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.