You might have heard the term ‘tax offset’ being thrown around. According to the ATO, a tax offset directly reduces (or offsets) the amount of tax payable on your taxable income in any given financial year.
The difference between deductions and offsets
First and foremost, it’s important to distinguish between tax offsets and tax deductions. As the ATO explains, a tax offset reduces your payable tax after it’s been calculated based on your taxable income, whereas a tax deduction reduces your taxable income before tax has been calculated on it. So while both an offset and a deduction have the potential to reduce the amount of overall tax you’ll pay, according to the ATO they work in quite different ways.
For example, if you meet the eligibility criteria outlined by the ATO, you may receive a tax deduction for the cost of a personal income protection insurance policy, and because the premium payment reduces your taxable income, this may reduce the amount of income you are taxed on. On the other hand, the ATO indicates that you may receive a tax offset for making post-tax contributions to your spouse’s superannuation provided all of the applicable rules and eligibility criteria are met.
How do tax offsets work?
As detailed on the ATO website, some tax offsets require you to actively make a claim (for example, by lodging paperwork or making a note on your tax return), while others will be automatically calculated for you by the ATO when you submit your tax return.
While offsets can potentially reduce your payable tax to zero, the ATO suggests that on their own they generally can’t get you an actual tax refund. In other words, if you were liable for $300 in tax but were eligible for $330 in tax offsets, in most cases you would not receive the $30 as a refund and would end up with a nil tax liability. It can be a good idea to seek advice from a tax professional for more details about how this may apply to your own personal situation.
While you should consider finding out about what rules affect your specific tax position, generally speaking by reducing your tax liability for a given year, you could end up with a tax refund (or a larger one) depending on how much you’ve paid in pay-as-you-go (PAYG) tax instalments over the course of the year. You can find details about the process of lodging a tax return and information on when you may be entitled to a tax refund, on the ATO or MoneySmart websites.
What are some common tax offsets?
According to the ATO, common tax offsets include:
Super-related tax offsets
There are two super-related tax offsets outlined by the ATO that apply directly to individuals: one for those receiving income from an Australian super income stream, and the previously mentioned offset for those making contributions to a spouse’s super.
The ATO suggests that if you receive the Australian super income stream tax offset, it will be either:
- 15% of the taxed element of your super stream income, or
- 10% of the un-taxed element of your super stream income, typically up to a maximum offset of $10,000.
You can go here to check eligibility rules for the Australian super income stream tax offset.
The tax offset for super contributions on behalf of a spouse can be up to $540 currently according to the ATO website, depending on factors such as your spouse’s total assessable income and reportable fringe benefits, the total sum of your contributions and the nature of your contributions. Your spouse’s super fund must also have been compliant during the financial year in which you made the contributions. You can read more about this tax offset here.
It’s also worth noting the ATO’s advice that if your income is below certain thresholds, your superannuation fund may receive the low income superannuation tax offset on your behalf to reduce the impact of superannuation contributions tax. You can read more about this here.
The following table contains a snapshot of the superannuation funds rated by Canstar based on someone aged 40-49. This table has been sorted by one-year performance (highest to lowest). Of course, it’s important to bear in mind that investments can go up and down, so past performance is not necessarily indicative of future performance.
Please note that the performance information shown in the table is for the investment option used by Canstar in rating of the superannuation product.
To view the past performance of all super funds, rated by Canstar, use our comparison tool:
Private health insurance tax offset
This offset is better known as the private health insurance rebate. According to the ATO, you may become entitled to this offset if you take out or renew an eligible private health insurance policy. If your private health insurance policy provides an ‘appropriate level of private hospital insurance cover’ according to the ATO, you may be eligible for the tax offset which the government contributes in order to help you with the cost of your premiums. The offset is subject to income testing, and is also claimable as a reduction in the cost of your premiums.
For more information on the private health insurance tax offset, you can go here.
Tax offset for low income earners
This offset is automatically calculated by the ATO when you submit your tax return for the financial year. The ATO indicates that, provided you are an Australian resident for tax purposes, you’ll receive this tax offset if your taxable income for the year is less than $66,667, and you’ll receive the full offset of $445 if your taxable income is $37,000 or less. Your offset will decrease by 1.5 cents for every dollar in excess of $37,000.
Seniors and pensioners tax offset
According to the ATO, if you meet the age requirement for the Age pension, you may be eligible for this tax offset even if you qualify for the Age pension itself but don’t receive it. There are a number of eligibility criteria, but if you meet them, this offset can reduce the amount of tax you are liable to pay, potentially to zero, and you may not have to lodge a tax return.
For more information on the seniors and pensioners tax offset, you can go here.