The Low Income Tax Offset is worth up to $700 and it belongs to Australian tax residents. Income taxed at working holiday maker rates does not attract it.
What is an offset, and why is it worth more than a deduction?
An offset reduces the tax you owe. A deduction reduces the income the tax is calculated on. The same dollar figure produces very different outcomes.
- A $700 deduction against income taxed at 15% saves you $105
- A $700 offset reduces your tax bill by the full $700
LITO is worth up to $700 for taxable income up to $37,500, shading down through $37,500 to $66,667 and disappearing above that. It is also non-refundable, meaning it can reduce tax to zero but never turns into a payment on its own.
Why can most working holiday makers not claim it?
Because LITO is a resident concession and working holiday maker income is taxed under its own schedule. A person taxed at 15% from the first dollar under the working holiday maker rates is not being taxed as a resident on that income, and the offset does not attach to it.
For most people reading this, LITO is not available, and no amount of care at lodgement changes it.
When does it become available?
It becomes available when you are an Australian tax resident for the year, which a minority of working holiday makers genuinely are. Residency depends on your own circumstances, has to be properly reviewed, and is easy to call wrongly in both directions.
What a resident finding is then worth varies. For some it is considerably more than LITO, for others LITO of up to $700 is the whole of it, and which outcome applies is assessed case by case when the return is prepared. Our guide to tax residency covers why the question is harder than it looks.
What can you claim instead?
Relief reaches working holiday makers through exemptions and deductions rather than through the resident offset system. Between them these items are worth considerably more than LITO would have been.
- The Medicare levy exemption, worth about $500 on $25,000 of earnings for someone not entitled to Medicare
- The small business income tax offset on ABN sole trader income, worth up to $1,000
- Recovery of any period withheld at 45% before your TFN reached the employer
- Work related deductions, which are proportionally more valuable on a working holiday return than on a resident one
Chasing LITO is wasted effort for most people. The Medicare position and a complete deduction list are where the same attention actually pays.
What happens if an offset exceeds your tax?
Nothing is paid out. LITO is non-refundable, so if your liability is $500 and the offset is $700, the tax becomes zero and the remaining $200 disappears rather than being refunded.
Your refund comes from the tax already withheld from your pay during the year, not from the offset. The offset reduces the final liability, which leaves more of the withheld tax to come back to you.
Can several offsets apply to the same return?
Yes, and they are calculated separately before being applied against total tax payable. A year with both wages and ABN income can carry the small business offset on the business portion while the Medicare position is handled separately.
That combination is where a return stops being a form and becomes a calculation, particularly where residency changed part way through the year. A part year resident has part of the year under one set of rules and part under another, and the offsets follow the periods rather than the whole.
What decides your position?
Mostly one question: whether you were an Australian tax resident for the year or any part of it. That depends on your own circumstances and has to be properly reviewed.
It is not a box you tick with confidence on a first reading. It is the item most often answered wrongly on a self lodged return, and it moves more money than every offset in this guide combined. It is worth resolving properly when the tax return is prepared.