What is a tax offset?

What are tax offsets?

Tax offsets directly reduce (or ‘offset’) the amount of tax payable on eligible taxable income in any given financial year.

How do tax offsets work?

A tax offset (also known as a tax rebate) works by reducing the amount of tax an eligible taxpayer owes at the end of a financial year.

Some tax offsets may require you to actively make a claim (such as by lodging paperwork or making a note on your tax return), whereas others, like the Low Income Tax Offset (LITO), will be calculated for you by the Australian Taxation Office (ATO) and factored into your tax return when you submit it, without you needing to do anything extra.

While offsets can potentially reduce your payable income tax to zero, the ATO notes that many of them, like the LITO, are ‘non-refundable’ which means they generally can’t get you an actual tax refund on their own.

In other words, if you were hypothetically liable for $3,000 in tax but were eligible for $3,300 in non-refundable tax offsets, you would not receive the $300 as a refund and would simply end up with a $0 tax liability.

Tax offsets also can’t reduce or negate costs such as the Medicare Levy or Medicare Levy Surcharge.

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What is the difference between tax deductions and tax offsets?

While tax offsets and tax deductions can both potentially save you money on your taxes, it’s important to be aware that they aren’t the same thing. A tax deduction reduces your taxable income before tax has been calculated on it.

For example, if you earn $80,000 in a financial year and qualify for deductions of $10,000, you would only pay tax on an assessable income of $70,000.

Can you claim tax offsets and tax deductions?

You can potentially access both deductions and offsets if you’re eligible for them. For example, you may be able to claim a number of tax deductions for working from home, because these expenses reduce your taxable income, while also receiving the Private Health Insurance tax offset.

What are some common tax offsets for Australians?

1. Tax offsets for lower income earners

Some taxpayers may be eligible for the Low Income Tax Offset (LITO), if they earn $66,667 or less in a financial year. The level of offset you receive will depend on how much taxable income you have (e.g. if you earn less than $37,500, you could receive a maximum offset of $700). The ATO says it will work this offset out for you when you lodge your tax return, so you should automatically benefit from it if you qualify.

2. Super-related tax offsets

Superannuation income stream tax offset

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 untaxed element of your super stream income, typically up to a maximum offset of $11,875 for the 2024/25 financial year.

A number of eligibility criteria and limits apply to this offset, so consult the ATO website for more information. You may also want to consider asking a tax professional for assistance.

Tax offset for super contributions on behalf of your spouse

This tax offset can be up to $540 per year currently, according to the ATO. The exact amount you’re eligible for will depend on factors such as your spouse’s age as well as their total assessable income, including any reportable fringe benefits and employer superannuation contributions. Your spouse’s super fund must also have been compliant during the financial year in which you made the contributions.

Low income super tax offset (LISTO)

If you earn $37,000 or less in a particular financial year, you’ll be given up to $500 back into your super fund. This is to stop fees from eroding your super balance.

Veterans’ super (invalidity pension) tax offset (VSTO)

This is a non-refundable tax offset that helps ensure veterans and their beneficiaries don’t pay more tax because of the Douglas court decision. It applies from the 2007–08 income year.

3. Private health insurance tax offset

This offset is better known as the private health insurance rebate and is offered by the Federal Government to encourage Australians to take out private health insurance. It works a little differently to most other offsets because there’s more than one way to claim it.

According to the ATO, you may become entitled to this offset if you take out or renew an eligible private health insurance policy which provides an ‘appropriate level of private hospital insurance cover’. This offset is subject to income testing, and can be claimed either as a premium reduction, which lowers the policy price your health insurance provider charges you, or as a refundable tax offset when you lodge your tax return.

4. Seniors and Pensioners Tax Offset

If you meet the age requirement for the Age Pension or receive another Australian Government pension from Centrelink or the Department of Veterans’ Affairs, you may be eligible for the Seniors and Pensioners Tax Offset (SAPTO). The ATO says that even if you don’t meet the income or assets test for the Age Pension, it’s possible you may still qualify for the SAPTO if you meet the other eligibility criteria. There are a number of eligibility criteria, but if you meet them the ATO says this could reduce the amount of tax you’re liable to pay by up to $2,230 for a single, $1,602 per partner in a couple, or $2,040 per partner of a couple separated by illness.

It may be a good idea to seek advice from a tax professional for more details about which tax offsets you may be eligible for, and how they apply to your own situation.

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