Where is my tax refund?

How much am I getting back on my tax? Why is my colleague getting back more than me? I'm only getting back $100, it's not fair!!

It used to surprise me when these questions or whinges were hurled at me from disgruntled clients in an accusing manner when told the estimate of their annual tax return. But not anymore because now I am only too familiar with this widespread expectation that taxtime means you are guaranteed to get money back from the Taxman. People talk amongst themeselves and some even brag about how much money they "got back" on their tax. The problem is they don't tell the braggee the real reason why they got money back. Oh no! They don't tell them that they only worked for 6 months of the year or had an investment property that drained $1,000 a month from their cash flow and now they are getting some tax back as a result of their unique circumstances.

Time to set the record straight.......and this might shock some readers so please brace yourself............TAX REFUNDS AREN'T GIMMIES!!!! If you have worked all year for the same employer and they have withheld tax correctly and you have no special circumstances, no massive investment property losses or major work related expenses then there is no reason to expect any refund at all. Yup you heard right none...nothing...zilch! That's the bad news but it needed to be said so I'm glad I got that off my chest. Now that your expectations have been reset from unrealistically high to close to nothing let's take a closer look at the workings of an individual tax return and how the Taxman gets to the magic final figure of how much you are getting back or how much you need to pay.

Why do we have to lodge tax returns? Good question and it's not so we can get a nice refund once a year. No, we have to lodge a return because we have to. If you don't then you will be penalised with late penalties until such as time as you do submit your tax return.

Ready for an even bigger shock??? If you are getting a refund then you have spent a lot of money or lost a lot of money at some point in the last year. Don't believe me??? Okay let's look at an example.

Frank is a schoolteacher and gets back $1200 on his tax. He is chuffed and it couldn't come at a better time as there is a sale and he buys himself an iPad to help him with his lessons for school (hope he remembers to claim that in next year's tax). A bit more info on Frank. He is married and has 2 young children at primary school. He worked the whole year at the same school and earned $70,000 per annum and his wife works as as admin assistant and earns $55,000 per annum.

Why did Frank get back $1200 when he lodged his tax return? Let's assume his employer has good accounting and payroll systems and withheld the correct tax from Frank's pay every fortnight when he received his pay. Frank has no investments apart from a savings account that earned $78 in the last year. He did wear logo'd shirts to school bearing the school logo. Frank paid $150 for the 3 shirts he bought from the school. He also bought some teaching resources to supplement what the school provided. Frank kept his slips for all the books, stationery and other resources he bought during the year.

How much do you think Frank spent on these resources to achieve $1200 tax refund? I'll tell you......he would have had to spend $3250 on the teaching resources to get back $1200 tax refund. Frank would probably be surprised that he spent so much and how it added up to that amount. I'm not sure how you feel but I reckon spending $3250 to get back $1200 sounds like a crap deal to me. If I were Frank I'd ask the school to provide more resources but then again........if he did that he wouldn't get a tax refund next time. Oh I forgot he could claim depreciation on the work % of his new iPad. It's depreciated over 3 years and is 50% work use so that's $200 per year depreciation for a whopping $70 refund.

Any tax deductible expenses only achieve a tax refund of the expense multiplied by the taxpayer's marginal tax rate (34.5% in Franks case). So if Frank spends $1,000 he gets back $345 as a tax refund. Lots of people (and you know who you are) believe or have been told that whatever you spend you get back in tax, Dollar for Dollar. That would be nice but sadly that's not the case. Whether you are making donations to charities or spending money on self education the return is going to be the same. I have seen many clients faces drop when I have had to explain this to them, shattering their plans of how they were going to spend the refund that they were counting on getting.

So next time your colleague brags about his record tax refund please say "well at least you are getting back some of that money you spent". If the response is "huh?" then please send them a link to this blog.