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What are Tax offsets? – A Comprehensive Guide

You must have come across the term tax offset being used in conversations regarding taxes, especially around tax time.

As per the Australian Taxation Office (ATO), a tax offset will directly reduce or offset the amount of tax payable on a person’s taxable income in a financial year, given that the person is eligible.

In this blog, we are explaining how tax offsets work, potential benefits and some common tax offsets that you might be eligible for.

What is a tax offset?

A tax offset reduces or offsets the tax an individual needs to pay on their taxable income (or the tax payable) in a given financial year.

tax offset

There are numerous tax offsets available in Australia, but you will have to fulfil the eligibility criteria to receive the benefits.

The amount of tax offset an individual may receive will depend upon:

  • Their taxable income, and
  • The amount of tax they need to pay.

How does the tax offset work?

Tax offsets, sometimes known as tax rebates, work by reducing or offsetting the amount of tax payable by an eligible taxpayer at the end of the financial year.

If you do not have any tax to pay, you will not receive any offset. Some tax offsets will require you to actively make a claim either by making a note on your tax return or lodging paperwork. Other offsets, on the other hand, may be calculated for you by the Australian Taxation Office (ATO) and factored into your tax return when you submit it. In this case, you will not need to do anything extra.

Are tax offsets refundable?

Most offsets are not refundable. As a result, they cannot reduce your tax below zero. However, this does not mean that there isn’t any refundable tax offset. For instance, a private health insurance rebate is a refundable tax offset.

refundable tax offset

Let us understand this with an example. Suppose you are liable for $2,000 in tax. Along with this, you are eligible for $2,500 in tax offsets. In this case, you will not receive a $500 refund for the tax offset, but your tax liability will be reduced to zero.

You must also remember that tax offsets will not negate or reduce specific costs like Medicare levy or Medicare levy surcharge, as stated by the ATO website.

What are the differences between tax offsets and tax deductions?

A lot of people think that tax offsets are the same as tax deductions. Although these two can potentially save you some money on your taxes, they are not exactly the same.

As per the ATO, a tax offset, sometimes called a tax rebate, will reduce the income tax payable after it has been calculated based on your taxable income.

A tax deduction will reduce the taxable income before any tax has been calculated on it.

For instance, if you owe $3,000 in tax to the ATO as per your taxable income and you qualify for tax offsets of $2,000, you will have to pay $1,000 in tax.

However, if you qualify for tax deductions of $10,000 and earn $80,000 in a financial year, you will pay income tax only on $70,000.

Can I claim tax offsets along with tax deductions?

Yes, you can claim tax offsets and tax deductions if you are eligible for what you are claiming. If you meet the eligibility criteria set by the ATO, you may be eligible to claim multiple deductions along with a tax offset.

So, it is better to reach out to a professional tax accountant who can help you claim as many deductions as you can. Along with this, you can check the ATO website to know what are the various offsets available to you.

Eligibility criteria for tax offsets

You will be eligible for the tax offsets if you are an Australian resident for tax purposes, your taxable income is less than the income thresholds (as per the offset), and you have to pay tax on your taxable income.

tax offset in Australia - eligibility

Now, let us move on to some of the most common tax offsets available for Australians.

Some common tax offsets for Australians

The following are some of the common tax offsets that are available for eligible Australians.

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

Let’s discuss all of these.

Super-related tax offsets

There are two super-related tax offsets stated by the ATO that apply directly to individuals. One such offset is for those receiving income from an Australian super income stream, and the other is for those making contributions to their spouse’s super fund.

The Australian Taxation Office suggests that if an individual has received the Australian super income stream tax offset, it will either be:

  • 15% of the taxed element of the individual’s super stream income or
  • 10% of the untaxed element of the individual’s super stream income, generally up to a maximum offset limit.

To know about the maximum offset limit and eligibility criteria, you should consult the ATO’s website to get the most up-to-date information.

You may also be able to claim a tax offset if you make an eligible super contribution on your spouse’s behalf (married or de facto). Your spouse should be earning under $40,000 or not work at all. Your contributions have to be either your spouse’s:

In this case, you may be able to claim a:

  • full tax offset of $540 if your spouse earns $37,000 or less and you pay $3,000 or more
  • partial tax offset if your spouse earns more than $37,000 but less than $40,000 and you pay less than $3,000.

Along with this, you will need to meet the eligibility criteria set by the ATO (which is given on their website).

Private health insurance tax offset

Private health insurance tax offset or the private health insurance rebate is offered by the Australian Government to encourage Australians to take out private health insurance. The offset is the amount the Australian Government contributes towards a person’s private health insurance (PSI).

This tax offset worked a little differently from other offsets as there is more than a single way to claim it. As per the ATO, you may be entitled to this tax offset if you take out or even renew an eligible private hospital insurance policy that can provide an appropriate level of private hospital insurance cover.

PSI Tax offset

You need to have PHI to claim this offset. The ATO says that this offset is subject to income testing. It can be claimed as a premium reduction (which can lower the policy price that is charged by the health insurance provider) or can be claimed as a refundable tax offset while lodging your tax return.

Seniors and pensioners tax offset

If you meet the age requirement for the Age Pension or you receive another Australian Government pension from Centrelink or even from the Department of Veterans’ Affairs, you may become eligible for the seniors and pensioners tax offset (SAPTO).

Even if an individual does not meet the income test or the assets test for the age pension, they may still qualify for the SAPTO, given that they meet the eligibility criteria.

If you are eligible, this offset can reduce the tax you are liable to pay by up to $2,230 for a single or $1,602 per partner in a couple. To learn about the eligibility and other conditions, you can reach out to the official website of the Australian Taxation Office.

Tax offsets for low- and middle-income earners

From 1 July 2022 onward, you may be eligible for the low-income tax offset if you earn up to $66,667.

Between 2018-19 and 2021-22, you might have been eligible to receive one or both of the following:

  • Low and middle-income tax offset (LMITO): for individuals that earn up to $126,000
  • Low-income tax offset (LITO): for individuals that earn up to $66,667.

Low and middle-income tax offset or LMITO ended on 30 June 2022.

The last year one can receive this offset is the 2021-22 income year.

In order to be eligible, you need to be an Australian resident for tax purposes, have a taxable income below certain income thresholds and pay tax on your taxable income.

You do not have to do anything to claim any of these tax offsets besides lodging your tax return. The ATO will work out the offsets after you lodge your tax return.

You can look up the tax offset amount on your notice of assessment (NOA) at less non-refundable tax offsets.

These offsets can reduce the tax you have to pay. They aren’t separate payments, and the unused offsets cannot be refunded.

Key Takeaways

Although your tax situation depends upon your personal circumstances, the combination of tax offset and tax deduction can reduce your tax liability significantly.

However, if you are confused about what tax offsets you are eligible for, you should consult a tax professional. Reach out to Clear Tax Accountants today to get professional advice on your tax matters from a team of professional accountants in Melbourne.

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