A tax refund happens when the amount of tax you paid during the year — mainly through PAYG withholding from your wages — is more than your final assessed tax liability for that year. The ATO calculates the difference when it processes your return and refunds the excess, usually within two weeks for electronic lodgements.
Why Some People Get Refunds and Others Get a Bill
Your employer withholds tax from every pay based on your projected annual income. This is an estimate — it does not account for deductions, tax offsets, investment losses, or some other income.
At the end of the year, the tax return reconciles the estimate against your actual position.
You get a refund when:
- Tax withheld > your actual tax liability
- Common reasons: significant deductions claimed, tax offsets (LITO), low part-year income, salary packaging, health insurance rebate
You owe more tax when:
- Tax withheld < your actual tax liability
- Common reasons: income from multiple sources (second job, rental income, investment income), under-withheld from main employer (wrong tax scale claimed), large capital gain with no withholding
What the ATO Calculates in Your Assessment
The Notice of Assessment summarises:
| Item | What it represents |
|---|---|
| Taxable income | All assessable income minus deductions |
| Gross tax | Tax before offsets, calculated using the ATO tax brackets |
| Tax offsets | LITO, LMITO (if applicable), health insurance rebate, etc. |
| Medicare levy | 2% of taxable income (reduced/exempt for low incomes) |
| Total tax liability | Gross tax minus offsets, plus Medicare levy |
| Less: tax already paid | Total PAYG withholding from all employers |
| Result | Refund (if negative) or debt (if positive) |
Factors That Increase Your Refund
- Work-related deductions — reduce taxable income, which reduces the gross tax calculation
- Low Income Tax Offset (LITO) — automatically applied for those earning below $66,667; up to $700
- Private health insurance rebate — if you did not claim the rebate through your insurer during the year, it is applied at tax time
- Franking credits — if you received franked dividends, the franking credit offsets your tax liability and can result in a refund if the credits exceed the tax owing
- Part-year income — if you worked for only part of the year, your employer may have withheld at the full-year rate
Factors That Reduce Your Refund (or Create a Bill)
- Rental income, investment income, or business income with no PAYG withholding
- Capital gains — no tax is withheld during the year; the full CGT liability hits at tax time
- HECS-HELP repayment — if your income is above the repayment threshold, a compulsory repayment is added to your tax bill even if withholding covered the income tax itself
- Medicare Levy Surcharge — if applicable (income above $93,000 singles with no private hospital cover)
- Loss of LMITO — the Low and Middle Income Tax Offset ended in FY2021–22; taxpayers who previously received it saw smaller refunds from FY2022–23 onwards
Average Australian Tax Refund
The ATO does not publish a precise average refund figure, but analyses of ATO data suggest the average individual return results in a refund of approximately $2,000–$3,000. Refunds are higher for people with significant deductions, rental property, or investment income from franked dividends.
Refunds vary enormously depending on:
- The gap between your employer’s withholding and your actual tax liability
- The size and validity of your deductions
- Whether you have investment income not subject to withholding
Frequently Asked Questions
Why has my refund gotten smaller in recent years? The most significant reason for smaller refunds from FY2022–23 onwards is the end of the Low and Middle Income Tax Offset (LMITO), which provided up to $1,500 per year to low and middle income earners. See why is my tax refund smaller for a full breakdown.
Can I get a refund if I did not earn enough to pay income tax? If your taxable income was below the tax-free threshold ($18,200 in FY2025–26) and you had tax withheld, you will receive a full refund of that tax. If no tax was withheld, there is no refund. However, you may still need to lodge a return depending on your situation.
Does a bigger refund mean I am better off? Not necessarily. A large refund means the ATO held more of your money than it needed to throughout the year — effectively an interest-free loan to the government. Some people prefer to adjust their withholding downwards via PAYG instalments or correct tax scale selection, so they receive more take-home pay during the year rather than a lump sum at tax time.
Can franking credits result in a cash refund? Yes. If your franking credits (from dividends on Australian shares) exceed your total income tax liability, the surplus is refunded as cash. This is particularly valuable for low-income earners and retirees in the pension phase of super.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent. Find one through the Tax Practitioners Board register.