Tax deductions, tax offsets and tax refunds: what is the difference?

A tax deduction is subtracted from income before any tax is worked out. The ATO's formula is assessable income minus allowable deductions equals taxable income, and income tax is then calculated on that taxable income.¹ A deduction does not reduce the tax itself directly. It reduces the income the tax scale is applied to, and the tax falls as a consequence.

Most deductible expenses relate to earning income. To claim a work-related expense, the ATO requires that the taxpayer spent the money and was not reimbursed, that the expense directly relates to earning their income, and that they have a record to prove it, usually a receipt.¹ A few deductions, such as gifts and donations, are allowed without being related to earning income. From the 2026–27 income year, a standard deduction of up to $1,000 for work-related expenses also applies, so eligible taxpayers with work income can claim up to that amount without receipts.²

How the standard deduction works, who is eligible and which expenses it covers is set out in the standard deduction article.

A tax offset is subtracted from the tax itself, after the tax scale has been applied. The ATO describes an offset, sometimes known as a tax rebate, as reducing the tax paid on taxable income.³ Because the offset is applied after tax is calculated, each dollar of a non-refundable offset generally reduces tax payable by a dollar, up to the amount of tax otherwise payable. The amount received depends on the person's taxable income and on the amount of tax they need to pay, and a person with no tax to pay receives no offset.

The low income tax offset applies to taxable incomes up to $66,667 and does not need to be claimed. It is worth up to $700 for a taxable income of $37,500 or less, then $700 minus 5 cents for every dollar above $37,500, then $325 minus 1.5 cents for every dollar above $45,000, cutting out above $66,667.⁴ The ATO works some offsets out automatically after a return is lodged. The low income tax offset is calculated automatically at lodgment and appears on the notice of assessment at the line for non-refundable tax offsets; other offsets are claimed in the offsets section of the return.

A deduction removes income from the top of a person's tax scale, so the tax saved is based on the marginal rate that would have applied to the deducted income, rather than the amount of the deduction itself. The saving depends on the person's marginal rate and their broader tax position. On the 2026–27 resident scale, a $1,000 deduction saves $150 where the deducted income would have been taxed at 15%, $300 at 30%, $370 at 37% and $450 at 45%. Each amount is derived by multiplying $1,000 by the relevant marginal rate.⁶ Below the $18,200 tax-free threshold, a deduction saves no income tax, because no income tax applies to that income.

A deduction can also reduce the Medicare levy. The levy is generally 2% of taxable income and is not included in the resident income tax rate tables. Where the full levy applies, a $1,000 deduction can therefore reduce the Medicare levy by a further $20.⁶ How marginal rates and brackets produce this arithmetic is covered in the tax brackets article.

On the 2026–27 resident scale, a $1,000 deduction from an $80,000 salary reduces the combined income tax and Medicare levy by $320. With the illustrative withholding used below, the assessment ends in a refund rather than a small bill. The two calculations are illustrative applications of the published scale, with every step shown.

Worked example · $80,000 salary with the $1,000 standard deduction

A resident employee earns $80,000 of salary in 2026–27 and claims the $1,000 standard deduction, so their taxable income is $79,000. Income tax on the scale is $4,020 plus 30% of the $34,000 above $45,000, which is $10,200, giving $14,220. The Medicare levy at the full 2% of taxable income adds $1,580, so the total assessed is $15,800. Without the deduction, tax on $80,000 would be $14,520 plus a $1,600 levy, a total of $16,120. The deduction saves $300 of income tax and $20 of Medicare levy, or $320 in all.⁶ If the employer withheld $16,100 during the year, an illustrative amount, the assessment ends $300 in the taxpayer's favour with the deduction, and $20 against them without it. The same withholding produces a refund in one case and a bill in the other, because only the assessed amount changes.