What is a tax offset?

Here’s an overview of tax offsets in Australia, including how they work, potential benefits and four common types of tax offset some of us might be eligible for.

What are tax offsets?

You might have heard the term ‘tax offset’ used in conversation now and then, particularly around tax time.

According to the ATO, a tax offset directly reduces (or ‘offsets’) the amount of tax payable on an eligible person’s taxable income in any given financial year.

One example is the Low and Middle Income Tax Offset (LMITO, sometimes colloquially referred to as the ‘Lamington’).

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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.

As detailed on the ATO website, 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 LMITO, will be calculated for you by the 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, including the LMITO and the Low Income Tax Offset (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, the ATO says.

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 they aren’t the same thing.

As the ATO explains, a tax offset, sometimes called a tax rebate, reduces the amount of income tax you have to pay after it’s been calculated based on your taxable income.

For example, if you owed the ATO $3,000 in tax based on your taxable income but qualified for offsets of $2,000, you would only need to pay $1,000 in tax.

On the other hand, a tax deduction reduces your taxable income before tax has been calculated on it.

For example, if you earned $80,000 in a financial year and qualified for deductions of $10,000, you would pay income tax as if you had only earned $70,000.

Can you claim tax offsets and tax deductions?

While both an offset and a deduction have the potential to reduce the amount of overall tax you pay, they can work in quite different ways, and you can potentially access both deductions and offsets if you qualify.

For example, if you meet the eligibility criteria outlined by the ATO, you may be able to claim a number of tax deductions for working from home, and because these expenses reduce your taxable income, this may reduce the amount of income you are taxed on. You would

The instant asset tax write-off for capital expenses is a different deduction many eligible Australian businesses are able to claim at the time of writing.

Separately, the ATO indicates you may receive a tax offset for making post-tax contributions to your spouse’s superannuation, provided you meet all the applicable rules and eligibility criteria.

→ Related: 10 things you might not know you could claim

What are some common tax offsets for Australians?

Here are four types of tax offset that may be available for eligible Australians:

1. Tax offsets for low- and middle-income earners
2. Super-related tax offsets
3. Private health insurance tax offset
4. Seniors and pensioners tax offset

1. Tax offsets for low- and middle-income earners

These are actually two different offsets – the Low Income Tax Offset (LITO) and the Low and Middle Income Tax Offset (LMITO). Some taxpayers may be eligible for both the LITO and the LMITO, according to the ATO. If you are eligible for either or both of these offsets, the ATO says it will work these out for you when you lodge your tax return, so you should automatically benefit from them if you qualify. Note that the LMITO has increased by $420 to a maximum of $1,500 for the 2021/22 financial year, but this is also the last year it will be available.

Whether you are eligible for the LITO and the LMITO will depend on your taxable income, and at the time of writing the ATO says only people with a taxable income of $37,000 or less are eligible to receive the maximum amount of both offsets.

2. 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 one 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 untaxed element of your super stream income, typically up to a maximum offset of $10,625 for the 2021/22 financial year.

A number of eligibility criteria and limits apply to this offset, so you can consult the ATO website to check the eligibility rules for it. You may also want to consider asking a professional tax adviser for assistance.

The tax offset for super contributions on behalf of a spouse 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 and reportable fringe benefits. Your spouse’s super fund must also have been compliant during the financial year in which you made the contributions.

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3. Private health insurance tax offset

This offset is better-known as the private health insurance rebate and is something the Australian Government offers 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’. The ATO says 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. The ATO also notes that how you choose to claim the rebate may affect whether you receive it as an offset or end up needing to pay extra tax.

4. Seniors and Pensioners Tax Offset

According to the ATO, 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 test or the assets test for the Age Pension, it is 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 offset could reduce the amount of tax you are 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.

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Key takeaways

While your exact tax situation will depend on your personal circumstances, it is possible a combination of tax offsets and tax deductions could reduce your tax liability down to zero or below, potentially resulting in a tax refund depending on how much you’ve paid in pay-as-you-go (PAYG) tax instalments over the course of the year.

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 may apply to your own personal situation.

Main image source: Andrey_Popov/Shutterstock.com

This article was originally written by James Hurwood.