What’s the Difference Between Tax Offset and Tax Deduction? The Distinction is Important!
Posted 9 Dec '22
Posted 9 Dec '22
We’ve all heard the terms “tax offset” and “tax deductions.” While many use these terms interchangeably, the reality is that they have two different meanings. As such, they have varying impacts on your tax result when it comes to completing your return!
It’s true that both tax offsets and tax deductions can help you reduce your tax burden. It’s essential for both individuals and businesses to know how tax offsets and deductions are applied to your income when calculating your final tax bill.
Here’s a simple overview of the difference between the two and how they show up to save you money during tax season!
Tax deductions reduce the amount of income that can be taxed. Think of a tax deduction as the expenses you incurred that relate to producing your income, be it related to salary & wage or your small business. These items can be included to reduce your taxable income, and as we work on a marginal percentage system of tax, this ultimately reduces the amount of tax you pay. These deductions are there to ensure that you are only paying tax on the net income you earn.
Remember, if you are deducting the full cost of something for your business, it must be used within your business. If you are deducting something you use for your business part of the time, you are only able to claim a portion of that item or service.
Common Tax Deductions for individuals include:
The most common employee-related deductions are work-related deductions. These include car expenses, travel expenses, uniforms & protective clothing and even self-education expenses. Outside of this, you can even deduct costs for managing your tax affairs, income protection insurance and making donations to gift-deductible recipients.
As stated by the ATO, a tax offset directly reduces (or ‘offsets’) the amount of tax payable on an eligible person’s taxable income in any given financial year. The government issues offsets to help certain individuals with tax relief or financial support.
Offsets are either refundable or non-refundable. Refundable offsets mean that you could receive money back, whereas non-refundable would only reduce your taxable position down to a nil result.
LMITO (Low and middle income tax offset) is the most commonly discussed offset and was established to assist low and middle-income taxpayers by reducing their tax burden. This offset is considered ‘non-refundable’, which means individuals using this offset are not eligible for a tax refund of their own.
Offsets are different to deductions as they reduce your tax payable calculation, not your taxable income calculation. Review the full list of tax offsets available to you in 2022!
Our Empire Accountants team of professionals are well-versed in analysing your expenses to determine viable deductions. Furthermore, we will ensure to consider any offsets you may be eligible for to help minimise your tax position.
Working with an accounting expert can help you save time and money this tax season. Contact Us at any time to speak to a member of our team and set up an appointment. We are happy to help make this tax season as stress-free and beneficial as possible!
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