With the 2026–2027 Federal Budget announcing a new $1,000 standard work-related expenses deduction and a $250 working Australians tax offset (WATO) for future financial years, you might be wondering about the difference between these two types of tax benefits. Both deductions and offsets can reduce how much tax you pay, but they work in quite different ways. Tax deductions reduce your taxable income before your tax is calculated. Common deductions you might already claim include:
- work-related expenses like uniforms or tools;
- gifts and donations to registered charities;
- investment property expenses; and
- costs of managing your tax affairs, such as tax agent fees.
For example, if you earn $60,000 and claim $2,000 in work-related deductions, your taxable income becomes $58,000. You then pay tax on this reduced amount.
The value of a deduction depends on your marginal tax rate. For example, a $1,000 deduction may save a resident taxpayer around $300 if their marginal tax rate is 30%, or $160 if their marginal tax rate is 16%, ignoring Medicare levy and other factors.
Tax offsets work differently: they directly reduce the actual tax you owe, dollar for dollar. They’re applied after your tax has been calculated on your taxable income. You might already receive offsets such as the:
- low income tax offset (LITO) of up to $700 for those with taxable income under $66,667;
- seniors and pensioners tax offset (SAPTO) for eligible pensioners;
- private health insurance rebate (a rebate is the same as an offset); or
- spouse superannuation contribution offset.
So, if you have taxable income of $30,000 and owe $1,888 in tax, then receive a $700 LITO, your final tax bill becomes $1,188.
Understanding this distinction can help you prioritise your tax planning strategies. A $1,000 offset is always worth exactly $1,000 off your tax bill (if you have at least $1,000 of income to absorb it). A $1,000 deduction might save you anywhere from $160 to $450 in income tax, depending on your tax bracket.
This is why the government’s Budget announcement of both types of measure is significant.
There’s another important point to note: most tax offsets can only reduce your tax to zero, not below. If you don’t owe any tax, you typically won’t receive the offset as a cash payment. However, some offsets like the private health insurance rebate are refundable.
Planning ahead
While the newly announced measures won’t apply to 2025–2026 tax returns, it’s worth reviewing your current deductions and offsets. Are you claiming all the deductions you’re entitled to? Are you receiving all available offsets? The ATO automatically calculates some offsets like LITO when you lodge, but others need to be claimed in the offsets section of your tax return.
