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In Australia, tax credits and tax deductions are two different mechanisms that help individual taxpayers reduce their tax liability.

Here’s a brief explanation of each:

Tax Deduction

Tax Deduction: A tax deduction reduces a taxpayer’s taxable income. Deductions are expenses that can be subtracted from an individual’s or business’s gross income to arrive at their taxable income. Common tax deductions in Australia include work-related expenses, charitable donations, and some investment-related expenses. By lowering taxable income, tax deductions effectively reduce the amount of tax owed.

For example, if your taxable income is AUD 80,000 and you have AUD 10,000 in deductions, your taxable income would be reduced to AUD 70,000. You would then pay tax on this reduced amount.

Tax Credit (Offset)

Tax Credit: A tax credit is a direct reduction of the tax liability itself, rather than a reduction of taxable income. Tax credits are subtracted from the amount of tax owed after the taxable income has been calculated. In Australia, tax credits are often referred to as tax offsets. Common tax offsets include the low-income tax offset, the seniors and pensioners tax offset, and the private health insurance rebate.

For example, if your tax liability is AUD 15,000 and you have AUD 2,000 in tax credits, your tax payable would be reduced to AUD 13,000.

In summary, the primary difference between a tax deduction and a tax credit in Australia is that a tax deduction reduces taxable income, while a tax credit directly reduces the tax liability. Both mechanisms serve to lower the amount of tax owed, but they operate in different ways.

Accountants Direct can assist with ensuring you maximise your deductions and claim all offsets.

Don’t risk it, contact us today on 1300 TAX SHOP or book directly here


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