A Tax Offset reduces the amount of tax you have to pay on your income.
The tax you are required to pay is first calculated on your taxable income.
If you are eligible for a tax offset – the income tax that has been calculated is then reduced by the amount of the tax offset.
Tax offsets are different from tax deductions. A tax deduction reduces your taxable income – which reduces the amount of tax that will be calculated on your income.
A tax offset reduces the income tax that has been calculated. Tax offsets can only reduce your tax payable to $0.
If you are not required to pay any tax – there will be nothing to reduce. When this happens, you do not receive any further benefit.
Tax offsets do not reduce your Medicare levy. Medicare levy is a separate calculation to your income tax.
To show you how this works here is an example:
Olivia is a hair dresser. She earned $20,000 of income during the year and had $300 of deductions. Olivia’s taxable income is $19,700 (which is her total income less her deductions).
The tax on Olivia’s taxable income is $312 – using the tax rates at the time of this example.
Olivia is able to claim the low income tax offset up to $445.
Olivia’s tax payable is reduced to $0. Her original tax payable amount of $312 is reduced to $0 because the low income tax offset is more than her amount payable.
Olivia will receive any tax she has paid back as a refund.