Why tax deductions and offsets might not matter once you don’t pay tax



What is the value of tax deductions?

The value of your tax deductions depends on your marginal tax rate. If you earn over $80,000, every $1 of deductions will reduce your tax by 37% and 1.5% Medicare levy (38.5% in total).


But what if you don’t pay any tax?

If you earned under $20,542 in the 2013 tax year, you won’t pay any tax. Although the tax free threshold is $18,200, the low income offset of $445 means that for earnings up to $20,542 the 19% marginal tax rate you pay is offset.


Are tax deductions worth anything when you don’t pay tax?

Once you are not paying any tax, deductions may be worthless. There may be other reasons that deductions may have value (if you are receiving government benefits being the main reason). But if you don’t receive benefits, there will probably be no reason to claim deductions if you are not paying tax.



Sarah earned $20,000 from a part-time job (her boss withheld $2,000). Sarah will get the $2,000 back on her tax whether she has any deductions or not.

Her sister Jane earned $10,000 during the year ($500 withheld). Similar to Sarah, Jane will receive the $500 back on her tax whether she has any deductions or not.


Are tax offsets worth anything when you don’t pay tax?

There are two types of tax offsets: refundable and non-refundable.


Non-refundable tax offsets – worthless if no tax

A non-refundable offset (like the low income offset) will reduce your tax, but not go beyond your tax credits (for example, Jane will only get $500 back and Sarah will only get $2,000 back).

So these won’t increase your refund if you aren’t paying any tax.


Refundable tax offsets – still worthwhile even if no tax

A refundable offset (like the 30% private health offset) will increase your refund. For example, if Sarah didn’t receive the 30% private health rebate as a premium reduction (as most people do) she could claim the 30% premium reduction as a refundable tax offset in her tax return and receive a refund.


Do government benefits mean it is worth claiming deductions?

I’d love your comments on this – claiming deductions should mean you can get more government benefits than you would usually be entitled to (or mean you become entitled to government benefits).


If you like this post, check out my book Increase your refund: Australian tax return tips for employees.

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