Australia Deductions, Offsets and Concessions v0.2
Australia Deductions, Offsets and Concessions v0.2
General reference only. This skill is general tax and accounting reference material for AI-assisted workflows. It has not been reviewed for any specific person's facts, documents, elections, deadlines, residency, filing status or local procedures. Do not rely on it to lodge, pay, amend or take a tax position without review by a qualified professional.
What this file is
Obligation category: Income tax Functional role: Router and decision framework for everything that reduces Australian tax Status: Source-cited draft, pending accountant review
Australia has no single "reliefs and allowances" concept. Four mechanisms sit behind that idea and they behave differently, so getting the mechanism right matters more than finding the item.
Section 1 - The vocabulary map
The vocabulary map
| Mechanism | What it reduces | Typical value of $1 | Australian examples |
|---|---|---|---|
| Deduction | Assessable income, producing taxable income | The taxpayer's marginal rate, so worth more to higher earners | Work-related expenses, rental expenses, business expenses, personal super contributions, donations to deductible gift recipients |
| Capital allowance | Assessable income, spread over time or immediately | Marginal rate, but timing changes the value | Decline in value under Division 40, capital works under Division 43, instant asset write-off |
| Tax offset (also called a rebate) | Tax payable, after tax is calculated | $1 of tax, regardless of marginal rate | Low income tax offset, seniors and pensioners tax offset, foreign income tax offset, private health insurance rebate |
| Concession or exemption | The base itself, or the rules that apply to it | Varies | Small business CGT concessions, the 50% CGT discount, main residence exemption, small business entity concessions |
Why the distinction matters. A deduction of $1,000 saves $320 for someone on a 30% marginal rate plus the 2% Medicare levy, and $470 for someone on the top rate. An offset of $1,000 saves $1,000 for both, but only if there is $1,000 of tax to reduce.
Refundable and non-refundable offsets. Most offsets are non-refundable: they can reduce tax payable to zero but do not pay out an unused offset. The treatment of any unused amount depends on the offset: some can transfer, carry forward or reduce other liabilities. Some offsets are refundable, so the excess is paid out. Franking credits attached to franked dividends and the private health insurance rebate are refundable. Check this before telling a taxpayer an offset is worth anything to them. ATO, About tax offsets
Section 2 - Scope statement
This skill covers:
- The order in which deductions, offsets and concessions are applied.
- The general deduction test, apportionment, the capital and revenue boundary, and the specific denial provisions.
- The standard deduction for work-related expenses that applies from the 2026-27 income year.
- Substantiation requirements and record retention.
- The main tax offsets and how refundability changes their value.
- Where each specialist rule set lives.
This skill does NOT cover:
- The detailed computation of any single item. Each has its own guide.
- GST credits. Those are not income tax deductions. See
australia-gst.md. - Fringe benefits tax. See
au-fbt-year.md. - State and territory concessions, including duty concessions and land tax exemptions. See
au-stamp-duty.mdandau-land-tax.md.
Where the specialist rules live
Where the specialist rules live
| Topic | Guide |
|---|---|
| Individual return items and work-related expense patterns | au-individual-return.md |
| Rental property income and expenses | au-rental-property.md |
| Small business CGT concessions | au-small-business-cgt.md |
| CGT discount, losses and cost base | au-capital-gains.md |
| Research and development tax incentive | au-rd-incentive.md |
| Personal services income restrictions | au-psi.md |
| Medicare levy and the surcharge | au-medicare-levy.md |
| Superannuation contribution deductions and caps | au-super-guarantee.md |
| Company losses, franking and Division 7A | au-company-tax.md, au-div7a.md |
| Foreign income tax offset | au-foreign-income.md |
Section 3 - The order of operations
- Order of operations — Apply the statutory offset priorities, including the rules for any unused amount. 1. Work out assessable income, including net capital gains. 2. Subtract allowable deductions to get taxable income. 3. Apply the rates for the income year to taxable income, giving basic income tax liability. 4. Calculate the Medicare levy and any Medicare levy surcharge separately. 5. Apply offsets to basic income tax liability in the order in section 63-10. For each unused amount, follow its statutory treatment: application to another liability, transfer, carry-forward, refund or loss. See Section 8.2 for the Medicare levy exceptions. 6. Add the remaining income tax and levy liabilities, then subtract any refundable excess offsets. 7. Subtract amounts already paid: PAYG withholding and PAYG instalments. (ITAA 1997 (Cth) s 63-10)
- Tax losses — A tax loss arises where deductions exceed assessable income. A loss is carried forward, not converted to a refund, and its use is restricted for individuals by the non-commercial loss rules and for companies by the continuity of ownership and business continuity tests.
Section 4 - Deductions: the decision steps
- Deductions decision steps overview — Identify the provision that allows the deduction before applying these steps. Steps 1 and 2 test general deductions under section 8-1. A specific deduction, such as a qualifying gift under Division 30, follows its own eligibility rules; failure of the section 8-1 test does not decide that claim. For specific deductions, apply steps 3 to 6 using the relevant provision's limits, apportionment, timing and evidence requirements. (ITAA 1997 (Cth) s 8-5)
Step 1 - Is there a nexus with assessable income?
- Nexus test — A loss or outgoing is deductible to the extent it is incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for that purpose. (ITAA 1997 s 8-1)
- ATO three conditions for employees — The ATO states the test for an employee as three conditions: the taxpayer spent the money and was not reimbursed, the expense directly relates to earning income, and there is a record to prove it. An employer instruction to buy something does not by itself make it deductible. (ATO, Claiming deductions)
Step 2 - Is it private, domestic or capital in nature?
- Private, domestic or capital exclusion — Section 8-1 denies a deduction to the extent the outgoing is private or domestic, or capital or of a capital nature. Ordinary travel between home and work and daily lunches are private. If section 8-1 excludes capital expenditure, check whether it qualifies under another regime: Division 40 decline in value, Division 43 capital works, the CGT cost base, or a specific write-off provision such as section 40-880 for certain business-related capital expenditure.
Step 3 - Does a specific provision deny or limit it?
- Specific denial or limit provisions — Deductibility can be denied even where the nexus exists. Examples include entertainment expenses, penalties and fines, holding costs for vacant land held by most non-business taxpayers, and general interest charge and shortfall interest charge incurred on or after 1 July 2025. Check the specific provision before allowing an unusual item.
Step 4 - Apportion
- Apportionment — Where an expense serves both an income-producing and a private purpose, only the income-producing share is deductible. The apportionment method must be reasonable and documented. A percentage guessed at year end is not a method.
Step 5 - Is it incurred in this income year?
- Timing / incurred — "Incurred" is not the same as "paid". Prepayment rules can spread a deduction over the period the benefit covers, with a 12 month exception available to individuals for non-business expenditure and to small business entities. For a specific deduction, use its own timing rule. For example, a qualifying gift of money under Division 30 is generally deducted in the income year the gift is made.
Step 6 - Is there evidence?
- Evidence — See Section 6. Substantiation is a condition of the deduction, not an audit formality.
Section 5 - The standard deduction for work-related expenses, from 2026-27
- Standard deduction for work-related expenses — A standard deduction of up to $1,000 for work-related expenses applies to Australian tax residents who earn income from work. It commences on 1 July 2026 and first applies to the 2026-27 individual tax return. It does not apply to the 2025-26 return. AUD
A standard deduction of up to $1,000 for work-related expenses applies to Australian tax residents who earn income from work. It commences on 1 July 2026 and first applies to the 2026-27 individual tax return. It does not apply to the 2025-26 return.
According to the ATO's summary of the measure:
- Current arrangements continue for a taxpayer with more than $1,000 of work-related expenses, and for a taxpayer who earns only business or investment income.
- Some deductions remain claimable in addition to the standard deduction, including expenses that are not work-related such as investment expenses and charitable donations, union and professional association membership fees, and income protection insurance premiums.
- The measure prevents a double benefit where an expense covered by the standard deduction is salary packaged.
- Substantiation and capital allowance rules were updated to support the measure.
The measure is law, enacted by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 and the Income Tax Rates Amendment (Tax Reform No. 1) Act 2026. ATO, Standard deduction for work-related expenses; Treasury Laws Amendment (Tax Reform No. 1) Act 2026; Income Tax Rates Amendment (Tax Reform No. 1) Act 2026
Practical effect. For a work-only taxpayer whose substantiated work-related expenses are under $1,000, the standard deduction is the better claim and removes the need to build a schedule of small items. For a taxpayer above $1,000, nothing changes and the full substantiation rules continue to apply to the actual claim.
Confirm the detailed operation before applying it. The mechanics that matter in practice, in particular whether the standard deduction is applied automatically or elected, and exactly which items sit outside it, must be checked against the ATO's 2026-27 return instructions when they are published. This guide states the measure as the ATO summarised it on 26 June 2026.
Section 6 - Substantiation
Substantiation is a statutory condition. Division 900 of the ITAA 1997 sets the written evidence rules for work expenses, car expenses, travel expenses and business travel expenses.
Substantiation requirements (ATO, Fixed rate method; ATO, Cents per kilometre method)
| Requirement | Rule |
|---|---|
| General work expense evidence | Written evidence is required. The document must show the supplier, the amount, the nature of the goods or services, the date of the expense and the date of the document |
| The $300 total work expense rule | Where total work expense claims for the year are $300 or less, the written evidence rule is relaxed, but the expense must still have been incurred and the claim must still be reasonable. This is not a free $300 |
| Car expenses, cents per kilometre method | Up to 5,000 business kilometres per car per year. No written evidence of the kilometres is required, but the basis of the estimate must be able to be shown, for example diary records |
| Car expenses, logbook method | A logbook covering a continuous period of at least 12 weeks, valid for five years, plus odometer readings and expense records |
| Working from home, fixed rate method | A record of the total hours worked from home for the year, plus evidence that the expenses were incurred. The rate was 70 cents per hour for 2024-25 and 2025-26 |
| Travel with an allowance | Reasonable amounts determined annually by the Commissioner can remove the need to keep receipts, but not the requirement to have incurred the expense |
| Record retention | Generally five years from the date the return is lodged, and longer where a CGT asset or a carried-forward loss depends on the record |
The cents per kilometre rate and the working from home fixed rate are set per income year. Look up the rate for the year being prepared rather than carrying last year's forward.
Section 7 - Capital allowances and write-offs
Capital allowances and write-offs (ATO, Instant asset write-off)
| Mechanism | What it applies to | Key point |
|---|---|---|
| Division 40 decline in value | Depreciating assets | Prime cost or diminishing value, over the asset's effective life. The Commissioner's effective life determination is a safe starting point |
| Immediate deduction for low cost items | Items costing $300 or less used mainly to produce non-business income | Does not apply to a set, or to substantially identical items, that together cost more than $300 |
| Instant asset write-off | Small business entities using the simplified depreciation rules | The limit is set per income year. It was $20,000 per asset for assets first used or installed ready for use between 1 July 2025 and 30 June 2026, for businesses with aggregated turnover under $10 million |
| Small business general pool | Assets costing at or above the instant asset write-off limit | 15% in the first year, 30% each year after |
| Division 43 capital works | Buildings and structural improvements | A fixed annual rate over a fixed period, claimed separately from Division 40 |
| Division 40-880 | Certain business-related capital expenditure not deductible elsewhere | Spread over five years |
| Car limit | Cars used for a business or income-producing purpose | Caps both the depreciation base and the GST credit. Look up the limit for the income year |
Confirm the instant asset write-off limit for the year being prepared. The limit has changed repeatedly. As at 16 September 2026 the ATO had published the $20,000 limit for 2025-26; the limit for 2026-27 must be confirmed on the ATO instant asset write-off page before it is applied. ATO, Instant asset write-off
Section 8 - Tax offsets
8.1 The offsets most often in play
The offsets most often in play (ATO, Low income tax offset; ATO, Seniors and pensioners tax offset)
| Offset | Refundable | Summary |
|---|---|---|
| Low income tax offset (LITO) | No | Up to $700 where taxable income is $37,500 or less. Between $37,501 and $45,000 the offset is $700 less 5 cents per dollar above $37,500. Between $45,001 and $66,667 it is $325 less 1.5 cents per dollar above $45,000. Nil above $66,667. Applied automatically |
| Seniors and pensioners tax offset (SAPTO) | No | Requires eligibility for a listed Australian Government pension or allowance, and income tests for the taxpayer and spouse. Unused amounts may be transferable between eligible spouses. Entitlement to at least $1 also raises the Medicare levy low income threshold |
| Private health insurance rebate | Yes | Income tested, and can be taken as a premium reduction or as an offset in the return |
| Franking credits on franked dividends | Yes | Included in assessable income first, then offset against tax, with the excess refundable to most resident individuals and complying super funds |
| Foreign income tax offset | No | Limited to the Australian tax on the doubly taxed income. See au-foreign-income.md |
| Small business income tax offset | No | For an individual with net small business income from a sole trader business or a share from a small business partnership or trust. Confirm the rate and cap for the income year |
| Zone and overseas forces offsets | No | Narrow eligibility rules |
| Beneficiary tax offset | No | For recipients of certain Commonwealth benefits and allowances |
8.2 Unused offsets and other liabilities
- Unused offsets and other liabilities — - An unused non-refundable offset is not paid out as an offset refund. Reducing income tax can still create or increase a refund of PAYG withholding or instalments already paid. - Most offsets do not reduce Medicare levy. However, section 63-10 table items 21 and 22 apply remaining veterans' superannuation (invalidity pension) tax offset and foreign income tax offset to Medicare levy, then Medicare levy (fringe benefits) surcharge. The remaining excess cannot be refunded, transferred or carried forward. See
au-foreign-income.mdfor FITO limits. - SAPTO affects the Medicare levy indirectly through the low income threshold; it does not reduce the levy directly. - An offset does not reduce a HELP or other study and training support loan repayment, which is calculated on repayment income, not on tax payable. (ITAA 1997 (Cth) s 63-10(1), table items 21 and 22; ATO, About tax offsets)
Section 9 - Concessions
Concessions change the base or the rules rather than reducing tax directly.
Concessions
| Concession | Test | Guide |
|---|---|---|
| Small business entity concessions | Aggregated turnover thresholds, which differ by concession | australia-bookkeeping.md, au-individual-return.md |
| Small business CGT concessions | $6 million maximum net asset value test or small business entity status, plus the active asset test | au-small-business-cgt.md |
| CGT discount | 12 months of ownership, and entity and residency tests | au-capital-gains.md |
| Main residence exemption | Dwelling used as the main residence, with partial and absence rules | au-capital-gains.md, au-rental-property.md |
| Research and development tax incentive | Registered eligible R&D activities | au-rd-incentive.md |
| Not-for-profit and DGR concessions | Endorsement and purpose tests | au-not-for-profit.md |
Do not treat a concession as available because the taxpayer is small. Each has its own test, and the aggregated turnover threshold is not the same for every concession.
Section 10 - Interactions and traps
- Reimbursement removes the deduction. An expense the employer pays or reimburses is not deductible to the employee. It may instead be a fringe benefit to the employer.
- Salary packaging removes it too. An expense met from pre-tax salary cannot also be deducted. The standard deduction measure includes a specific rule preventing that double benefit.
- A GST credit is not a deduction. Where a GST credit is claimable, the deductible amount is the GST-exclusive cost. Where it is not claimable, for example on an input taxed acquisition or by an unregistered taxpayer, the GST-inclusive amount is the cost.
- Non-commercial losses. An individual's loss from a business activity may be quarantined unless one of the statutory tests is met or the Commissioner exercises the discretion.
- Personal services income. PSI rules can deny deductions that would otherwise be available,
particularly for rent, home office occupancy costs and payments to associates. See
au-psi.md. - Capital allowance and CGT overlap. Amounts deducted under Division 40 or Division 43 reduce the cost base of the underlying asset, so a deduction now can increase a capital gain later.
- Deduction timing versus payment. Superannuation contributions are deductible in the year the fund receives them, not the year they are journalised.
Section 11 - Worked example
Facts. Nadia is an Australian tax resident for the whole of the 2026-27 income year. She is an employee with salary of $92,000 and $19,000 of PAYG withheld. She has no spouse, no private health insurance obligations in issue, and no HELP debt. All figures are synthetic.
Her substantiated amounts for the year:
Nadia's substantiated amounts
| Item | Amount | Treatment |
|---|---|---|
| Tools, work-related journal, work-related phone use | $780 total | Work-related expenses |
| Union fees | $620 | Claimable in addition to the standard deduction |
| Income protection insurance premiums | $540 | Claimable in addition to the standard deduction |
| Donation to a deductible gift recipient | $200 | Not work-related, claimable in addition |
| Interest on a margin loan on income-producing shares | $1,300 | Investment expense, claimable in addition |
Step 1, choose the work-related expense basis. Her work-related expenses of $780 are less than $1,000, so the standard deduction of $1,000 produces the larger claim.
Step 2, total deductions.
Standard deduction for work-related expenses 1,000 Union fees 620 Income protection premiums 540 DGR donation 200 Margin loan interest 1,300 Total deductions 3,660
Step 3, taxable income.
Salary 92,000 Less deductions 3,660 Taxable income 88,340
Step 4, tax at 2026-27 resident rates.
0 to 18,200 nil 18,201 to 45,000 at 15c 26,800 x 0.15 = 4,020 45,001 to 88,340 at 30c 43,340 x 0.30 = 13,002 Gross tax = 17,022
Step 5, offsets. Taxable income of $88,340 exceeds $66,667, so LITO is nil.
Step 6, Medicare levy and the result.
Medicare levy 88,340 x 2% = 1,766.80 Total tax and levy = 18,788.80 Less PAYG withheld = 19,000.00 Refund = 211.20
Step 7, compare with claiming actual work-related expenses. Claiming the actual $780 instead of the $1,000 standard deduction would give taxable income of $88,560, tax of $17,088, a Medicare levy of $1,771.20 and a refund of $140.80. The standard deduction is worth $70.40 more, being the $220 difference in deductions at her 30% marginal rate plus the 2% Medicare levy.
What the example shows. The value of a deduction is the deduction multiplied by the marginal rate and the levy, not the deduction itself. It also shows why the four extra items matter: each is outside the standard deduction, so each still reduces tax in full.
Section 12 - Common errors
- Treating an offset as a deduction, or the reverse, and overstating the benefit by a factor of three or more.
- Assuming a non-refundable offset produces a refund where there is no tax to reduce.
- Applying the 2025-26 rules to a 2026-27 return, or the reverse, now that the standard deduction and the 15% second bracket apply from 1 July 2026.
- Claiming $300 of work expenses with no expense actually incurred. The relaxation is of the written evidence rule, not of the requirement to have spent the money.
- Carrying forward last year's cents per kilometre rate or working from home rate.
- Claiming a deduction for an expense the employer reimbursed, or that was salary packaged.
- Claiming the GST-inclusive cost where a GST credit was also claimed.
- Claiming a capital item as an immediate deduction because it is small, without checking the instant asset write-off limit and eligibility for the year.
- Ignoring the non-commercial loss rules for an individual's side business.
- Claiming both Division 40 and Division 43 on the same expenditure.
Section 13 - Self-checks
- The income year is identified, and the rules used are those for that year.
- Each item is classified as a deduction, capital allowance, offset or concession.
- Each offset is identified as refundable or non-refundable.
- Every deduction meets its governing provision's eligibility rules, limits and apportionment requirements; section 8-1 claims pass the nexus test.
- Each claim meets its applicable evidence requirements, and any apportionment method is documented.
- Capital items use the correct regime, including the eligibility rules for any immediate write-off.
- Amounts reimbursed or salary packaged are excluded.
- The offsets are applied to tax payable, not to taxable income.
- Offsets follow section 63-10 priorities, including any application to Medicare levy or surcharge and the treatment of unused amounts.
- Refunds of excess PAYG payments are distinguished from refunds of unused offsets.
- Rates, thresholds and limits are confirmed against the ATO page for the income year.
Section 14 - Sources
- Income Tax Assessment Act 1997, s 8-1 (general deductions), s 8-5 (specific deductions), Division 25 (specific deductions), Division 26 (denials), Division 40 (capital allowances), Division 43 (capital works), Division 900 (substantiation).
- Treasury Laws Amendment (Tax Reform No. 1) Act 2026, https://www.legislation.gov.au/C2026A00049/latest
- Income Tax Rates Amendment (Tax Reform No. 1) Act 2026, https://www.legislation.gov.au/C2026A00050/latest
- ATO, Standard deduction for work-related expenses, https://www.ato.gov.au/about-ato/new-legislation/in-detail/individuals/standard-deduction-for-work-related-expenses
- ATO, Claiming deductions, https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/how-to-claim-deductions
- ATO, About tax offsets, https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/tax-offsets/about-tax-offsets
- ATO, Low income tax offset, https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/tax-offsets/low-income-tax-offset
- ATO, Seniors and pensioners tax offset, https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/tax-offsets/seniors-and-pensioners-tax-offset
- ATO, Fixed rate method for working from home, https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/working-from-home-expenses/fixed-rate-method
- ATO, Instant asset write-off, https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/depreciation-and-capital-expenses-and-allowances/simpler-depreciation-for-small-business/instant-asset-write-off
- ATO, Tax rates: Australian resident, https://www.ato.gov.au/tax-rates-and-codes/tax-rates-australian-residents
Sources were checked on 16 September 2026. The working from home fixed rate and the instant asset write-off limit for 2026-27 had not been published at that date.
Section 15 - Disclaimer
This skill and its outputs are provided for informational and computational purposes only and do not constitute tax, legal or financial advice. Open Accountants and its contributors accept no liability for any errors, omissions or outcomes arising from the use of this skill. All outputs must be reviewed and signed off by a qualified professional in the relevant jurisdiction before lodging or acting upon them.
The most up-to-date version of this skill is maintained at openaccountants.com.
Contributed by Ryan Duguid.
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Today's figures and who stands behind this skill
This file is an AI skill (tax rules your AI follows) from OpenAccountants, copied on 2026-09-20. Rates, thresholds and deadlines change. For the current version of this skill, its official sources and the named accountant (if any) who stands behind it, call get_skill with slug au-deductions-offsets on the OpenAccountants connector (https://www.openaccountants.com/connect), or read https://www.openaccountants.com/skills/au-deductions-offsets. If neither is available, confirm every figure against the official source pages cited above before relying on it.
