admin.dlkadvisory, Author at DLK Advisory

Division 296 tax on large super balances applies from 1 July 2026: are you ready?

Admin 4th August, 2026

If your total superannuation balance is above $3 million, a new layer of tax may apply to certain earnings attributable to the portion above that threshold. Division (Div) 296 tax applies from the 2026–27 income year, with assessments expected after the relevant earnings information has been reported to the ATO.

What is Division 296 tax?

Div 296 tax is levied directly on the individual and is separate from personal income tax and superannuation fund tax. The ATO issues the assessment, and payment is generally due within 84 days of the notice. Div 296 tax is in addition to the (up to) 15% tax that super funds pay on fund earnings in the accumulation phase.

From 2026–27, Div 296 tax applies to you if you have a large total superannuation balance (TSB) as follows: TSB up to $3 million: no Div 296 tax; TSB above $3 million: 15% Div 296 tax on earnings attributable to super balances over $3 million; and TSB above $10 million: a further 10% Div 296 tax on earnings attributable to super balances over $10 million. These thresholds are indexed to the Consumer Price Index. The $3 million threshold is indexed in $150,000 increments and the $10 million threshold in $500,000 increments. Unlike the tax on earnings paid by super funds, Div 296 tax applies to large super balances in the retirement phase as well as the accumulation phase.

Who is affected?

You may be liable for Div 296 tax if your total superannuation balance just before the start of the year, or at year end, is above $3 million and your total superannuation earnings for the year are greater than nil (although for the first year of this new tax the ATO will only look at your TSB on 30 June 2027). Your TSB generally includes Australian super interests in APRA-regulated funds, SMSFs and relevant public sector schemes, subject to valuation rules and exclusions. Foreign super interests are excluded. Certain individuals are excluded, including child recipients of a super income stream and individuals for whom a structured settlement contribution has been made in the relevant income year or any earlier income year.

How is it worked out?

There are three broad steps: your super fund calculates its Div 296 fund earnings for the whole fund for the year; the fund attributes a share of those earnings to your interest in the fund and reports the amount to the ATO; and the ATO applies a formula to work out the proportion of your TSB above each threshold and calculates the tax. Div 296 fund earnings for APRA-regulated superannuation funds are attributed by the fund trustee on a fair and reasonable basis. However, small funds, including SMSFs, must use a specific formula to calculate the member’s share of earnings, based on the average value of their interest in the fund over the year. Trustees of defined benefit and certain other superannuation interests that don’t have an account balance attributable to the beneficiary (eg lifetime income streams) use an alternative method to attribute your earnings that’s more appropriate for those particular types of superannuation interests.

Paying the tax

You can pay Div 296 tax personally, elect to release the amount from your super, or use a combination. If electing release, your application generally must be lodged within 60 days of the assessment notice. Tax attributable to a defined benefit interest is generally deferred until benefits become payable.

Next steps

Div 296 is complex, particularly for members with SMSFs, defined benefit interests or a mix of accumulation and pension accounts. Please contact our office to review your position and plan ahead.

How financially resilient is your business?

Admin 28th July, 2026

If revenue suddenly declined or a large customer stopped buying, what would happen to your business?

For many businesses, the answer isn’t obvious. Revenue may be strong, customers may be plentiful and everyday operations may appear healthy, but financial resilience is often tested when something unexpected occurs. A delayed payment, rising costs or a temporary decline in sales can place pressure on cash flow and financial commitments.

Understanding your business’s exposure to these types of events can provide valuable insights into your business’s financial position. While every business is different, several financial indicators can signal how resilient your business may be when conditions become more challenging.

How predictable is your revenue?

How much revenue your business generates is only part of the picture. Revenue consistency can be just as important! Some businesses rely on recurring income, and others depend more on project-based work, seasonal demand or one-off sales. Neither is inherently better, but understanding your own revenue drivers can help identify potential pressure points.

It can also be useful to consider how widely revenue is spread across your customer base. If a significant proportion of income comes from just a few customers, changes in customer demand, payment timing or business relationships may affect cash flow more than if revenue comes from a broader mix of clients. Discussing revenue trends with your tax professional or financial adviser may also highlight areas of concentration or dependence that’re easily missed day-to-day.

Revenue and profit aren’t the same

Strong sales figures don’t always translate into strong financial performance. Rising operating costs, narrower margins and changing market conditions can all affect profitability. Your business may be generating more revenue than ever while retaining less profit than expected.

Regularly reviewing profit and loss reports alongside cash flow information can provide a more complete picture of business performance, and your tax professional can help provide context about what the numbers suggest for your business.

Are your records in shape?

Accurate financial records do more than just help meet your tax obligations. Maintaining up-to-date information on income, expenses and cash flow makes it easier to understand your business’s performance and make informed decisions. Clear records also support discussions with your accountant, adviser or lender about business performance and cash flow.

For sole traders and family businesses in particular, maintaining a clear separation between business and personal finances supports a clearer view of profitability and cash flow and makes it easier to understand where business funds are used.

Could you absorb a setback?

Most businesses face challenges at some point. Equipment may need replacing, a major customer may pay later than expected, or demand may temporarily decline. Financial resilience isn’t about predicting every possible challenge. Rather, it’s about understanding whether the business has sufficient capacity to manage periods of disruption without creating excessive pressure on everyday operations.

Having cash reserves, reliable financial information and a clear understanding of upcoming commitments offers you greater flexibility when circumstances change.

Beyond today’s numbers

Assessing financial resilience doesn’t require a major overhaul. It starts with understanding how your business generates revenue, how dependent it is on particular customers, and whether your financial information gives a clear picture of performance.

Even if you have no plans to sell, expand or make significant changes, understanding these factors can help identify both financial strengths and areas of potential risk. The goal isn’t to eliminate uncertainty, but to better understand potential risks before they become more significant.

If you’d like help reviewing these areas, contact our office. We can help assess the financial indicators that may affect your business’s resilience and long-term sustainability.

Do you need to declare foreign income in your tax return?

Admin 22nd July, 2026

Have you retired to Australia with a pension from overseas, worked overseas for part of the year, or received income from investments held in another country? If so, it’s worth checking how that income needs to be reported in your Australian tax return.

As a starting point, if you’re an Australian resident for tax purposes, you generally need to declare income you receive from anywhere in the world. This is often referred to as declaring your worldwide income.

Foreign pensions and annuities
Most foreign pensions and annuities are taxable in Australia, even if tax has already been withheld overseas. However, the tax treatment can vary depending on the type of pension and whether Australia has a tax treaty with the other country. In some cases, you may be entitled to reduce the taxable amount.

For example, some foreign pensions have an undeducted purchase price (UPP). Broadly, this reflects personal contributions you’ve made towards the pension or annuity, with part of the pension treated as a return of those contributions.

There are specific rules for some overseas pensions. For example, if you receive a UK State Pension, you may be entitled to a UPP deduction. For a category A pension or category B widow’s pension, the ATO says the deduction can be calculated as 8% of the UK State Pension amount, converted to Australian dollars.

You may also be able to claim a foreign income tax offset if foreign tax has been paid on income that’s also taxable in Australia. This helps reduce the risk of being taxed twice on the same income.

Foreign income, deductions and foreign tax paid must generally be converted into Australian dollars.

Foreign employment income
If you’ve worked overseas, your employment income will often still need to be reported in Australia. Foreign income can also include payments from overseas platforms, such as income received by content creators or freelancers, although the way it’s reported depends on what the payment is for.

Some foreign employment income may be exempt from Australian tax, but only in limited circumstances. These rules are specific and can depend on the type of work, the length of overseas service, the employer and the country involved.

Why this is worth checking
Foreign income mistakes can be costly. If a tax return contains a false or misleading statement that results in a tax shortfall, penalties may apply. The base penalty can be 25%, 50% or 75% of the shortfall amount, depending on whether the issue involved a failure to take reasonable care, recklessness or intentional disregard of the law. Interest charges may also apply.

If you realise something’s been left out or reported incorrectly, it’s usually better to deal with it early. Voluntary disclosure may reduce any penalty.

Where to from here?
Foreign income can involve residency, tax treaties, offsets, exemptions, pension rules and currency conversion. If you receive money from overseas, we can help you get your tax return right by working out what needs to be declared and how the rules apply to your circumstances.

Small business tax time made simpler

Admin 15th July, 2026

Tax time has a habit of sneaking up when you’re focused on running your business, but doing a little groundwork can save stress, reduce the risk of errors and help you check whether any concessions are available. With tax time for the 2025–2026 income year now here, it’s a good time to check your records, review your deductions and speak with your adviser about any changes that may affect your business.

Get your online access sorted

Before you lodge, make sure your digital access and adviser authorisations are in order. This may include checking that your business can access online tax and super services, confirming that the right people are authorised to act for the business, and ensuring your tax professional can access the information they need. Sorting this out early can help avoid delays when lodgment deadlines approach.

Report all income and separate the personal stuff

One of the simplest ways to avoid problems at tax time is to make sure all business income is captured, including cash payments and non-monetary benefits such as goods or services received for your work. Keeping business and personal spending separate will also make life easier. If you’ve used business money for personal expenses, keep good records separating business and personal spending to help prevent issues later.

Practical tests for deductions

When considering tax deductions, keep these three tests in mind: the expense must relate to your business, not private use; if the expense mixes business and private use, only the business portion is claimable; and you need records or receipts to substantiate your claim. There’s also an important change for interest charges. General interest charge and shortfall interest charge incurred on or after 1 July 2025 are no longer deductible. Amounts incurred before 1 July 2025 may still be deductible for the 2024–2025 and earlier income years, depending on the circumstances.

Concessions worth checking

Don’t overlook the concessions available to eligible small businesses, including simplified depreciation rules, immediate deductions for prepaid expenses, and the instant asset write-off. For example, businesses with aggregated annual turnover of less than $10 million that use the simplified depreciation rules may be able to immediately deduct the business-use portion of eligible assets costing less than $20,000, provided the assets are first used or installed ready for use between 1 July 2025 and 30 June 2026.

Payday super’s here

Payday super started on 1 July 2026. Employers now need to pay super guarantee for each payday, with contributions generally required to be received by employees’ super funds within seven business days after payday. Super guarantee is now calculated using the new concept of qualifying earnings, so check your payroll, STP reporting and super payment processes are up to date.

Looking ahead

The ATO also has practical small business tax time resources, including its 2026 Tax Time toolkit for small business, with guidance on common issues such as deductions, record keeping, business and private expenses, and changes for the new income year. Reviewing these can help you identify questions and opportunities to discuss with your tax professional before lodging. Every business is different, and the right approach depends on your circumstances. Please contact our office to discuss how these tax time obligations, concessions and new changes apply to your business. We can help identify issues early, confirm your eligibility for concessions and ensure your return reflects your situation correctly.

Why your super insurance might not cover what you expect

Admin 1st July, 2026

If you have a superannuation account, there’s a reasonable chance you also hold life insurance through it – possibly without realising. Almost 10 million superannuation accounts have insurance attached to them, yet many members can’t say what they’re covered for, how much it costs or whether it actually suits their needs. Before assuming your default cover has you sorted, it’s worth unpacking some common misconceptions.

Misconception 1: “Everyone gets cover automatically”
Insurance through super doesn’t start automatically if you’re a new member aged under 25 or your balance is under $6,000, unless you contact your fund and ask for it, or you work in a dangerous job where your fund gives you automatic cover. If you’re younger or just starting out, you may have no safety net at all unless you opt in.

Misconception 2: “Default cover will be enough”
Default cover is a starting point, not a tailored solution. In particular: default cover may be lower than, or different from, cover available outside super; eligibility rules and exclusions can apply; and cover can stop if your account becomes inactive, your balance is too low, you change funds (unless arrangements are made to transfer or replace it) or you reach an age limit. When reviewing your insurance, check whether there are exclusions or whether you’re paying a loading – this is a percentage increase on the standard premium charged to higher-risk people such as those with a high-risk job, a pre-existing medical condition, or those classified as smokers. If your fund has classified you incorrectly, you may be paying more than necessary.

Misconception 3: “My cover follows me when I switch funds”
Often, cover won’t follow you. If you switch superannuation funds, your insurance policy may not be portable, meaning the cover you had can lapse once you’re no longer a member. Some funds allow you to transfer your policy to personal ownership, but this may require health checks and the insurer could charge more to continue the cover. Consolidating accounts can also unintentionally cancel valuable cover, so always check before you act.

Misconception 4: “If I stop contributing, nothing changes”
Cover can change if your account isn’t active. By law, super funds cancel insurance on accounts with no contributions for at least 16 months. Some funds have their own rules and cancel insurance if your balance is too low. Your fund will typically attempt to notify you before changes happen, so it’s important to keep your contact details updated.

Misconception 5: “More accounts means more protection”
Holding multiple super accounts may simply mean multiple premiums quietly draining your retirement savings. If you have more than one super account, you may be paying premiums on more than one insurance policy, which reduces your retirement savings. Claim outcomes can vary between policies, and benefits aren’t always cumulative. Consider whether you need more than one policy, or whether you can get cover through one fund.

Misconception 6: “It’s always the cheapest option”
Premiums may be lower because super funds buy cover in bulk, but that doesn’t always translate to the best value. Cover may not be enough, or may change over time, and it also may not be cheaper than insurance you can buy elsewhere.

Where to from here?
Superannuation and insurance can be complex. Before you assume your default cover’s doing the job, speak with your professional adviser to review your policy, premiums and any gaps, so you know exactly what you’re paying for and whether it still fits your circumstances.

Tax hacks, half-truths and what the ATO’s watching

Admin 23rd June, 2026

Scrolling social media for a quick tax win? You’re not alone, but you may be heading for trouble. With the end of the financial year approaching, the ATO has issued a clear warning: incorrect claims are firmly on its radar this tax time, and it has outlined the key areas it’ll be watching when returns start landing.

The misinformation problem

The ATO is urging the community to be wary of incorrect or misleading information, particularly claims promising bigger refunds, shortcuts or hacks. A lot of the bad advice doing the rounds is coming from third-party sources: AI tools, social media “finfluencers”, and even well-meaning family and friends, who may unintentionally pass on information that simply doesn’t apply to your circumstances.

ATO Assistant Commissioner Anita Challen has cautioned taxpayers to be especially careful with information drawn from AI platforms, noting, “AI can be helpful, but it often draws from a broad and inconsistent range of sources, which can lead to inaccurate advice”.

The key is, you remain responsible for what’s on your return. Taxpayers are accountable for ensuring the information they or their agents give the ATO is accurate, regardless of whether it came from a mate, a website or a chatbot. Penalties and interest can apply where claims can’t be substantiated.

Focus area 1: work-related expenses

Overclaimed work-related deductions are once again under the microscope. As Ms Challen put it, “don’t fall into the trap of thinking if you intentionally claim a little more than you are entitled to, it’ll fly under the radar and that the ATO won’t notice”.

Every work-related claim must meet three tests: the expense must directly relate to earning your income; you must have paid for it yourself and not been reimbursed; and you must have a record, such as a receipt, invoice or logbook, to back it up.

If you work from home, the fixed rate method lets you claim 70 cents for every hour worked from home, which already covers running costs such as internet, phone usage, electricity and stationery. A common mistake is “double-dipping” – using the fixed rate and then separately claiming items it already includes.

Keeping a clear record of your hours worked from home throughout the year will make this far easier to substantiate. Ms Challen has indicated that taxpayers who think they’ve overclaimed in previous years should lodge an amendment, or speak to their tax professional about amending prior year claims before the ATO comes knocking.

Focus area 2: omitted income

The ATO is also reminding taxpayers to declare all sources of income on their return, including side-hustles, cash jobs, interest and rental income. With extensive data matching now in place across banks, sharing economy platforms and property managers, undeclared income is far more visible to the ATO than many people realise.

The flip side is that legitimate deductions are often broader than expected. The ATO’s occupation and industry specific guides – or a quick chat with a registered tax professional – can help you identify everything you’re properly entitled to claim.

Speak to us before you lodge

A dodgy tip from TikTok or an AI chatbot can quickly turn into an ATO review, an amended assessment or worse. Before you lodge this year, please contact our office. We’ll help you claim everything you’re properly entitled to, and keep you well clear of the ATO’s compliance radar.

Your end-of-financial-year payroll checklist

Admin 16th June, 2026

The upcoming end of the financial year means it’s time to ensure all your employee payroll and super records are accurate and up to date.

Keeping on top of reporting means you can meet your legal obligations and ensure a smooth year-end for your business and employees.

Here’s a handy checklist for this hectic time of year.

PAYG

Ensure this year’s pay data is cut off after the last pay to be received by staff by 30 June 2026. Check and delete any tax variations ceasing as of 30 June 2026. Enter any new tax variations applying from 1 July 2026.

Revise termination worksheets used for redundancies to the new tax-free limits and employment termination payment (ETP) cap. Take care: if an employee’s terminated by 30 June but paid on or after 1 July, the new rates and thresholds apply.

Review staff who left in 2025–2026, particularly after 31 March 2026, checking whether they’ll have reportable fringe benefits (RFB) for the 2026–2027 income year. If so, you need to maintain their Single Touch Payroll (STP) record and complete the RFB field at next income year-end.

Identify any RFB amounts exceeding the disclosure threshold. Where disclosure applies, consider giving employees a written explanation to minimise queries about income statements.

Check that any staff overpayments are reversed out of wages and coded as loans before finalising in STP. Ensure wages appear in the correct income year. Payments arriving on or after 1 July 2026 should appear in the 2026–2027 income year.

Submit STP annual reporting by selecting the final event indicator to “true” for all staff by 14 July 2026. Review changes to pay rates or salary sacrifice arrangements applying from 1 July. Award rate increases usually apply to the first full pay from 1 July.

Review whether 2026–2027 may result in 53 weekly pays or 27 fortnightly pays, in which case staff can elect to have additional tax withheld. This may also affect super, including salary sacrifices, for staff tracking the concessional limit ($32,500 for 2026–2027).

Update your payroll software for the PAYG withholding tax tables applying from 1 July 2026.

Superannuation

Note that the super guarantee rate remains 12% for the 2026–2027 income year. Ensure reportable employer superannuation contributions appear correctly at the STP reportable employer super contributions (RESC) field.

Check whether the maximum super contribution base applies to high-income employees. For 2026–2027, with payday super, this base becomes an annual figure of $270,830 in qualifying earnings.

Ensure payroll software, clearing house and super payment processes can support payday super from 1 July 2026. From then, you must pay employees’ super guarantee on payday, to be received by their super funds within seven business days, unless an extended timeframe applies.

The April to June 2026 quarter remains in the existing quarterly super system. Make sure June quarter super is paid in time to meet 30 June for tax deductibility and 28 July for super guarantee obligations.

Payroll tax and WorkCover

Review which states and territories staff are employed in and make sure you have the appropriate payroll tax and WorkCover registrations in place.

File a copy of the lodged FBT return to use for payroll tax and WorkCover annual returns. Revenue authorities will usually request it during audits.

Obtain details of any contractor arrangements to be included. Note any changes in required payroll tax and WorkCover declarations for the new financial year.

If the business is part of a group of employers for payroll tax purposes, check if entities have left or joined the group. Review payroll tax office websites and state/territory budget announcements for rebates or incentives available in each jurisdiction.

Five super moves to consider before 30 June 2026

Admin 10th June, 2026

The end of financial year’s creeping up and it’s a great time to review whether you need to take superannuation action before 30 June 2026. Here are a few moves that could make a meaningful difference.

Check your concessional contributions cap

Concessional contributions are generally before-tax contributions, including employer super guarantee and salary sacrifice contributions. They also inc lude personal after-tax contributions claimed as a deduction.

The 2025–2026 general concessional contributions cap is $30,000. This applies across all your super funds combined. If you make concessional contributions exceeding the cap you’ll owe extra tax, so take care with year-end contributions.

If your total super balance on 30 June 2025 was under $500,000, you may be able to carry forward unused concessional contribution cap amounts from the previous five financial years, increasing your 2025–2026 concessional contributions cap.

Maximising personal tax-deductible contributions can be useful if your annual income’s higher than usual (and you could use a bigger deduction), or you need to boost your super.

Lodge a notice of intent before claiming personal deductions

If you want to claim a tax deduction for personal super contributions, plan ahead! You need to give your fund a valid notice of intent to claim or vary a deduction and receive the fund’s acknowledgement before claiming in your tax return.

It’s also important to submit your notice to your super fund before rolling over any super, withdrawing super amounts, starting a pension or splitting contributions with your spouse. These can all affect the notice validity and what contributions you can deduct.

Make sure contributions reach your fund by 30 June

Don’t assume a super contribution counts as soon as it leaves your bank account. Contributions only count towards a yearly cap when your super fund receives them.

A payment initiated on 30 June may not land in the fund’s account until July, pushing it into next financial year. Allow several business days for processing and check on your fund’s cut-off times.

Consider co-contributions and spouse contributions

Eligible low and middle-income earners who make after-tax personal contributions before 30 June may qualify for a government super co-contribution.

The maximum $500 co-contribution’s generally available if you earn under $47,488 in 2025–2026 and contribute $1,000. The co-contribution reduces if you earn more, and you won’t qualify if you earn over $62,488. Any contributions claimed as deductions don’t qualify for co-contributions.

You don’t need to apply separately for a co-contribution. Make sure your super fund has your tax file number, and the ATO will work out the entitlement with your lodged tax return.

You may also be able to claim a tax offset up to $540 if you contribute up to $3,000 to your spouse’s super and their income’s below $37,000. The offset reduces if their income’s between $37,000 and $40,000.

Check your minimum pension payments

If you’re retired and drawing an account-based pension, you must withdraw at least the annual mandatory minimum amount as pension income before 30 June, or your pension could lose its tax-free status.

This is important for all types of funds, and particularly if you’re a self-managed super fund (SMSF) member, as you’re personally responsible for your fund’s legal compliance.

If you’ve paused payments, withdrawn non-pension lump sums, or started a pension part-way through the year, confirm you’ve received enough pension income before 30 June to avoid unexpected consequences.

Are you ready?

The best approach to super planning depends on your income, age, super balance, employment circumstances, contributions and retirement plans. Remember, getting professional advice for your situation is always a good idea.

Could your super insurance have been cancelled without you knowing?

Admin 2nd June, 2026

Taking extended leave from work might seem like a straightforward decision, but it could have unexpected consequences for your superannuation insurance coverage that many Australians remain unaware of.

The 16-month rule you need to know:

Since July 2019, superannuation funds have been required to cancel insurance cover for accounts that remain inactive for 16 consecutive months, unless members specifically elect to maintain their coverage. An account becomes inactive when it hasn’t received any amounts – including employer contributions, personal contributions, or rollovers – for 16 consecutive months. The moment a contribution or rollover is received, the 16-month countdown resets.

When this commonly occurs:

Inactive periods leading to cancelled insurance frequently affect people during significant life events, such as: extended parental leave beyond paid entitlements; career breaks or sabbaticals; periods of unemployment or study; and working overseas without Australian superannuation contributions. Many Australians discover their insurance has been cancelled only when they need to make a claim or receive their annual statement.

The notification process:

Your superannuation fund must send insurance inactivity notices before cancelling coverage. These notices are sent when your account has been inactive for 9, 12, and 15 months – essentially giving you warnings at 7 months, 4 months and 1 month before cancellation. However, these notices are only effective if your fund has your current contact details. If you’ve moved house, changed email addresses, or haven’t updated your details, you might miss these critical communications.

How to protect your coverage:

To maintain insurance during periods of account inactivity, you must provide written notice to your fund electing to keep your coverage. This is often called “opting in”. Once you’ve opted in, the election remains valid until you tell your fund you no longer want insurance. Remember, cover can still end for other reasons, including age limits, insufficient balance to pay premiums, policy terms or trust deed requirements, or if you request cancellation. The opt-in process varies between funds, so check your fund’s specific requirements. Some funds accept online elections, while others require signed paper forms.

Additional restrictions on coverage:

Insurance cannot be offered through your super fund in other circumstances, including for: accounts where the balance has never reached $6,000, unless the member elects to have cover; and accounts where the member is aged under 25, unless the member elects to have cover, or is covered by a dangerous occupation exception.

Regular account monitoring:

The Australian Financial Complaints Authority (AFCA) recommends regularly checking your superannuation statements and maintaining current contact details with your fund. This ensures you receive important notices about your account status and insurance coverage. You can monitor your superannuation through ATO online services, which displays all your accounts. The service flags accounts with insurance coverage, but you should check directly with each fund to confirm whether insurance cover applies and whether it may be at risk of cancellation.

What if coverage is cancelled?

If your insurance has already been cancelled due to inactivity, you may be able to apply for new coverage, though this could involve health assessments and waiting periods. Some funds offer reinstatement options for recently cancelled policies.

Take action now:

Review your superannuation accounts to check whether you have insurance coverage and consider whether you need to opt in to maintain it during any planned career breaks. Contact your superannuation fund to update your contact details. If you’re planning extended leave, discuss your options before your account becomes inactive. Consider speaking with a qualified financial adviser to review your superannuation and insurance arrangements, particularly if you’re planning major life changes that could affect your contribution patterns.

What’s the difference between tax deductions and tax offsets?

Admin 26th May, 2026

With the 2026–2027 Federal Budget announcing both 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. While both deductions and offsets can reduce how much tax you pay, they work in quite different ways, and understanding this can help you make better decisions about your tax planning.

What are tax deductions?

Tax deductions reduce your taxable income before your tax is calculated. Think of them as amounts that our tax laws allow you or your tax agent to subtract from your income when working out how much tax you owe. 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, and 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.

What are tax offsets?

Tax offsets work differently: they directly reduce the actual tax you owe, dollar for dollar, and are 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. For example, 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.

Why the difference matters

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), while 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. The working Australians tax offset (WATO) provides an annual tax offset of up to $250 from the 2027–2028 income year for all eligible Australian workers, while the standard tax deduction of up to $1,000 from 2026–2027 allows workers to lower their taxable income from work by $1,000 without keeping receipts when they lodge their tax return. A $1,000 tax deduction could benefit some higher income earners more than lower income earners, while the (up to) $250 working Australians tax offset will provide the same dollar benefit to most of the 13 million Australian workers expected to receive the full $250 offset.

Most offsets aren’t refundable

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, although some offsets like the private health insurance rebate are refundable.

Planning ahead

While the newly announced measures will not 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, and 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.

Get professional advice

Tax planning involves balancing many moving parts, and the interaction between deductions, offsets and your overall financial situation can be complex. We can review your specific circumstances to help you understand your entitlements and make the most of the opportunities, so talk to us today.