Tax Offset vs Tax Deduction
Tax offset and tax deduction are related to income tax. Tax offset reduces the tax liability, whereas tax deduction reduces the assessable income (taxable income).
What is Tax Offset?
Tax offsets are ways of reducing the amount of tax that a person / company must pay but are not deductions. After calculating the tax due by the individual / company then the tax offsets are deducted from this, to arrive at the net tax due for the period. If one’s tax offset is higher than their tax due, this would only result in the tax due to be zero rather than bringing it down to a refund. Tax offsets could be an amount of tax that has already been paid; e.g. Foreign tax or tax reliefs specified in the respective tax systems. Tax offsets are often given as a percentage. For example, tax treatment on pensions where if the individual’s income is $100 and there is a tax offset allowed for 10%; i.e. the tax offset would be $10. If the tax rate used for the individual is 15%, the tax to be paid would be $15. The tax offset reduces the tax liability. Hence the tax liability would be $5.
What is Tax Deduction?
Tax deductions are items that are allowed to be deducted in the income tax calculation. Tax deduction reduces the assessable (taxable) income. These are mainly expenses that are incurred during the production of income. These deductions can also be over a period of time. For an e.g. depreciations of fixed assets are deductions allowed in arriving at the income tax. Since the asset is used in the production of income, the depreciation charge (tax depreciation) is allowed to be deducted from the total income before arriving at the income tax. Cost of goods sold is also another deduction that tax systems allow. This can be considered as a deduction as it is a cost incurred in the production of income. Some tax deductions have limits as to the maximum amount that can be deducted even if they are items that are directly related to the income. These may be entertainment related expenses incurred during the period. (i.e. a maximum limit exists for deducting entertainment related expenses).
What is the difference between Tax offset and Tax Deduction
Both tax offset and tax deduction are related to tax, but the key difference that exist between the two is that, deduction reduces assessable income (taxable income) where as tax offset reduces the tax liability.
Tax can be lowered by taking advantage of tax deductions and tax offsets. Tax offset allows the individual / company to reduce the tax liability which is arrived at from the taxable income. Whereas tax deductions allows to reduce the taxable income.