Many Australians noticed their tax refund dropped significantly from the 2022–23 financial year onwards. The primary reason is the end of the Low and Middle Income Tax Offset (LMITO), which had delivered up to $1,500 per year to eligible taxpayers. Other factors — including income increases from wage growth, the Medicare Levy Surcharge, and reduced deductions — can also reduce your refund.
The Biggest Reason: LMITO Ended
The Low and Middle Income Tax Offset (LMITO) was a temporary offset introduced in 2018–19 and extended several times. It was worth up to $1,500 per person in its final year (FY2021–22) for individuals earning between $48,000 and $90,000.
It was not renewed for FY2022–23 onwards. This means:
- A person earning $80,000 in FY2022–23 received up to $1,500 less offset than the year before
- With no change to income or deductions, that directly translated to a smaller refund
The LMITO was often misunderstood as a permanent offset. Its removal was not an increase in the tax rate — it was the expiry of a temporary cut.
Stage 3 Tax Cuts (From FY2024–25)
In FY2024–25, the government implemented Stage 3 tax cuts that restructured the income tax brackets. These cuts reduced tax rates for a wide range of incomes, particularly those earning between $45,000 and $135,000. While this means lower tax payable, it can mean a slightly smaller refund if withholding has been adjusted to reflect the new rates (as most employers updated their payroll software from 1 July 2024).
Other Reasons Your Refund May Be Smaller
1. Your income increased Higher income means a higher marginal tax rate on extra earnings. If your employer’s withholding did not keep pace with your actual income, you may owe more — or get a smaller refund.
2. You claimed fewer deductions If you did not work from home as much, purchased fewer work-related items, or had a lower deduction total overall, your taxable income is higher and your refund correspondingly smaller.
3. HECS repayment increased HECS-HELP repayment thresholds and rates are indexed. If your income rose above a new threshold, a larger compulsory repayment is added to your tax bill, reducing your net refund.
4. You crossed into a higher Medicare Levy Surcharge bracket If your income exceeded $93,000 (singles) and you did not have private hospital cover, the Medicare Levy Surcharge (1%–1.5%) applies. This increases your tax liability, reducing the refund.
5. Investment income you had to declare Income from bank interest, dividends, or capital gains increases your taxable income without any corresponding withholding. If this is new or increased, it reduces your refund.
6. The ATO recovered a debt The ATO automatically applies refunds against any outstanding ATO debt. Check your ATO account in myGov if your refund is lower than the assessment suggested.
What Changed Year by Year
| Financial Year | Key change affecting refunds |
|---|---|
| FY2021–22 | LMITO at maximum $1,500 (final year) |
| FY2022–23 | LMITO removed — most refunds dropped $500–$1,500 |
| FY2023–24 | No major offset changes |
| FY2024–25 | Stage 3 tax cuts — lower tax rates for most, LITO unchanged |
Can I Do Anything About It?
A smaller refund is not necessarily a bad outcome — it means less of your money was held by the ATO throughout the year. That said, there are legitimate ways to manage your tax position:
- Maximise genuine deductions — work-related expenses, income protection insurance, investment property costs, donations to DGRs
- Pre-pay concessional super contributions — salary sacrifice or personal deductible contributions reduce taxable income (within the $30,000 concessional cap)
- Prepay investment loan interest — if you have an investment property or margin loan, prepaying January–June interest before 30 June brings the deduction forward
- Review your withholding rate — if you consistently owe money at tax time (rather than get a refund), your employer may be under-withholding; ask about adjusting your tax scale
Frequently Asked Questions
Will refunds go back up now that Stage 3 cuts have taken effect? The Stage 3 cuts reduced tax rates from FY2024–25. For most people in the $45,000–$135,000 range, tax payable is lower. However, employers are also withholding less during the year (to reflect the new rates), so the refund amount at tax time may not increase dramatically — you simply receive more in each pay.
Is there a replacement for the LMITO? No direct replacement. The Low Income Tax Offset (LITO) — worth up to $700 for incomes below $37,500, phasing out to $66,667 — remains in place. There is no equivalent of the LMITO for middle income earners.
Why did my refund go from $2,000 to $400 between FY2022 and FY2023? This is a common experience. The difference of up to $1,600 is almost entirely explained by the LMITO ending. A person earning $60,000–$90,000 would have received the maximum $1,500 LMITO in FY2021–22 and nothing from it in FY2022–23.
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.