What is a Tax Offset? [Explained With Example]

You must have heard the term “tax offset” during conversations right around tax time in Australia. 

Tax offsets provide relief to specific taxpayer categories and income groups. 

In this blog, we will cover:

• What is tax offset
• Tax offset eligibility
• Tax offset for small businesses
• Common misconceptions about tax offsets
• LMITO and LITO Tax offsets

What is a Tax Offset ATO?

A tax offset is a reduction in the amount of tax an eligible taxpayer owes in a given income year.

The Australian Taxation Office (ATO) offers various tax offsets to provide targeted assistance to different groups of taxpayers, encouraging certain behaviours or helping those in specific situations.

Example of Tax Offset:

Sarah, a freelance graphic designer earns a total income of $45,000/year. 

She calculates her tax bill based on her income to file taxes.

Now, Sarah discovers that she qualifies for a tax offset designed to support freelancers like her. 

This tax offset allows her to deduct a certain amount directly from her tax bill. 

In Sarah’s case, the tax offset is $1,000.

So, her calculated tax bill of $3,000 can be reduced by the tax offset of $1,000. 

This means that Sarah will only need to pay $2,000 in taxes.

In this example, the tax offset tailored for freelancers helped Sarah lower her tax liability by $1,000. It provided valuable savings as a recognition of her freelance work.

Small Businesses Income Tax Offset (SBITO):

Small Business Income Tax Offset (SBITO) [1] is designed to provide relief to small businesses with an aggregated turnover of less than a certain threshold. 

It can help reduce the income tax payable by eligible small businesses. It is also applicable to sole traders.

Tax offsets ATO are incentives that reduce tax burden for specific income groups, including small businesses, sole traders, and work from home individuals.

Uncover More: 

• Work from Home Tax Deduction In Australia: Check Your Eligibility
• Sole Trader Tax Deductions in Australia: A Comprehensive Guide

These offsets lower the overall tax liability and offer financial relief for certain income groups.

Who is Eligible for a Tax Offset?

1. From July 1, 2022: If you earn up to $66,667, you could qualify for the low-income tax offset.
2. Between 2018–19 and 2021–22: You might have been eligible for these:
   • Low-income tax offset – if you earned up to $66,667.
   • Low and middle-income tax offset – for incomes up to $126,000.
3. LMITO Ended: Sadly, the low and middle-income tax offset (LMITO) said goodbye on June 30, 2022. No more LMITO for the 2022–23 income year and beyond.

To claim tax offsets, you must:

• Be an Australian resident for tax purposes.
• Pay tax on your income.
• Have a taxable income below certain thresholds.

Claiming Tax Offsets:

You don’t need to do anything special – just file your tax return.

ATO will work out the offsets after you’ve filed. You’ll see the offset amount on your assessment notice under “Less non-refundable tax offsets.”

LITO Offset maximum limit is $700. 

In a Nutshell:

Tax offsets depend on your income and eligible income groups can claim them to give their wallet a little break. 

LMITO was applicable till 2023 but they have left the tax scene as of 2023 onwards. ^[2] 

How do Tax offsets reduce your Tax Payable?

Tax offsets are like special discounts applied to your total tax bill, which means you end up paying less in taxes.

Here’s how it works: Let’s say you qualify for a tax offset of $500, and your calculated tax bill is $2,000. The offset takes away $500 from that amount. 

So, you would only need to pay $1,500 in taxes.

Tax offsets can bring your tax owed down to zero, but they can’t give you extra money.

They’re a way to make paying taxes a bit easier on your wallet by providing specific deductions based on your situation.

In short, tax offsets are a helpful tool to reduce your tax bill and keep more of your money where it belongs – in your pocket.

What is The Difference Between Tax Offsets and Tax Deductions?

Tax offsets directly reduce the amount of tax you owe. On the other hand, tax deductions decrease your taxable income before calculating your tax liability.

Tax Offsets:

Tax offsets, often referred to as tax credits, directly reduce the amount of tax you owe to the government. They act as a dollar-for-dollar reduction in your tax liability. 

Think of tax offsets as a way to lower your tax bill after all your income has been assessed and your tax has been calculated.

For example, if you have a tax liability of $5,000 and qualify for a tax offset of $1,000, your tax bill will be reduced to $4,000. 

Tax offsets can even bring your tax owed down to zero, but they typically cannot generate a tax refund or payment beyond that point.

Tax Deductions:

Tax deductions, on the other hand, reduce your taxable income, which in turn lowers the portion of your income subject to taxation. 

Deductions subtract eligible expenses from your total income before calculating your tax liability.

For instance, if your total income is $50,000 and you have $5,000 in eligible tax deductions, your taxable income becomes $45,000. 

This means you’ll pay tax based on the reduced taxable income.

5 Common Misconceptions About Tax Offsets Vs The Reality

Misconception #1: Tax Offsets Generate Tax Refunds

Reality: Tax offsets can indeed reduce your tax payable to zero. 

However, they cannot create a tax refund beyond that point. 

They can not provide additional funds – they simply offset your tax liability.

Misconception #2: Tax Offsets Are Complex and Inaccessible

Reality: Tax offsets may appear complex, but they are designed to benefit specific income groups. 

ATO outlines clear Eligibility criteria and straightforward application processes.

You can also consult a professional CPA to seek additional information on available tax offsets.

Another simpler method is to get an AI-powered Tax app to automatically detect your eligible tax offers.

Misconception #3: Tax Offsets Apply to All Income Levels Equally

Reality: Tax offsets are income-dependent. 

The benefits vary based on your income and other qualifying factors. 

Higher-income individuals may have reduced or no access to certain offsets.

Misconception #4: Tax Offsets Are Only for Businesses

Reality: Tax offsets are not exclusive to businesses. 

They are applicable to various taxpayer categories such asindividual earners, families, low income groups and some additional expenses.

Misconception #5: Tax Offsets Are a Temporary Solution

Reality: Tax offsets are a legitimate part of the tax system.

They provide relief and incentives to taxpayers. 

The Bottomline

Tax offsets provide relief to low and middle-income groups among certain other taxpayer categories. 

Claiming an eligible tax offset will reduce your tax liability and you will end up paying less than the total amount you owe on your tax return.

LITO and LMITO are the two most common tax offsets in Australia. However, as of 2023, LMITO has been discontinued. 

Tax Offsets – Frequently Asked Questions ANSWERED

Is Tax Offset a Payment?

No, the tax offset is not a payment.

Instead, it’s a reduction applied to the amount of tax you owe. It lowers your total tax liability, but it doesn’t provide any extra money or payment.

What are the Different Types of Tax Offset in Australia?

 There are several different types of tax offsets for Australians, such as

• Low-Income Tax Offset (LITO)
• Low and Middle-Income Earner Tax Offsets (LMITO)
• Seniors and Pensioners Tax Offset (SAPTO)
• Transfer of Unused Offsets for Seniors and Pensioners
• Superannuation-Related Tax Offsets
• Beneficiary Tax Offset
• Private Health Insurance Offset
• Medical Expenses Tax Offset (2015–16 to 2018–19)
• Offset for Maintaining an Invalid or Invalid Carer
• Zone Tax Offset
• Overseas Forces Tax Offset

What does Offset Mean on a Payslip?

The tax offset is NOT to be confused with the payslip offset.

Payslip “offset” is the adjustment subtracted from your total earnings (gross pay) to calculate your actual take-home pay (net pay). ^[3] 

These deductions could be income tax, retirement contributions, health insurance premiums, and other authorized deductions. The term “offset” highlights the process of subtracting these amounts to determine your final paycheck.

Access Additional Information:

• Can You Claim Deductions Without Receipts in Australia?
• What is Marginal Tax Rate in AU – [FY 2023-24] Complete Guide
• How to Avoid Contribution Tax – ATO Tax Threshold [Updated 2023-24]

References:

[1] SBITO – ATO

[2] Income Group Tax Offsets – ATO

[3] Understanding your Payslip – ACT Govt