Tax Return:: Difference between Tax Deductions and Tax Offsets

Hello, this is P&C Tax Professionals.

Today we are going to discuss about a topic that a lot of people get confused when they apply for their tax return, so without further ado let's get into it!

In this blog post we would like to explain what tax deductions and tax offsets are and how they differ.

First of all, in simple terms, deductions or expenses help you to pay less tax by lowering your taxable income. On the other hand, offsets help you to reduce the amount of tax that you owe on your taxable income (i.e. it reduces your tax payable amount).

To get a better understanding, we will go through an example for each case.

1. Deduction

Let's pretend you are working as a tiler where you have a gross income of $40,000 and have spent a total of $600 on materials and tools purchased for work. In this case, your taxable income will change from $40,000 to $39,400 ($40,000 gross income - $600 deductible expenses).

Alternatively, if you are working as a chef and you have spent a total of $500 in the cost of purchasing chef pants, kitchen knives and safety shoes (which are all work-related expenses), this $500 will be deducted from your income and your taxable income will consequently reduce by the amount equivalent to your deductions.

Obviously, the tax that is payable when you have an income of $40,000 and when you have an income of $39,400 would be different.

Based on the tax rate which is applied from 2021, the tax rate for an income of $39,400 is 19% as it falls within the taxable income bracket of $18,201 to $45,000. In this case, the actual income tax savings from the $600 deduction is $114.

2. Tax Offset

Now let's move onto an example involving tax offsets.

To begin with, if you are an Australian resident for tax purposes with an income between $18,201 to $45,000, you are entitled to receive a low income tax offset of up to $700 depending on your taxable income for the financial year. This will help you to reduce the tax payable on your taxable income. Hence, the primary purpose of a tax offset is to reduce your tax liability not to increase the amount of tax refund that you receive.

Moreover, small business owners with an annual turnover of less than $5 million can receive up to $1,000 in cash as small business income. In other words, this small business income tax offset can reduce the tax you have to pay by up to a maximum limit of $1,000 per year.

Did this clear up some of your confusions on the difference between a tax deduction and a tax offset?

When applying for a tax return in Australia, the difference in the amount of the refund can be huge if you accidently select or enter a different number for your tax deductions, tax offset, Medicare, residency, etc. Which is why we highly recommend for people to consult with a professional accountant before proceeding with the lodgment of their tax return.

As always, any questions or queries can be sent through our Official Facebook Page (P&C Tax Professionals - Australia) or via our email address at: pnctax@naver.com.

Thank you and bye for now !