk
Partner, Accountant

1300 102 542 | 0405 106 401
corinne@egu.au

Sources

This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.

Corinne Kirk