Q: I am expecting to receive a tax benefit under the low to middle income tax offset the Government legislated last week. Is an offset the same as a deduction? Does the tax benefit work in the same way?
A: Offsets are different from tax deductions. A deduction, such as work travel, home office expenses and interest expense, reduces the amount of taxable income. This means that our taxable income is calculated after subtracting any deductions.
The benefit you receive from a deduction depends on your tax bracket. For example, if your annual income was $80,000 your top marginal rate is 32.5 percent. If you are claiming $1000 of deductions, the deductions will reduce your taxable income to $79,000, saving $325 of tax.
But offsets are subtracted from tax payable. So, if your tax payable is $15,000 and you receive an offset of $1000, your tax payable falls to $14,000.
In most cases, tax offsets can only reduce the amount of tax you pay to zero, with no refund of excess amount (franking credits are an exception).
The Australian Taxation Office has confirmed the low and middle income tax offset is a non-refundable offset.
Generally, offsets do not reduce the Medicare level and cannot be carried forward to the following year.
Deductions tend to be job specific, while offsets tend to be means tested and apply to people in certain income brackets.