What Causes a Surprise Tax Bill for Taxpayers?
Getting a surprise tax bill from the ATO can be stressful. You might have budgeted based on your regular income and tax withheld, only to find out you owe more than expected once your tax return is processed.
If you’re a taxpayer wondering why this happens, here are some common causes of yearend surprise to a tax bill — and what you can do to avoid them next time.
Written By:
Emelia Afful
Director
Don’t get hit by an unexpected ATO debt! Discover the top reasons taxpayers receive a surprise tax bill, including incorrect payroll withholding, undeclared investment income, and capital gains. Learn proactive tax planning strategies to avoid future shocks and manage your finances with confidence.
1. Irregular or Unexpected Income
Whether it’s a bonus from your employer, redundancy pay, or selling an investment property, unexpected income can push you into a higher tax bracket. The tax withheld from your salary throughout the year may not cover the tax on these lump sums, resulting in a bill.
2. PAYG Instalments for Small Business and Contractors
If you run a business or do contract work, you might pay Pay As You Go (PAYG) instalments based on last year’s income. If your current year’s income is higher, your instalments might not cover the tax owed, causing a shortfall at tax time.
3. Division 293 Tax on Super Contributions
High-income earners (those with income plus super contributions above $250,000) may have to pay Division 293 tax, which adds an extra 15% tax on some concessional super contributions. Many are unaware of this additional tax until they receive their assessment.
4. Medicare Levy Surcharge (MLS)
If you earn over a certain income threshold (currently $101,000 for singles and $202,000 for families) and don’t have private hospital cover, you may have to pay the Medicare Levy Surcharge — an extra 1% to 1.5% of your taxable income on top of the standard 2% Medicare Levy.
5. HELP/HECS Debt Repayments
Your compulsory HELP or HECS student loan repayments increase with income. If your earnings rise unexpectedly during the year, your repayment rate could increase, adding to your tax bill.
6. Capital Gains Tax (CGT)
Selling assets such as shares or property (other than your main residence) can trigger CGT. If you don’t plan for this tax or fail to claim applicable discounts (e.g., the 50% discount for assets held more than 12 months), you may owe more than expected.
7. Claiming Incorrect or Insufficient Deductions
Sometimes taxpayers claim deductions they’re not eligible for or don’t keep adequate records to substantiate their claims. The ATO may disallow these deductions, resulting in a higher taxable income and a bigger tax bill.
8. Late Lodgement Penalties and General Interest Charge (GIC)
If you lodge your tax return or activity statements late, the ATO can impose penalties and interest (GIC) on any unpaid tax. This can quickly increase what you owe beyond the original tax amount.
Tips to Avoid a Surprise Tax Bill
- Update your tax withholding (PAYG) regularly: Use the ATO’s tax withholding calculator if your income changes.
- Keep detailed records: Track your income, expenses, and deductions carefully throughout the year.
- Review your PAYG instalments: If your income is higher or lower than last year, request an instalment variation.
- Plan for capital gains and super tax: Talk to your accountant about timing asset sales or managing your super contributions.
- Lodge on time: Avoid penalties and interest by meeting all ATO deadlines.
- Seek professional advice: An accountant can help identify risks and opportunities in your tax situation.
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