The purpose of tax 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 Tax Office thought ‘hey, let’s really mess with their minds and change the name… of just some of them!’
How Do Tax Offsets Work?
Basically, tax offsets (rebates) reduce the amount of tax payable after it has been calculated on your taxable income.
They are not the same as deductions, which are taken off your income before your tax is worked out. This makes a big difference.
In most cases, 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. These are often referred to as either ‘refundable’ or ‘non-refundable’ offsets.
Tax offsets, in general, do not reduce your Medicare levy either; however, where you have excess refundable tax offsets, you can use them to reduce your tax, including your Medicare levy.
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.
* The rates provided in examples and explanations are current at the time of writing but are subject to change each financial year.