Income tax
Tax offset
A tax offset reduces the amount of income tax you owe directly, dollar for dollar, after your tax has been calculated on your taxable income.
A tax offset is different from a deduction. A deduction reduces your taxable income, so its value depends on your tax rate. A tax offset reduces the tax calculated on that income, so it takes the full value of the offset off your bill. Offsets are applied after your gross tax has been worked out and before PAYG credits are taken into account.
Most tax offsets are non-refundable, meaning they can reduce your tax to nil but not below. If the offset is bigger than your tax, the extra is generally lost and not carried forward. Some offsets are refundable, which means any excess is paid to you as a refund. Franking credits are the best-known refundable credit for resident individuals, and are treated as a type of credit in the tax return.
Offsets are available in many situations. Examples include the low income tax offset, which depends on income and is set by legislation, offsets for some dependants and spouses, the small business income tax offset for eligible sole traders and partners with income from a small business, the seniors and pensioners offset, and others. The rules, amounts and income tests change, so check the ATO for the current details.
The small business income tax offset is a good illustration. It is available to individuals receiving business income through a sole trade, partnership or trust, and the amount depends on the tax payable on the small business income, up to a cap. It is not available to companies. It is calculated automatically in the tax return when the relevant income is entered.
A common misunderstanding is that offsets are the same as claiming a deduction at a higher value. For example, a $100 deduction at a 30% rate saves $30, while a $100 tax offset saves $100. The two are very different, so check which one you are dealing with. Another is to assume that an unused non-refundable offset can be saved for next year, which generally it cannot.
Offsets are automatically calculated by the ATO in many cases, but you may need to provide information to claim others. Keep documents supporting eligibility. This is general information only, so confirm which offsets you can claim with the ATO or a registered tax professional.
Worked example
Leo's tax on his taxable income comes to $9,000. He is entitled to a tax offset of $700. His tax after the offset is $9,000 - $700 = $8,300, before PAYG credits. If, instead, he had a $700 deduction at a 30% marginal rate, his tax would fall by only $700 x 30% = $210. The offset is worth far more.
Practical tips
- Do not confuse offsets with deductions, because an offset reduces tax dollar for dollar.
- Remember most offsets are non-refundable and cannot create a refund or be carried forward.
- Check the ATO website for current offset amounts and income tests, as these change.