Understanding Offsets & Rebates

 The purpose of offsets and rebates is to provide tax relief for people who’s situation may make the full payment of tax difficult (either because of low income or excessive expenses).

‘Tax offset’ is one of those terms that was difficult enough to understand when they were all named ‘rebate’, but the ATO thought ‘hey, let’s really screw with their minds and change the name… of just some of them!’

 

How Offsets Work?

 Basically, tax offsets (rebates) reduce the amount of tax payable after it has been calculated on the taxable income.

They are not the same as deductions, which are taken off your income before your tax is worked out.

Tax offsets, in general, do not reduce your Medicare levy; however, where you have excess refundable tax offsets, you can use them to reduce your tax, including your Medicare levy.

Tax offsets can only reduce the amount of tax you pay to zero, that is, if your tax offsets are greater than your tax due, you do not get a refund of the excess amount – with a few exceptions. The refundable tax offsets are:

• Private Health Insurance Rebate
• Franking tax Offset
• Baby Bonus
• Education Tax Refund

Example

Sally works as a shop assistant. She earned $20,000 income and had $300 in deductions. Sally’s taxable income is $19,700 (income less deductions). Tax on Sally’s taxable income is $2,055 (15% of taxable income above the tax-free threshold of $6,000).

Sally is entitled to the maximum low income tax offset of $1,500. She also can claim $500 for the medical expenses tax offset.

Sally’s new tax liability is now just $55 ($2,055 less $2,000 rebates/offsets). As you can see, Sally is considerably better off for having used the offsets available to her.

Common Offsets

 Some available offsets are:

  • Low income tax offset (taxpayers with taxable income under $30,000 will receive this)
  • Dependant rebate (for single income families without dependants)
  • Senior Australians offset
  • Pensioner rebates
  • Entreprenuers’ tax offset (up to 25% of tax payable on any income from businesses whose turnover is less than $75,000 in total, if they are in the STS system)
  • Medical expenses rebate (20% on out-of-pocket medical expenses after first $2,000)
  • and many, many others

 

* The rates provided in examples and explanations are current at the time of writing but are subject to change each financial year.

This information is for guidance only and is not intended as specific advice to any reader. Professional advice should be obtained before acting on any information contained herein. The publisher accepts no responsibility for loss occasioned to any person or organisation as a result of action or the refrain of action as a consequence of the contents of this publication.