How is a tax refund calculated?
A refund is not free money — it is the gap between what your employer withheld and what you actually owe. Here is exactly how that gap is worked out, and how to grow it.
Every July, millions of Australians lodge a return hoping for a refund. But a refund is not a bonus from the government — it is simply your own money coming back because too much tax was taken during the year. Here is how the number is calculated in 2026-27.
The basic formula
Your refund is: tax withheld from your pay across the year, minus your actual tax for the year. Your actual tax is the income tax on your taxable income (income minus deductions), less the Low Income Tax Offset, plus the 2% Medicare levy and any HELP/HECS repayment. If your employer withheld more than that total, the difference is your refund. If they withheld less, you have a bill.
Worked example
Sarah earns $85,000, and her employer withheld about $18,600 in tax across the year. She claims $2,500 in deductions — a mix of work-related expenses and working from home. That lowers her taxable income to $82,500, cutting her actual tax by roughly $800 (her $2,500 of deductions at her 32% marginal rate). Because her withholding was based on the full $85,000, she gets that ~$800 back as a refund.
Why deductions do not come back dollar-for-dollar
A common myth is that a $1,000 deduction means $1,000 back. It does not. A deduction reduces your taxable income, so it saves you tax at your marginal rate — for most people 30-39%. So $1,000 of deductions is worth roughly $300-$390, not $1,000.
Why you get a refund at all
Usually because your employer withheld slightly more than needed as a buffer, or because your deductions and offsets lowered your tax below what the withholding assumed. A big refund is not really a win — it means you lent the ATO money interest-free all year.
Estimate your refund
Enter your income, tax withheld and deductions to see your 2026-27 refund or bill.
This is general information, not personal advice. Your actual assessment depends on all your income and circumstances. See also our guide to working-from-home deductions.
Frequently asked questions
How is my tax refund calculated?
It is the tax withheld from your pay minus your actual tax for the year (income tax on income less deductions, minus offsets, plus Medicare and any HELP repayment). If more was withheld than you owe, you get the difference back.
Does a $1,000 deduction mean $1,000 back?
No. A deduction lowers your taxable income, so it saves tax at your marginal rate — usually 30-39%. A $1,000 deduction is worth roughly $300-$390 in reduced tax, not the full $1,000.
Why did I get a bill instead of a refund?
Usually because not enough was withheld — for example from a second job that did not claim the tax-free threshold, investment income with no tax taken out, or a HELP debt that was under-withheld. The shortfall is payable when you lodge.
Is a big refund a good thing?
Not really. It means too much tax was withheld and you gave the ATO an interest-free loan all year. Money in your pay each fortnight, invested or offsetting a loan, is generally better than a lump sum refund.