What is a tax offset?
Index
What is a tax offset?
In this article we will explore the meaning of a tax offset, how they work, how they differ from typical tax deductions, and the various types of tax offsets that you could be eligible to use at tax time.
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Tax offsets meaning and how it works
What is “tax offset” supposed to mean? Tax offsets are used to reduce or “offset” the amount of tax you need to pay on your total taxable income for any given financial year. There are a number of different tax offsets available, as well as an eligibility criteria you must meet in order to receive the benefits.
The main tax offset types available in Australia are:
- Low income tax offset (LITO)
- Low and middle income tax offset (LMITO, also known as the ‘Lamington’)
- Seniors and pensioners tax offset
- Super related tax offsets
- Private health insurance tax offset
How does a tax offset work?
A tax rebate or tax offset reduces the amount of tax you have to pay at the end of a financial year. In some cases they can help reduce your payable income tax to zero, but they are ‘non-refundable’ so you won’t receive a tax refund based purely on a rebate. This means, if you have $2,000 of tax to pay, but are eligible for $2,500 in tax offsets, you would not get a $500 refund for the tax offset. The offset simply reduces your tax liability to zero.
Certain tax offsets, such as the LMITO, are automatically applied to your tax return by the ATO upon submission. However, other tax offsets may require you to make a claim for them if you’re eligible.
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Eligibility criteria for tax offsets
You’re eligible for the tax offsets if you’re an Australian resident for tax purposes, have a taxable income that’s less than the income thresholds, and pay tax on your taxable income.
Let’s explore the five different types of tax offsets further and the eligibility criteria you need to meet to use them on your tax return.
Low income tax offset
For low income earners, the LITO amount you receive will vary depending on your taxable income. The ATO will automatically calculate this tax offset, so you don’t need to make a specific claim.
A taxable income of $37,500 or less: The maximum offset you can receive is $700.
A taxable income ranging between $37,501 and $45,000: You are eligible for $700, minus 5 cents for every $1 above $37,500.
Taxable income between $45,001 and $66,667: You are eligible for an offset of $325 minus 1.5 cents for every $1 above $45,000.
Low and middle income tax offset
In certain cases, you may be eligible for the LITO and the LMITO. The ATO will work this out for you once your tax return has been submitted and you will receive the rebate for both if you are eligible. For the 2021-22 financial year, the LMITO has been increased by $420. This means the base amount for this financial year will be $675, while the maximum offset amount is $1,500.
For the 2018-19, 2019-20 and 2020-21 financial years, the LMITO remains between $255 and $1,080. As long as your taxable income for the financial year is below $126,000, you will receive LMITO. The overall amount you will receive will depend on your taxable income bracket and how much tax you paid.
For the 2021-22 financial year, here is the amount of offset you might expect to receive depending on your taxable income:
A taxable income of $37,000 or less: You are eligible for a rebate of $675.
A taxable income ranging between $37,001 and $48,000: You are eligible for a tax offset of $675, plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,500.
Taxable income between $48,001 and $90,000: You will receive a tax offset of $1,500.
Taxable income between $90,001 and $126,000: You will receive a tax offset of $1,500, minus 3 cents for every dollar of the amount above $90,000.
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Seniors and pensioners tax offset (SAPTO)
If you satisfy the age requirement for the Age Pension, or receive a government pension from either Centrelink or the Department of Veterans’ Affairs, you might be eligible for the SAPTO. As long as you meet all the eligibility criteria, you could receive a tax offset of up to $2,230 for a single person, $1,602 for each partner of a couple, or $2,040 for each partner of an illness separated couple, depending on your taxable income amount.
Super related tax offsets
The ATO has two different super related tax offsets:
- An offset for an individual receiving income from an Australian super income stream
- An offset for an individual contributing to their spouse’s super.
For those receiving the Australian super income stream tax offset, you will either get a rebate for 15% of the taxed part of your super stream income, or 10% of the untaxed part of your super stream income, usually up to a maximum of $10,000. The eligibility criteria for the super income stream tax offset is quite extensive and limits apply. Check with the ATO or a professional tax accountant to see if you’re eligible.
Currently, the tax offset you can receive for super contributions on behalf of a spouse is up to $540. The amount you receive will be influenced by your spouse’s total assessable income, reportable fringe benefits, and their age. To be eligible for the offset, during the financial year that you made contributions, your spouse’s super fund needs to have been complying.
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Private health insurance tax offset
The private health insurance rebate is the amount the Australian Government contributes to the cost of your private health insurance premiums. This is to encourage people to take up cover. If you renew or take up an eligible private health cover plan that offers an ‘appropriate level of private hospital insurance cover’, you may be able to receive this type of offset.
The available rebate is income tested and usually paid through your private health insurance provider to reduce the premium. Otherwise, you will receive it as a refundable tax offset when you lodge your return.
Is a tax offset the same as tax deductions?
No, tax rebates are different to tax deductions. Sure, they can both save you money on your annual taxes, but the difference is that a tax rebate decreases the amount of income tax you pay on your taxable income after it’s been calculated. Whereas, tax deductions reduce your taxable income before the tax is calculated.
Can I claim tax offsets as well as tax deductions?
Yes, you can claim both tax offsets and tax deductions as long as you are eligible for what you’re claiming. For instance, working from home tax deductions are available for remote workers. These deductions can significantly reduce the amount of income you’re taxed on. Discuss the different types of deductions you can claim and the tax offsets you may be eligible for with a tax professional to maximise your return.
Check the ATO website for further information on various offsets available to you. Getting in touch with a qualified tax specialist will also help you maximise your return.