Everyone would like to pay less income tax – but beyond standard deductions, it can be difficult for a non-professional to know how to proceed. Just thinking about it can be confusing. One issue is sound-alike names for tax law provisions that may be very different from each other. Here, we look at tax offset vs tax deduction.
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Taggart & Partners is a leading tax accountant East Brisbane based and serving a wide variety of enterprise clients with sound tax advice and business consultation. We’ve helped clients improve their bottom line through proven, real-world tax minimisation strategies. We offer a full range of business tax accounting services. Call us on (07) 3391 1188, e-mail us at enquiries@taggartandpartners.com.au or get in touch online.
Tax Offset
Taken at the end of tax calculation, a tax offset directly reduces the amount of tax to be paid. It’s usually used by the Australian government to promote and encourage a desirable activity – an example is the Small Business Income Tax Offset of up to $1000 per year to unincorporated small businesses.
It may be helpful to note that the Australian Taxation Office sometimes uses the term “rebate” interchangeably with “tax offset” in their documentation. The more familiar term “rebate” may be an easy way to understand what a tax offset is, and clarify the difference in tax offset vs tax deduction.
A tax offset can reduce the amount of tax you owe to zero, but it cannot generate a tax refund. If your tax owed goes below zero due to a tax offset, then you would simply owe no tax – you don’t get the difference in a refund. Also, for individuals, tax offsets will not reduce the amount owed for Medicare Levy and Medicare Levy Surcharge.
A tax offset is generally calculated according to income, so how much a business or an individual made in a tax year will affect eligibility for a specific tax offset, and often how much that offset will be. This can get complicated, but the good news is that the Taxation Office will calculate most tax offsets when the tax return is filed, although you may need to claim offsets when you file, and in some cases supporting documentation will be needed.
Tax Deduction
Tax deductions are taken before tax calculation – they reduce taxable income, so you pay tax on a lower amount than you would have done without them. Tax deductions are familiar to most people from their personal tax returns. Generally speaking, the legitimate costs of making the money that the government wishes to tax are likely to be eligible as tax deductions. It is proper that there are tests and restrictions and exclusions, but that is the basic idea. Excellent documentation is necessary.
In addition, for larger deductions as often found in business, there may be a schedule defining when and how much of a particular type of cost may be deducted – and this can change, so keeping up with the tax code is also necessary. A current example would be the imminent reversion of Temporary Full Expensing back to Instant Asset Write-off, probably at a much lower threshold than before. Not being aware of this may cost some people a lot of money.
Tax Professionals
You are probably getting the picture that professional tax advice is desirable. Tax offset vs tax deduction is just the very beginning. Tax matters can be opaque and complex, and they will likely only get more so over time. Trusted advice is a highly valuable resource that can only gain in importance to your enterprise. Please note that this article is intended as an overview of the subject, for informational purposes only. You should consult with your professional tax advisor.
Taggart & Partners – Here for You
Taggart & Partners are ready to stand with you, as we do for many excellent businesses. We are tax advisors and business consultants, and our record of many years speaks for itself. We are here to answer questions and suggest options and strategies, for taxation and a full range of forward-looking business issues. For a friendly consultation, call us on (07) 3391 1188, e-mail us at enquiries@taggartandpartners.com.au or get in touch online. The next level for your enterprise is only a step away.