05. Tax Offsets

Joshua Easton


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TAX OFFSETS DIFFERENT TO DEDUCTIONS

Tax offsets – which are different to tax deductions – allow some individual and business taxpayers to reduce the amount of tax they pay when they lodge their tax return.Pensioners, small business, low-income earners and parents are among those who may be entitled to this concession.

Tax offsets are slightly different to a tax deduction, which is taken off a person’s income before the tax is calculated.With tax offsets, the Tax Office works out how much tax a person should pay then reduces that amount by the tax offsets available.

Generally, there are three types of tax offsets – those that:

  • Provide tax relief for personal circumstances – for example, offsets for senior Australians and people living in remote areas;
  • Give you a credit for an amount of tax that has effectively already been paid – such as credits for franked dividends and foreign tax; and
  • Provide an incentive – for example, the tax offset for mature age workers and the private health insurance rebate.

In most cases, tax offsets can only reduce the amount of tax you pay to zero.In other words, you generally don’t get a refund if the offsets are greater than the tax that is payable.

The only tax offsets which do provide a refund are the private health insurance rebate and franking tax offset.

Tax offsets, in general, do not reduce your Medicare levy.However, if you have excess refundable tax offsets available – such as those mentioned above – these can reduce your tax, including the Medicare levy.

DEPENDANT OFFSETS ABOLISHED

The Government abolished nearly all the dependant tax offsets, including the dependent spouse tax offset (DSTO), for all taxpayers from 1 July 2014.

A new dependant offset was introduced with effect from the 2012-13 income year – the dependant (invalid and carer) tax offset (DICTO).As a result, access to the DSTO was restricted to those taxpayers whose spouse was born before 1 July 1952 and to taxpayers who qualify for the zone tax offset (ZTO), overseas civilians tax offset (OCTO) or overseas forces tax offset (OFTO), regardless of the age of their dependent spouse.In addition, access to the other dependant tax offsets – namely the invalid spouse, carer spouse, child-housekeeper, invalid relative, parent and parent-in-law offsets and the housekeeper tax offset was limited to those taxpayers who qualify for ZTO, OCTO or OFTO.

The Government then announced that the DSTO and the other dependency offsets will be abolished from 1 July 2014.The housekeeper offset was also abolished from 1 July 2014.

From 1 July 2014, taxpayers who qualify for ZTO, OCTO and OFTO may qualify for the DICTO.Further, taxpayers with a dependant who is genuinely unable to work due to a carer obligation or a disability may be eligible for the DICTO.

LOW-INCOME TAX OFFSET (LITO)

2017-18

Tax Offsets (Rebates)

Low Income Tax Offset (LITO)

Taxable Income (TI) Reduction in Offset (RI) Maximum Offset
$0 – $37,000 Nil $445
$37,001 – $66,666 (TI – $37,000) x 0.015 $445 –RI
$66,667 + $445 Nil


Low and middle-income tax offset from 1.7.2018

A low and middle-income tax offset (LMITO) will be introduced as a non-refundable tax offset of up to $530 pa to resident low and middle-income taxpayers from 2018-19 to 2021-22.

The LMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. For taxable incomes between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530.

For taxpayers with taxable incomes from $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar.

The LMITO will be received as a lump sum on assessment after an individual lodge their tax return. The benefit of the LMITO is in addition to the existing low-income tax offset.

INCOME MEANS TESTING FOR OFFSETS

There is an income threshold to determine whether a taxpayer is eligible for the following offsets:

  • Seniors and pensioners tax offset
  • Invalid and invalid carer offset
  • Spouse super contribution offset
  • Net medical expenses tax offset

BENEFICIARY TAX OFFSET

If you received one or more of the payments listed below, you may be entitled to a beneficiary tax offset.Beneficiary offsets are calculated to reduce tax which would be otherwise payable on beneficiary allowances.

The following list shows the payments and allowances that qualify for the beneficiary tax offset:

  • Parenting payment (partnered);
  • Newstart allowance;
  • Youth allowance;
  • Mature age allowance;
  • Partner allowance;
  • Sickness allowance;
  • Special benefit;
  • Widow allowance;
  • Austudy payment;
  • Exceptional circumstances relief payment or farm help income support;
  • Education payment of any of the following, at 16 years or older:

-ABSTUDY living allowance;

-Payment under the veterans’ children education scheme;

-Payment under the assistance for isolated children scheme;

-Payment under the Military Rehabilitation and Compensation Act education and training scheme 2004 – shown as ‘MRCA education allowance’ on your PAYG payment summary – individual non-business.

  • Training for employment programme allowance; new enterprise incentive scheme allowance; textile, clothing and footwear special allowance; green corps training allowance; or other taxable Commonwealth education or training payments.
  • Income support component from a community development employment project (CDEP) – shown as ‘CDEP salary or wages’ on your PAYG payment summary – individual non-business.
  • CDEP scheme participant supplement.

ZONE TAX OFFSET

Taxpayers who live in remote areas of Australia may be entitled to a Zone Tax Offset depending on the amount of time spent in the relevant zones.

In general, taxpayers qualify as residents of a zone where they reside in the zone (not necessarily continuously) for 183 days or more.Remote areas do not include offshore rigs.To find out whether a location is currently in a “zone” or “special” area, refer to the ‘Australian Zone list’ available on the ATO website.

The 2017/18 rates are set out below:

Description Maximum Offset $
Special Area in Zone A $1,173 + 50% of the relevant rebate amount
Special Area in Zone B $1,173 + 50% of the relevant rebate amount
Zone A $338 + 50% of the relevant rebate amount
Zone B $57 + 20% of the relevant rebate amount

From 1 July 2015, you can claim the zone tax offset if your usual place of residence was in a remote or isolated area (known as a zone) during the income year.

If your usual place of residence was in a zone for less than 183 days in the income year, you may still be able to claim the tax offset, as long as your usual place of residence was in a zone for a continuous period of less than five years and:

  • you were unable to claim in the first year because you lived there less than 183 days
  • the total of the days you lived there in the first year and the current income year is 183 or more. The period you lived in a zone in the current income year must include the first day of the income year.

Any discretion exercised by the Commissioner for the zone tax offset will be made with reference to your usual place of residence.

Fly-in Fly-out “FIFO” and Drive-in drive-out “DIDO” workers lose zone rebate

From 1 July 2015 the zone rebate entitlement is no longer available to FIFO and DIDO workers where such workers do not have their usual residence in an identified geographic zone currently classified as eligible for the ZTO.

NET MEDICAL EXPENSES TAX OFFSET

In the May 2013 Federal Budget, the then Gillard Government announced the phase out of the Net Medical Expenses Tax Offset (‘NMETO’) by the end of the 2019 income year.

Legislation amendments to give effect to this measure were enacted by the Tax and Superannuation Laws Amendment (2014 Measures No. 1) Act 2014.There are transitional arrangements that allow claims for the NMETO can only be made as follows, subject to satisfying the income test set out below:

  • For the 2014 income year, the NMETO can be claimed in respect of the full range of eligible out-of-pocket medical expenses if the offset was claimed in the 2013 year;
  • For the 2015 income year, the NMETO can be claimed in respect of the full range of eligible out-of-pocket medical expenses if the offset was claimed in both the 2013 and 2014 income years;
  • From 1 July 2015, the NMETO can only be claimed in respect of out-of-pocket medical expenses relating to disability aids, attendant care or aged care, up to and including the 2019 income year; and
  • From 1 July 2019 (i.e. from the 2020 income year), the NMETO is abolished for all taxpayers.

The medical expenses tax offset may be available if you have out-of-pocket medical expenses over a specified limit in an income year.

For the 2017/18 income year, the maximum tax offset is 20 per cent – 20 cents in the dollar of your net medical expenses over the $2,333 threshold amount.There is no upper limit to the amount you can claim.

Note the offset applies to net expenses after Medicare refunds or reimbursements from your private health fund.

Due to the $2,333 threshold it is important that only one family member claim the offset in order to maximise benefits.

The net medical expenses tax offset is means tested and varies depending on whether a person’s income exceeds the Medicare Levy Surcharge thresholds in the table below.When net medical expenses exceed the lower threshold a tax offset equal to the reimbursement rate is available to resident taxpayers on the excess amount.Expenses can be incurred on behalf of the taxpayer or their dependants.There is no upper limit on the amount that can be claimed.

Net Medical Expenses Tax Offset 2017-18

Status Adjustable taxable income for rebates (1,2) Medical expenses Rate of Offset
Single $90,000 or less $2,333 or less 0
Greater than $2,333 20%
Greater than $90,000 $5,504 or less 0
Greater than $5,504 10%
Family (3,4) $180,000 or less $2,333 or less 0
Greater than $2,333 20%
Greater than $180,000 $5,504 or less 0
Greater than $5,504 10%

1.‘Adjusted taxable income for rebates’ is calculated as the taxpayer’s taxable income + adjusted fringe benefits total + reportable super contributions + target foreign income + total net investment loss + any tax-free pension or benefit – deductible child maintenance expenditure.

2.A taxpayer will be eligible for the family threshold if they are married on the last day of the income year or have a dependant on any day of the income year.

3.Single parents and couples (including de factor couples) are subject to the family tiers.Thresholds are increased by $1,500 for each child after the first.

4.Where the taxpayer is married it is the combined total of theirs and their spouse’s ‘adjusted taxable income for rebates’ that is compared to the threshold.

SENIOR AND PENSIONERS TAX OFFSET (SAPTO)

From 1 July 2012, the pensioner tax offset merged with the more generous Senior Australian’s Tax Offset (SATO) to form the new Seniors Pensioners Tax Offset (SAPTO).

Rebate Income Thresholds –

Family Situation Maximum Offset $ Shade-out Threshold $ Cut-out Threshold $
Single, separated or widowed 2,230 32,279 50,119
Each member of a couple (married or de facto) 1,602 28,974 each 41,790 each
Each member of a couple (married or de facto) separated due to illness or because one was in a nursing home 2,040 31,279 each 47,599 each

 

REFUNDING FRANKING CREDITS – INDIVIDUALS

Dividends paid to shareholders by Australian resident companies are taxed under a system known as ‘imputation’.It is called an imputation system because the tax the company pays is imputed, or attributed, to the shareholders.The tax paid by the company is allocated to shareholders by way of franking credits attached to the dividends they receive.

You include an amount equal to the franking credit attached to your dividend in your assessable income.You are also entitled to a franking tax offset equal to the amounts included in your income.

The franking tax offset will cover, or partly cover, the tax payable on the dividends.If the tax offset is more than the tax payable on the dividends, the excess tax offset will be applied to cover, or partly cover, any tax payable on other taxable income received.

If any excess tax offset amount is left over after that, the Tax Office will refund that amount to you.

BRIEF SUMMARY OF 2017/18 PERSONAL TAX OFFSETS

DICTO max offset $2,666
DICTO cut-off (dependent’s ATI) $10,946
DICTO cut-out (taxpayer’s ATI) $100,000
Ordinary Zone A $338 + 50% DICTO
Ordinary Zone B $57 + 20% DICTO
Special Zone A or B $1,173 + 50% DICTO
Low income max rebate $445
Low income shade-out (1.5c per $1) $37,000
Low income cut-out $66,667
SAPTO (single) max offset $2,230
SAPTO (single) shade-out (12.5c per $1) $32,279
SAPTO (single) cut-out $50,119


PRIVATE HEALTH INSURANCE REBATE

From 1 July 2012, the private health rebate is income tested against three income tier thresholds.Higher income earners will receive less private health insurance rebate or, if they do not have the appropriate level of private patient hospital cover, the Medicare Levy Surcharge may increase.The income threshold calculation is based on the definition of income used to calculate Medicare Levy Surcharge for individuals or families.

The 2017-18 income thresholds are provided in the below table.

  Base Tier $ Tier 1 $ Tier 2 $ Tier 3 $
Income Thresholds
Singles
Singles 90,000 or less 90,000 – 105,000 105,001 – 140,000 140,001+
Families / Couples
0 dependants 180,000 or less 180,001 – 210,000 210,001 – 280,000 280,001+
1 dependant 180,000 or less 180,001 – 210,000 210,001 – 280,000 280,001+
2 dependants 181,500 or less 181,501 – 211,500 211,501 – 281,500 281,501+
3 dependants 183,000 or less 183,001 – 213,000 213,001 – 283,000 283,001+
4 dependants 184,500 or less 184,501 – 214,500 214,501 – 284,500 284,501+
5 dependants 186,000 or less 186,001 – 216,000 216,001 – 286,000 286,001+
Each extra child 1,500 1,500 1,500 1,500
Rebate 1 July 2017 to 31 March 2018
Aged under 65 25.934% 17.289% 8.644% 0%
Aged 65 – 69 30.256% 21.612% 12.966% 0%
Aged 70 or over 34.579% 25.935% 17.289% 0%
Rebate 1 April 2018 to 30 June 2018
Aged under 65 25.415% 16.943% 8.471% 0%
Aged 65 – 69 29.651% 21.180% 12.707% 0%
Aged 70 or over 33.887% 25.415% 16.943% 0%

PAID PARENTAL LEAVE

A Government funded Paid Parental Leave scheme has been available for eligible recipients from 1 January 2011.The parental leave payment is equal to the federal minimum wage (currently $719.35 per week) and can be paid for up to 18 weeks.

The primary carer must have adjusted taxable income of $150,000 or less for the financial year prior to the child’s birth or adoption and have satisfied a work test.The work test requires the person to have worked at least 330 hours in the preceding 10 months, which equates to one full-time day per week.They must also have worked continuously for 10 out of the 13 months preceding the birth or adoption; therefore, the work test cannot be satisfied by only working full-time for two months prior to the birth of a child.

The Baby Bonus was replaced from 1 March 2014 with the Newborn Upfront Payment & Newborn Supplement for children who are born, taken into care for at least 13 weeks, or placed for adoption after 1 March 2014.

The Newborn Upfront Payment is $550, while the Newborn Supplement will total $1,649.83 for their first child and $550.55 for subsequent children. To receive the maximum Newborn Supplement payment, you need to be eligible for the base rate of FTB Part A, if you are eligible for less than the base rate, your payment will be reduced. Also, you must not be getting parental leave pay for the same child.

This measure will also amend the Paid Parental Leave work test.Families with children born or adopted within 13 months of each other will have their previous Paid Parental Leave period count towards the work test for their next child.This will allow families to more easily qualify for Parental Leave Pay for their second child.

EMPLOYMENT TERMINATION PAYMENTS

ETPs can comprise of two different components:

oa tax-free component

oa taxable component.

Tax is only withheld from the taxable component.

Depending on the type of ETP, the concessional tax treatment may be limited to the smaller of:

othe ETP cap

othe whole-of-income cap.

The top rate of tax applies to amounts paid in excess of these caps.

The ETP cap amount for the 2017–18 income year is $200,000. ($205,000 for 2018 – 19) This amount is indexed annually.

The whole-of-income cap amount for the 2017–18 income year is $180,000. This amount is not indexed. This cap is reduced by any other taxable income payments the employee receives in the income year – for example, salary or wages.

In some cases, you may need to include an ETP in the taxable payments when working out the whole-of-income cap.

The ETP payment summary has an ETP code that you use to describe the type of ETP and which cap has been applied to it.

RESEARCH AND DEVELOPMENT

The Research and Development (R&D) tax incentive replaced the R&D tax concession from 1 July 2011.It provides targeted R&D tax offsets designed to encourage more companies to engage in R&D.The incentive has two core components.

Entities engaged in R&D may be eligible for:

  • A 43.5% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million per annum, provided they are not controlled by income tax exempt entities.
  • A 38.5% non-refundable tax offset for all other eligible entities (entities may be able to carry forward unused offset amounts to future income years).

The rate of the R&D tax offset is reduced to the company tax rate for that portion of an entity’s notional R&D deductions that exceed $100 million for an income year.This change applies to assessments for income years starting on or after 1 July 2014 and before 1 July 2024.

The R&D tax incentive aims to boost competitiveness and improve productivity across the Australian economy by:

  • Encouraging industry to conduct R&D that may not otherwise have been conducted.
  • Improving the incentive for smaller firms to undertake R&D.
  • Providing business with more predictable, less complex support.

The ATO and AusIndustry (on behalf of Innovation Australia) jointly administer the R&D tax incentive.Your R&D activities must be registered with AusIndustry (http://www.business.gov.au/Pages/default.aspx) before the tax offset is claimed and the ATO determines if the expenditure claimed in your tax return for your R&D activities is eligible for the tax offset.

R&D Tax Incentive Changes

The calculation for entities claiming the R&D tax incentive will change commencing for income years beginning on or after 1 July 2018. Also, a maximum cash refund for “smaller” R&D claimants will be capped at $4 million per financial year. A “smaller” R&D claimant is an entity with aggregated annual turnover below $20 million.

The changes for calculating the R&D tax incentive are based around an “R&D intensity percentage” for each entity. The R&D intensity percentage is based on the amount of R&D related expenditure as a percentage of total company expenditure. The lower the R&D intensity percentage for the entity, the lower the maximum available tax offset.

Currently there is a limit on which a company can claim the accelerated rates for the R&D tax incentive. Above this limit, the R&D tax incentive can still be claimed but only at the entity’s corporate tax rate. It is proposed in the budget that the maximum eligible expenditure to get the concessional rates will rise from $100 million per entity per year to $150 million.

Companies with annual turnover above $20 million

Up to 30.6.2018, 38.5 per cent non-refundable tax offset is available with a minimum eligible R&D expenditure of $20,000 pa.

Proposed: Four levels of non-refundable tax offset based on an R&D intensity percentage and the entity’s corporate tax rate.

  • 40 percent or 42.5 per cent offset if more than 10 per cent of total expenditure relates to R&D
  • 36.5 per cent or 39 per cent offset if R&D intensity percentage is between 5 per cent and 10 per cent
  • 34 per cent or 36.5 per cent offset if R&D intensity percentage is between 2 per cent and 5 per cent
  • 31.5 per cent or 34 per cent offset if R&D intensity percentage is between 0 per cent and 5 per cent

Companies with annual turnover less than $20 million

For expenditure up to 30.6.2018, a 43.5 per cent refundable tax offset is available with a minimum eligible R&D expenditure of $20,000 pa.

Proposed: A refundable tax offset of 13.5 per cent percentage points above the entity’s corporate tax rate. This will mean no change for some companies as the refundable tax offset will remain 43.5 per cent. However, “base rate entities” which have a lower corporate tax rate of 27.5 per cent will now have a maximum refundable tax offset of 41 per cent. Also, it is proposed that the maximum cash refund available is $4 million. Any additional refunds past this amount can be carried forward to later income years.

TAX OFFSET FOR UNINCORPORATED SMALL BUSINESS

For the 2016/17-year unincorporated small businesses will benefit from an 8% (5% in 2015/16) discount on income tax payable on income from business activity. The discount is capped at $1,000 per individual for each income year and is a tax offset.

SUPERANNUATION OFFSETS

Low Income Superannuation Tax Offset (LISTO)

From 1 July 2017 a superannuation tax offset has been introduced as a means of reducing tax on superannuation contributions for low income earners.

This offset will be non-refundable, based on the tax paid on concessional contributions of low income earners up to a cap of $500.

To be eligible for this offset, members will have to have an adjusted taxable income of less than $37,000 and have had a concessional contribution made on their behalf.

Increased threshold of low income spouse tax offset – Super

The eligibility threshold for the low-income spouse tax offset will be increased from $13,800 to $40,000 for the receiving spouse from 1 July 2017.This offset will provide up to $540 per annum with the expectation of improving the superannuation balances of these low-income spouses.

INCOME TESTS

Income tests are used to work out your eligibility for a number of tax offsets and benefits, which can reduce the amount of tax you have to pay.

The ATO uses a number of items from your tax return when applying income tests.You should ensure that you complete all items that apply to you in the income tests section of your return.

A number of offsets, benefits and obligations are assessed using a family income threshold.If you have a spouse, you should include your spouse’s income in the relevant section of your tax return.

Depending on your circumstances, any of the following tests may be used to assess your entitlements. The ATO uses income tests to assess the following items in your tax return.

Tax Offsets

  • Net medical expenses tax offset for disability aids, attendant care or aged care
  • Invalid and invalid carer tax offset
  • Seniors and pensioners tax offset
  • Medicare levy surcharge (lump sum payment in arrears) tax offset
  • Spouse super contributions tax offset

Other items

  • Private health insurance rebate
  • Medicare levy surcharge threshold calculation
  • Government super con-contribution
  • A deduction for your personal super contributions
  • A deduction for your business losses (non-commercial losses)
  • Income tax concessions available to participants in certain employee share schemes
  • HELP and SFSS repayments

Adjusted Taxable Income (ATI)

Your ATI affects your entitlement to any dependant tax offset.

Generally, your adjusted taxable income includes your:

  • Taxable income (your assessable income minus deductions)
  • Adjusted fringe benefits amount (total reportable fringe benefits amounts x 0.53)
  • Tax-free government pensions or benefits (includes disability pensions, carer payments and defence pensions)
  • Target foreign income (includes any income earned from overseas that is not already included in your taxable income or received in the form of a fringe benefit)
  • Reportable super contributions (includes both reportable employer super contributions and deductible personal super contributions)
  • Total net investment loss (includes both net financial investment loss and net rental property loss)
  • Child support you paid

Rebate income

The ATO will work out what is termed ‘rebate income’ to determine whether you are eligible for the seniors and pensioners tax offset.

Your rebate income includes your:

  • Taxable income (your assessable income minus deductions)
  • Adjusted fringe benefits amount (total reportable fringe benefits amounts x 0.53)
  • Total net investment loss (includes both net financial investment loss and net rental property loss)
  • Reportable super contributions (includes both reportable employer super contributions and deductible personal super contributions)

Income for Medicare Levy Surcharge purposes

The ATO uses your income for surcharge purposes to work out if you have exceeded the Medicare levy surcharge threshold that applies to you.They do this to determine:

  • If you are entitled to the private health insurance rebate, and
  • If you do not hold an appropriate level of private health insurance, your liability to pay the Medicare levy surcharge.

Private Health Insurance rebate

To assess your private health insurance (PHI) rebate entitlement, generally your income for surcharge purposes is your:

  • Taxable income (your assessable income minus deductions)
  • Reportable fringe benefits amount, as reported on your payment summary
  • Total net investment loss (includes both net financial investment loss and net rental property loss)
  • Reportable super contributions (includes both reportable employer super contributions and deductible personal super contributions)
  • The amount on which family trust distribution tax has been paid.

Medicare Levy Surcharge

You may have to pay Medicare levy surcharge (MLS) if you or your dependants (including your spouse, even if they had their own income) did not have an appropriate level of private patient hospital cover for the whole financial year and your income was above a certain amount.

HELP and SFSS repayment income

Your repayment income includes your:

  • Taxable income (your assessable income minus deductions)
  • Reportable fringe benefits amount, as reported on your payment summary
  • Total net investment loss (includes both net financial investment loss and net rental property loss)
  • Reportable super contributions (includes both reportable employer super contributions and deductible personal super contributions)
  • Any exempt foreign employment income amounts included in a tax return.

Super income tests

Reportable employer super contributions are included in the income tests for the following:

Spouse super contributions tax offset

Government super co-contribution

Deduction for personal super contributions