When tax time comes around, you naturally start to think about tax deductions. Those are the items that will lower your overall tax bill, so you should claim everything you’re eligible for. However, there are tax offsets that can also dramatically reduce the tax you are obligated to pay.
What Are Tax Deductions?
Tax offsets are different than tax deductions. Tax deductions are claims on work expenses that you’ve had to pay in the course of earning your income. Usually employees have personal income tax taken out of their weekly, fortnightly or monthly wage or salary by their employers and is known as Pay-As-You-Go (PAYG).
During tax season, any work-expenses you have incurred are subtracted from your total income to reduce your personal income tax. The amount of tax you pay depends on how much you earn and how many deductions you can claim. Tax deductions are taken into account before your total tax has been calculated.
Income that is taxable includes:
- Salary and wages
- Pensions and annuities
- Most government payments
- Investments
- Capital gains
- Income from trusts, partnerships or businesses
- Foreign income
You will not need to pay tax on:
- Lottery or prize winnings
- Small gifts or birthday presents
- Some government payments
- Child support
- The tax-free portion of a redundancy payment
- Government super co-contributions
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What Are Tax Offsets And Rebates?
Tax offsets and rebates directly reduce the amount of tax payable on your taxable income and are applied after tax has been calculated and generally cannot be refunded or carried forward for use in future years. Tax offsets are not the same as tax deductions. Each dollar of a tax offset reduces your tax payable by each dollar, regardless of your taxable income.
Common Tax Offsets
Common tax offsets include:
- Low-to-middle-income-earners (LITMO)
- Taxpayers who have an invalid relative
- Pensioners and senior Australians
- Zone and overseas forces
To receive a tax offset, you must meet certain criteria that is set by the ATO. Tax offsets will not reduce your Medicare Levy and Medicare Levy Surcharge. The Medicare levy is 2% of your taxable income, in addition to the tax you pay on your taxable income.
Seniors And Pensioners Tax Offset
Your tax liability will be reduced by the seniors and pensioners tax offset (SAPTO) if you pass the criteria with Centrelink or reach the Veteran pension age. The SAPTO is available on assessment of your tax return. In some cases, SAPTO may reduce your taxable income to zero and you may not need to lodge an income tax return. SAPTO is a non-refundable tax offset.
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Rates and rebate income thresholds for SAPTO
| Status | Maximum tax offset amount | Shading-out threshold | Cut-out threshold |
| Cut-out threshold | $2,230 | $32,279 | $50,119 |
| Each partner of a couple | $1,602 | $28,974 | $4,790 |
| Each partner of an illness separated couple | $2,040 | $31,279 | $47,599 |
Low Income, And Low and Middle Income Tax Offsets
If you are a low, or low and middle income earner, you may be eligible to claim the low income tax offset, and low and middle income tax offset (LITMO). You won’t need to complete any section in your tax return as it is automatically added to your tax return. You’ll be able to see the amount you receive in your tax assessment. It won’t be paid in a separate payment.
This tax offset can reduce your tax payable to zero, but you won’t receive any unused offset amount.
Low Income Tax Offset
The maximum low income tax offset is $700.
The amount of the low income tax offset (LITO) you receive will depend on your taxable income.
If your taxable income is:
- $37,500 or less, you will get the maximum offset of $700
- between $37,501 and $45,000, you will get $700 minus 5 cents for every $1 above $37,500
- between $45,001 and $66,667, you will get $325 minus 1.5 cents for every $1 above $45,000.
Low and Middle Income Tax Offset
The Government announced on 29 March 2022 a proposal to increase the low and middle income tax offset (LMITO) by $420 for the 2021–22 income year.
This will increase the base amount to $675 and the maximum amount to $1,500.
The Government also confirmed that 2021–22 income year will be the last year that LMITO is available.
Low and middle income tax offset
| Taxable Income | Offset |
| $37,000 or less | $675 |
| From $37,001 to $48,000 | $675 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,500 |
| From $48,001 to $90,000 | $1,500 |
| From $90,001 to $126,000 | $1,500 |
Australian Super Income Stream Tax Offset
If you receive income from an Australian super income stream, you may be eligible for a tax offset equal to 15% of the taxed element or 10% of the untaxed element. There is a limit of $10,000 you’re entitled to receive.
Unless the income is from a disability super benefit or death benefit, you won’t be eligible for the taxed element for this tax offset. You’re not entitled to a tax offset for the untaxed element of any super income stream you receive before you turn 60 years old unless the super income stream is a death benefit income stream or the deceased died after they turned 60 years old.
If you’ve contributed super into your spouse’s super fund or retirement savings (RSA) who is earning a low income or not working, you may be able to claim a tax offset of up to $540 per year. There are certain criteria that must be met, including:
- You and your spouse were Australian residents and lived together on a permanent basis (whether married or defacto)
- Your spouse’s income is $37,000 or less
- The contributions were not reportable to you and were made to a complying super fund
The tax offset for eligible spouse contributions can’t be claimed for super contributions that you made to your own fund, then split to your spouse. That is called a rollover or transfer, not a contribution.
Zone and Overseas Forces Tax Offset
If you live in a remote area or serve in forces overseas, you might be eligible for a zone tax offset or an overseas forces tax offset. If you qualify for both tax offsets, then the greater offset will be applied.
Zone Tax Offset
If you reside in a specified remote or isolated region (not an offshore oil or gas rig) from 1 July 2015 for 183 days in an area classed as Zone A or Zone B you might be eligible for the zone tax offset. Other criteria may apply. Unused days cannot be carried forward.
Overseas Tax Offset
You may be eligible for the overseas tax offset if you serve in a specified overseas locality for 183 days, your income relating to that service us not exempt from tax, and you are either a member of the Australian Defence Force or United Nations Armed Force. Unused days cannot be carried forward.
Are you claiming your tax offsets and rebates?
Individual tax can be complicated and is different for everyone. An ITP Tax Accountant will help you organise and manage your tax affairs, maximise your tax and claim your tax offsets if you are eligible. If you’re a client of ITP, you can ask your tax accountant for tax advice throughout the year. ITP Accounting Professionals have helped Australian Individual and Businesses for 50 years. Speak with an ITP Tax Professional for help with your tax affairs.