Tax Offsets and Deductions in Australia (2025–26)
Published by SWIFT ACCOUNTANTS PTY LTD · Last reviewed
Knowing how to legitimately reduce your tax bill is one of the most valuable financial skills an Australian can have. This guide explains the key tax offsets (like the LITO) and the most commonly claimed deductions — and how each one reduces the tax you pay.
Tax Offsets vs Tax Deductions: What Is the Difference?
Many Australians use the terms interchangeably, but offsets and deductions work differently and have very different values:
Tax Offset
Reduces the amount of tax payable directly — dollar for dollar. A $700 offset saves you exactly $700 in tax, regardless of your income bracket. Most offsets are non-refundable (they can reduce your tax to zero but not create a refund).
Tax Deduction
Reduces your taxable income — the income on which tax is calculated. A $1,000 deduction saves $300 if your marginal rate is 30%, or $370 if your rate is 37%. Higher income earners get more value from deductions.
Both are valuable and can be used together. Understanding which type each item is helps you calculate the actual saving it provides.
The Low Income Tax Offset (LITO)
The Low Income Tax Offset (LITO) is the most important tax offset for most Australians. It is applied automatically by the ATO — you do not need to claim it separately in your tax return.
For 2025–26, the LITO works as follows:
- Taxable income up to $37,500: Maximum LITO of $700
- $37,501 – $45,000: LITO reduces by 5 cents per dollar above $37,500
- $45,001 – $66,667: LITO reduces by a further 1.5 cents per dollar
- Above $66,667: No LITO — it has fully phased out
Because the LITO can reduce your tax to zero, combined with the tax-free threshold of $18,200, the effective tax-free threshold for a low-income Australian resident is closer to $21,885 — the income level where the LITO exactly offsets the tax otherwise payable.
Work-Related Deductions
Work-related deductions are expenses you incur to earn your employment income. The ATO requires that you genuinely incurred the expense, it was directly related to earning your income, you have a record to prove it, and you were not reimbursed by your employer.
Tools, Equipment & Technology
If you purchase tools or equipment for work, you can claim a deduction. Items costing $300 or less can be claimed immediately in full. Items over $300 must be depreciated over their effective life. Computers, printers, and work phones used for work purposes (with an appropriate work-use proportion) are also deductible.
Professional Memberships & Subscriptions
Annual fees for professional associations, unions, and industry bodies are deductible if membership is relevant to your income-earning activities. Work-related journals, newspapers, and subscriptions to professional resources are also claimable.
Work Uniforms & Protective Clothing
Compulsory work uniforms that are unique to your employer (with a logo), occupation-specific clothing (such as chef's uniforms or nurse's scrubs), and protective clothing (safety boots, hard hats, hi-vis vests) are deductible. General clothing — even if worn only for work — is not deductible unless it qualifies as a uniform or protective gear.
Vehicle and Travel Expenses
Travel between two separate workplaces (e.g., going from your main employer to a second job) is deductible. Carrying heavy equipment to work may make commuting deductible. However, ordinary travel from home to your regular workplace (commuting) is not deductible.
For car expenses, you can use either the cents per kilometre method (88 cents/km for 2025–26, up to 5,000 km) or the logbook method (actual vehicle expenses proportional to work use, based on a 12-week logbook).
Self-Education Expenses
Courses, workshops, or study that maintain or improve skills directly related to your current job are deductible. The study must be relevant to your current income-earning activities — you generally cannot deduct education costs for a new career you are moving into.
Home Office Deductions
If you work from home — whether full time, part time, or occasionally — you can claim a deduction for costs associated with that work. From 1 July 2024, the ATO's fixed rate method allows you to claim 70 cents per hour for each hour worked at home.
The 70 cents per hour covers electricity and gas, internet and phone costs, stationery, and computer consumables. You still need to keep a record of hours worked at home (timesheet, diary, or roster records). You can separately claim depreciation on office furniture and equipment, as these are not included in the 70 cent rate.
Alternatively, you can use the actual cost method to claim the real expenses incurred — but this requires more detailed record keeping, including a floor plan showing the percentage of your home used for work.
Investment Property Deductions
If you own an investment property that generates rental income, you can deduct a wide range of expenses against that income. Deductible expenses include:
- Loan interest on the investment property mortgage
- Council rates, land tax, and water charges
- Property management fees
- Repairs and maintenance (immediate deduction)
- Insurance premiums
- Depreciation on the building structure (capital works) and items within it
If your deductions exceed your rental income, the net rental loss can generally be offset against your other income — this is called negative gearing. The net loss reduces your taxable income and therefore your overall tax bill.