Tax Offset

Eligibility for the senior and pensioner tax offset
To qualify for SAPTO, you must meet two primary requirements. Firstly, you need to be eligible for an Australian Government pension or allowance. This includes pensions and allowances received from Centrelink or the Department of Veterans’ Affairs (DVA). Secondly, you must satisfy the income limits set by the Australian government.

Income limits and rebate income
The income limits for SAPTO eligibility depend on your marital status and living arrangements. If you are single and your rebate income is below $50,119, or if you are part of a couple and the combined rebate income is below $83,580, you meet the income limit criteria. In cases where you and your spouse had to live apart due to illness or one of you was in a nursing home, the combined rebate income limit is $95,198 ($47,599 for each partner).

Understanding rebate income
Rebate income includes various components when calculating eligibility for SAPTO. It encompasses your own rebate income, your spouse’s rebate income, and the amount a trustee of a trust was liable to pay tax for a spouse who was under a legal disability. This could be due to reasons such as being an undischarged bankrupt or being declared legally incapable due to a mental condition. By considering all these factors, a more accurate assessment of your eligibility can be made.

Tax offset reduction
If your rebate income exceeds the shading-out threshold, the SAPTO is subject to reduction. The reduction rate is $0.125 for every dollar that your rebate income exceeds the threshold. To simplify the calculation, the reduction amount is rounded up to the nearest whole dollar. The Australian Taxation Office (ATO) applies this reduction based on the amount that provides you with the greatest entitlement.

Transferring unused SAPTO between spouses
In situations where both you and your spouse are eligible for SAPTO, it’s possible to transfer any unused offset amount to your spouse. This provision allows couples to optimize their tax benefits. When you lodge your tax returns, the ATO assists in calculating and facilitating the transfer of the unused SAPTO. This strategy can help couples minimize their overall tax liabilities and maximize their combined savings.

Exempt pensions for transfers
For the purpose of transferring the unused SAPTO, certain pensions and allowances are considered exempt. These include disability support pensions, youth disability supplements, carer payments, invalidity service pensions (paid under the Veterans’ Entitlements Act 1986), and partner service pensions (also paid under the Veterans’ Entitlements Act 1986). It’s important to be aware of these exemptions when considering the transfer of unused SAPTO to ensure accurate calculations.

Foreign Residents
For foreign residents, the calculation of the unused offset is slightly different. If your spouse is a foreign resident and receiving an Australian Government pension or allowance, their unused offset is calculated as if they were a resident. This provision ensures that foreign residents are not disadvantaged when it comes to SAPTO entitlements.

Eligibility for the beneficiary tax offset
To qualify for the beneficiary tax offset, you must be receiving specific Australian Government allowances and payments and be liable to pay tax. If you receive a qualifying tax-free government pension or benefit and have no other taxable income, you will pay no tax for the year. This means that if the government payments are your sole income source throughout the tax year, you do not have to pay any tax. However, if you have additional income, you may still need to pay some tax, but you may be eligible for the beneficiary tax offset.

Examples of eligible payments include Jobkeeper, Youth Allowance, Austudy, Farm household allowance, and CDEP wages. It is important to note that regular pension recipients are not eligible for this offset. By offering this tax offset, the Australian Tax Office aims to provide income protection to lower-income individuals who rely on government benefits.

Claiming the beneficiary tax offset
Claiming the beneficiary tax offset is a straightforward process. The Australian Tax Office (ATO) automatically calculates the offset when processing your tax return. However, to ensure that the ATO correctly identifies and includes the offset, it is essential to enter the appropriate eligible income data in your tax return. This includes providing accurate information about the government allowances and payments you have received during the tax year.

The non refundable nature of the beneficiary tax offset
While the beneficiary tax offset is not refundable in the traditional sense, it provides a reduction in the tax you owe. Assuming you accurately fill out your tax return with the relevant details, the offset will apply, resulting in a lower tax liability. This means that the offset directly reduces the amount of tax you are required to pay, increasing your disposable income.

Calculating the beneficiary tax offset
To calculate your beneficiary tax offset, you need to gather specific information, including the total amount of your government allowances and payments, your taxable income, and your rebate income amount. Additionally, if you have a de facto partner or spouse, you will need their taxable income, their total rebate income amount, and any net income from a trust where the trustee was liable to pay tax on disability due to your spouse being under a legal disability.

It is worth noting that there are a few exempt pensions that require the total amount of your pension income for the tax year. These pensions include disability support pension, wife pension, carer pension, invalidity service pension, and partner service pension.

Eligibility for the zone tax offset
To claim the Zone Tax Offset, individuals must meet specific criteria. Firstly, they must be residents of specified remote areas or isolated areas in Australia. However, offshore oil or gas rig residents are not eligible for this tax offset. The Australian zone list categorizes remote areas into Zone A and Zone B, with additional special areas within these zones. It’s important to note that some newly established localities may meet the requirements for a special area but are not yet included in the Australian zone list.

Furthermore, to be eligible for the Zone Tax Offset, an individual’s usual place of residence must be a remote or isolated area listed in the Australian zone list. Additionally, the individual must have resided in that place for 183 days or more during the income year. However, if the individual’s usual place of residence was in a zone for less than 183 days, there are exceptions. If the individual’s usual place of residence was in a zone for a continuous period of less than five years and they were unable to claim the offset in the first year due to not meeting the 183-day requirement, they may still be eligible to claim the offset if the total days spent in the zone across the first and current income year add up to 183 days or more, including the first day of the income year.

Calculating the zone tax offset
The Zone Tax Offset is calculated based on a fixed amount and a base amount. The fixed amount varies depending on the geographic location. For Zone A residents, the fixed amount is $338 plus 50% of the base amount. Zone B residents receive a fixed amount of $57 plus 20% of the base amount. Special zone areas have a fixed amount of $1,173 plus 50% of the base amount. Overseas forces, such as Australian Defence Force members or United Nations armed forces personnel, receive a fixed amount of $338 plus 50% of the base amount.

The base amount can be included if the individual maintained a child under 21 or a full-time student under 25, or if they were entitled to claim the Invalid and Carer Offset. The base amount values vary depending on the dependent category.

Eligibility criteria for the small business tax offset
To be eligible for the Small Business Tax Offset, you must meet the following criteria:

• Carrying on a small business as a sole trader: As a sole trader, you must be actively engaged in running a small business.
• Share of net small business income from a partnership or trust: If you are a partner or beneficiary of a partnership or trust, you must have a share of net small business income.
• Aggregated turnover of less than $5 million: Your small business must have an aggregated turnover of less than $5 million for the income year.

Calculating the small business tax offset

The Small Business Income Tax Offset rate is 16%.

The Small Business Tax Offset is calculated based on the proportion of tax payable related to your total net small business income. 

If your total net small business income is equal to or greater than your taxable income, the offset will be the offset rate of 16% multiplied by your basic income tax liability for the year. 

If you are a sole trader, your net small business income is used to calculate your Small Business Tax Offset. Calculating your net small business income involves subtracting any allowable deductions and expenses related to your business from your total business income. The resulting amount is your net small business income.

Once you have calculated your net small business income, you can determine your Small Business Tax Offset using the following steps:

• Calculate your basic income tax liability: This is the tax payable on your taxable income before applying any offsets or deductions.
• Determine the proportion of tax payable related to your net small business income: Divide your net small business income by your taxable income. This will give you the proportion of tax payable related to your business income.
• Calculate the offset amount: Multiply the proportion of tax payable related to your net small business income by the offset rate of 16%. The result is your Small Business Tax Offset.

To claim the Small Business Tax Offset, you do not need to perform any additional calculations. The ATO automatically calculates the offset amount using the information provided in your tax return. The offset amount will be displayed on your ATO notice of assessment.

As an Australian taxpayer, you have the opportunity to leverage the spouse contribution tax offset to support your partner’s superannuation savings. By making eligible super contributions on behalf of your spouse, you can claim a tax offset, which can provide financial benefits for both of you. 

Tax offset amount
The tax offset amount depends on the contribution amount and your spouse’s income. If you pay $3,000 or more and your spouse earns $37,000 or less, you can claim the full tax offset of $540. For contributions less than $3,000, and if your spouse earns between $37,000 and $40,000, you can claim a partial tax offset.

Eligibility criteria
To be eligible for the spouse contribution tax offset, you must meet the following conditions for the income year in which you make the claim:

• Contributions made to a complying super fund.
• Both you and your spouse were Australian residents.
• The contributions were not deductible by you.
• You and your spouse were not living separately and apart on a permanent basis.
• Your spouse’s age should be under 75 years when the contributions are made
• Your total super balance should not exceed the general transfer balance cap.

Income and balance caps
For the spouse contribution tax offset, your spouse’s income must be less than $40,000 for the relevant income year. The income includes their assessable income, total reportable fringe benefits amounts, and total reportable employer superannuation contributions.

Calculating the tax offset amount
The tax offset amount is determined using specific worksheets, which consider your spouse’s income and the contribution amount. If your spouse’s income is $37,000 or less, Worksheet 2 is used to calculate the offset. If their income is between $37,000 and $40,000, Worksheet 3 is employed. The calculations involve comparing the spouse contributions, income thresholds, and other factors to determine the offset amount.

Spouse contributions and contribution splitting
To ensure your spouse’s superannuation continues to grow, you have two options: making spouse contributions and arranging for contribution splitting.

You can make voluntary after-tax contributions into your spouse’s super fund if they are a low-income earner or have taken time off for caring responsibilities. These contributions may qualify for the spouse contribution tax offset, providing a tax benefit of up to 18% for contributions up to $3,000 per year. The maximum tax offset of $540 can be claimed if your spouse’s total assessable income is $37,000 or less.

Contribution splitting allows you to direct some of your employer or voluntary personal contributions into your spouse’s super account. This option is available if your spouse is under their preservation age or between 65 and their preservation age and has not yet retired. Contribution splitting is facilitated through your super fund, and it enables you to transfer up to 85% of your concessional contributions from the previous year.

Legally married or de facto
To qualify for the spouse contribution tax offset, your partner must be your legally married or de facto partner. However, if you are legally married but live separately and apart on a permanent basis, your spouse may not be considered eligible under the superannuation laws.

Eligibility for the Private Health Insurance tax offset (rebate)

To qualify for the private health insurance tax offset you must have private health insurance (PHI). The tax offset, also referred to as the private health insurance rebate, is an amount contributed by the government towards your private health insurance.

Your entitlement to the private health insurance rebate depends on several factors. First, it considers the age of the oldest person covered by your policy. Second, it takes into account your single or family income thresholds and rates for the Medicare levy surcharge, based on your family status. If your income is higher, the amount you can receive as an rebate may be reduced or unavailable if it exceeds a certain threshold.

Private Health Insurance income thresholds 2024–25

Threshold	Base tier	Tier 1	Tier 2	Tier 3
Single threshold	$97,000 or less	$97,001 – $113,000	$113,001 – $151,000	$151,001 or more
Family threshold	$194,000 or less	$194,001 – $226,000	$226,001 – $302,000	$302,001 or more

Private Health Insurance income thresholds 2023–24

Threshold	Base tier	Tier 1	Tier 2	Tier 3
Single threshold	$93,000 or less	$93,001 – $108,000	$108,001 – $144,000	$144,001 or more
Family threshold	$186,000 or less	$186,001 – $216,000	$216,001 – $288,000	$288,001 or more

Private Health Insurance Rebate 2024–25 & 2023–24

Threshold	Base tier	Tier 1	Tier 2	Tier 3
Aged under 65	24.608%	16.405%	8.202%	0%
Aged 65-69	28.710%	20.507%	12.303%	0%
Aged 70 or over	32.812%	24.608%	16.405%	0%

How to claim the Private Health Insurance rebate

Claiming your private health insurance rebate can be done in two ways: as a premium reduction or as a refundable tax offset when you lodge your tax return.

• Premium Reduction: By opting for a premium reduction, you can lower the price of your policy charged by your health insurer. However, it’s important to note that depending on various factors such as your chosen offset level and income threshold for the Medicare levy surcharge, you may be required to repay a portion of your premium reduction.
• Refundable Offset: Alternatively, you can choose to receive the private health insurance offset as a refundable amount when you lodge your tax return. This means that you will receive the offset as a refund, providing you meet the eligibility criteria.

The method you choose to claim your offset and the level of offset you claim for your policy will determine whether you receive a private health insurance tax offset or need to repay some of your premium reduction. These factors are also influenced by your income threshold for the Medicare levy surcharge.

Income testing for adults covered by the policy

Each adult covered by a private health insurance policy is subject to income testing to determine their entitlement to the rebate. It is important to note the following:

Determining Entitlement: Regardless of who pays for the insurance policy, each adult is income tested to assess their eligibility for the private health insurance rebate.

Share of Insurance Cost: Income testing is conducted on each adult’s share of the cost of the insurance policy.

Scenarios affecting income tests for the private health insurance rebate

Depending on your specific circumstances, the income test for the private health insurance rebate may vary. The following scenarios outline the different outcomes:

One Adult Covered by a Policy: If you are the only adult covered by a private health insurance policy, your share of the policy for rebate purposes is determined by the total cost of the policy, excluding any lifetime health cover loading. Regardless of who pays for the policy, you will undergo income testing to determine your rebate entitlement.

Multiple Adults Covered by a Policy: In cases where the policy covers more than one adult, the premiums paid are divided equally among the adults covered by the policy at the time of payment. Each adult’s share of the policy cost is calculated based on the total cost divided by the number of adults covered. When lodging their tax returns, each adult undergoes income testing for their share of the policy cost, resulting in potential different outcomes.

Dependent Persons Covered by a Policy: Dependent persons on a private health insurance policy are not income tested, and their income does not count towards the income test for the rebate. Therefore, dependent persons are not considered to have a share of the policy cost.

Dependent Person Only Policies: A dependent person covered by a dependent person-only policy is not entitled to a private health insurance rebate. Consequently, they are not subject to income testing.

 

What is the foreign income tax offset?

The Foreign Income Tax Offset (FITO) provides relief from double taxation for individuals with assessable income from overseas.

The foreign income tax offset rules are found in Division 770 ITAA 1997. To be eligible for the offset, you must have paid foreign income tax on income or gains included in your Australian assessable income. The foreign tax must be a tax on income, profits, gains (including capital gains), or any other tax covered by an agreement under the International Tax Agreements Act 1953.

The foreign income tax offset applies to all forms of income and all taxpayers, including individuals and other entity types. While mainly applicable to Australian residents, foreign persons, or non-residents whose foreign income is taxed in Australia may be eligible for the offset in certain circumstances. In rare cases, foreign tax imposed on Australian source income may contribute to the foreign income tax offset.

The foreign income tax offset is not a refundable tax offset. That is, if your foreign income tax offset exceeds your basic income tax liability, you will not be refunded the excess foreign income tax offset. Further, you cannot carry forward any unused foreign income tax offset to another year.

The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax – even if you paid the foreign income tax in another income year.

For a foreign income tax offset to be available, it must be that the foreign tax has been paid. It is not sufficient that it has been assessed and not paid or that you know the tax will later become payable.

Under section 770-140 ITAA 1997, foreign tax will be treated as not being paid to the extent that you or any other entity became entitled to a refund of the foreign income tax, or any other benefit worked out by reference to the amount of the foreign income tax (other than a reduction in the amount of the tax).

Differences between Australian and foreign tax systems may result in paying foreign income tax in a different income year than when the related income or gains are included in your Australian income tax return. If you paid foreign income tax after the year in which the income or gains were included, you can amend your assessment to claim the offset within four years of paying the foreign income tax. Amendments should also be made for changes in the amount of foreign tax paid that counts towards the offset.

Calculating the foreign income tax offset

For offsets of $1,000 or less, you only need to record the actual amount of foreign income tax paid. If the offset amount exceeds $1,000, you need to calculate the foreign income tax offset using this formula:

Foreign income tax offset = (Foreign income × Australian taxable income) ÷ Worldwide income × Foreign tax paid

Here’s a breakdown of the components of the formula:

• Foreign income: This refers to the income you earned from foreign sources that is included in your Australian assessable income or non-assessable non-exempt income.
• Australian taxable income: This is your total income from all sources that is subject to Australian tax.
• Worldwide income: This includes your total income from both Australian and foreign sources.
• Foreign tax paid: This is the amount of tax you paid to the foreign country on your foreign income.

Note that the foreign income tax offset cannot exceed the amount of Australian tax payable on the foreign income.

Foreign income tax offset not only reduces your tax liability but can also be applied against the Medicare levy and Medicare levy surcharge. If there is any remaining offset after reducing your tax payable, it can be used to offset your liability for these healthcare-related charges.

The foreign income tax offset is automatically calculated by the ATO when you lodge your income tax return.

Foreign tax paid by someone else

Section 770-130(2) ITAA 1997 provides that you are considered to have paid foreign income tax in relation to an amount included in your income if some other entity has paid the tax under an arrangement with you or under the law relating to the foreign tax. An example is if you are a partner in a partnership and the partnership pays foreign income tax on the partnership income.

Also, under 770-130(3), you are considered to have paid foreign income tax where section 6B ITAA 1936 operates. This provision attributes income to another amount of income of a particular kind or source. Where foreign income tax has been paid in respect of the other amount of income and the taxed amount is less than it would have been if that tax had not been paid, the provision operates.

This will apply, for example, in relation to the beneficiary of a trust. This example is given in the legislation.

Example

Tim, an Australian resident, derives interest income of $1,000 from a foreign country. As that country’s laws require the payer of the interest to withhold tax at a rate of 10%, Tim receives $900 (that is, $1,000 less tax of $100). Although he has not directly paid the foreign income tax, Tim is taken to have paid that tax because it was paid under the law relating to the foreign income tax. Tim includes $1,000 in his Australian assessable income and claims a foreign income tax offset of $100.

Example

Aust Co (An Australian resident) is the sole beneficiary of an Australian resident trust H and is presently entitled to all the income of trust H. Trust H owns shares in For Co (a foreign company). For Co pays a dividend to trust H and the dividend is subject to withholding tax in For Co’s country of residence.

Trust H allocates to Aust Co, the dividend, as well as other Australian source income trust H earned in the year (none of which was subject to foreign income tax). Aust Co is treated as having paid the foreign income tax paid by For Co under subsection 770-130(3). The foreign income tax is treated as paid in respect of the amount included in Aust Co’s assessable income that is attributable to the dividend.

Foreign income tax paid on NANE income

Resident taxpayers can claim a foreign income tax offset for foreign income tax paid on non-assessable non-exempt (NANE) income under sections 23AI or 23AK of the ITAA 1936.

The tax offset only applies to foreign income tax paid on income that falls under sections 23AI or 23AK as NANE income. The tax-paid deeming rules, which apply to previously attributed income amounts, do not affect the calculation of foreign income tax paid on distributions.

Typically, the foreign income tax paid will be in the form of withholding tax on dividend distributions. In such cases, if the tax is paid by someone else under the foreign country’s tax laws, the tax-paid deeming rules can be applied, considering the attributable taxpayer as having paid the foreign income tax. However, it must be demonstrated that the tax is paid in relation to the section 23AI or 23AK amounts. The tax offset limit is increased by the amount of foreign income tax paid on section 23AI or 23AK income.