Tax offsets are the quiet achievers of the Australian tax system: unlike deductions, which shrink your taxable income, an offset shrinks your actual tax bill — dollar for dollar. The low income tax offset is worth up to $700 a year, the seniors and pensioners offset up to $2,230, and there’s a $1,000 small business offset most sole traders have never heard of. This guide works through every major offset for 2026-27 with real numbers, clears up the confusion left by the old LMITO, and flags the ones people most often miss.
The short answer
- A tax offset reduces your tax payable directly. A $700 offset cuts $700 off your tax bill. A $700 deduction at a 30% marginal rate only cuts $210. Offsets are almost always more valuable, dollar for dollar.
- Most offsets are automatic. Lodge your return, and the ATO works out your LITO, SAPTO and small business offset itself. You can check them on your notice of assessment under “non-refundable tax offsets”.
- Offsets are usually non-refundable. They can bring your tax down to zero, but they won’t create a refund on their own — and if your tax is already zero, the offset is worth nothing to you.
- Offsets don’t reduce the Medicare levy. The 2% levy is calculated separately and offsets can’t touch it.
- For 2026-27 the offsets are unchanged, but the bottom tax rate dropped from 16% to 15% and a $1,000 standard work deduction starts this year — both change the maths around them.
Offsets vs deductions: the $5,000 test
Imagine you earn $60,000 and you’re deciding between a $5,000 work-related deduction and a $5,000 tax offset. At a 30% marginal rate, the deduction saves you $5,000 × 30% = $1,500. The offset saves you the full $5,000 — because it comes straight off the tax bill instead of off the income the bill is calculated on.
Deductions are still worth claiming — and they have a useful side effect: by lowering your taxable income, they can push you into a better offset bracket. But when you see “offset” on your return, know it’s the good stuff.
The big one: Low Income Tax Offset (LITO) 2026-27
LITO is the offset most Australians receive. If you’re a resident for tax purposes and your taxable income is below $66,667, you almost certainly get some of it — and the ATO applies it without you lifting a finger.
Here are the official 2026-27 figures, unchanged since 2020-21:
| Taxable income | Your LITO |
|---|---|
| $37,500 or less | $700 (the maximum) |
| $37,501 – $45,000 | $700 minus 5 cents for every $1 above $37,500 |
| $45,001 – $66,667 | $325 minus 1.5 cents for every $1 above $45,000 |
| More than $66,667 | Nil |
Two practical consequences of the phase-out design:
1. The “real” tax-free threshold is higher than $18,200. Because the $700 maximum offset wipes out 15% tax on $4,666.67 of income, a full-year resident with no other offsets pays no income tax until taxable income passes about $22,866 in 2026-27 (last year, at the 16% rate, it was about $22,575). That’s not a separate threshold in the law — it’s just the maths of LITO doing its job.
2. The phase-out is gradual, not a cliff. Earn $1 more and you don’t lose the whole offset; you lose 5 cents or 1.5 cents of it. There’s no income level where earning extra leaves you worse off.
You can see exactly what you received on your notice of assessment — look for the line “Less: non-refundable tax offsets”. If the number surprises you, work backwards through the table above with your taxable income.
Worked examples: LITO at the new 15% rate
Maya earns $34,000. Her tax before offsets: ($34,000 − $18,200) × 15% = $2,370. Her income is under $37,500, so LITO = $700. Tax payable: $2,370 − $700 = $1,670.
Daniel earns $42,000. Tax before offsets: ($42,000 − $18,200) × 15% = $3,570. LITO = $700 − 5c × ($42,000 − $37,500) = $700 − $225 = $475. Tax payable: $3,570 − $475 = $3,095 — an effective rate of about 7.4%.
Priya earns $60,000. Tax before offsets: $4,020 + 30% × ($60,000 − $45,000) = $8,520. She’s in the 1.5c phase-out band: LITO = $325 − 1.5c × ($60,000 − $45,000) = $325 − $225 = $100. Tax payable: $8,520 − $100 = $8,420.
Run your own numbers through the income tax calculator — it factors LITO into the result automatically.
Seniors and Pensioners Tax Offset (SAPTO) 2026-27
SAPTO is the heavyweight: up to $2,230 for a single senior, and it’s the reason many older Australians pay no income tax at all on modest incomes. Yet plenty of eligible people miss it because they assume it’s only for Age Pension recipients. It isn’t.
You’re in the running if you’ve reached Age Pension age (67 on 30 June of the income year) and receive an Australian Government pension or allowance — or you’re self-funded but would qualify for the Age Pension but for the income or assets test. You must be a resident for tax purposes, and your rebate income (broader than taxable income — it adds back items like reportable super contributions) must be under the cut-out threshold.
The 2026-27 figures:
| Status | Maximum offset | Full offset up to | Cut-out |
|---|---|---|---|
| Single | $2,230 | $36,034 | $53,874 |
| Each partner of a couple | $1,602 | $31,847 | $44,663 |
| Illness-separated couple (each) | $2,040 | $34,767 | $51,087 |
Above the shading-out threshold, the offset reduces by 12.5 cents for every dollar of rebate income. Like LITO, it’s automatic — but there’s a planning lever LITO doesn’t have: unused SAPTO can transfer between spouses. If one partner’s offset exceeds their tax bill, the excess can reduce the other’s. The ATO works this out from your returns; you don’t file anything extra.
Worked example: Margaret is 68, single, with rebate income of $30,000 — below the $36,034 shading-out threshold, so she gets the maximum $2,230. Her tax before offsets: ($30,000 − $18,200) × 15% = $1,770. She also gets LITO of $700. Total offsets: $2,930 — more than her tax bill, so her income tax is $0. (The Medicare levy is calculated separately, with its own senior thresholds.)
Stack LITO and SAPTO together and a single senior pays no income tax on roughly the first $36,960 of income in 2026-27 — nearly double the standard tax-free point. That’s the number to remember when deciding how much super to draw or how much part-time work to take on.
The forgotten $1,000: Small Business Income Tax Offset
If you’re a sole trader, a partner in a partnership, or a beneficiary of a trust, and the business has aggregated turnover under $5 million, the ATO owes you an offset of 16% of your net small business income, capped at $1,000. It’s been at 16% since 2021-22 and it’s still there in 2026-27.
The maths is simple: with $6,250 or more of net small business income, 16% hits the cap and you get the full $1,000. With $3,000 of business income, you get $480. It’s worked out from the business income you report — no separate claim — which is exactly why people miss it: there’s nothing to tick, so nothing reminds you. Check your last notice of assessment; if it isn’t there and you had business income, your return may not have identified it correctly.
One exclusion to know: net capital gains from business assets, personal services income (unless you’re a personal services business), and prior-year losses don’t count toward “net small business income”. Our sole trader tax guide walks through how business income is reported in the first place.
Three more offsets worth knowing
Zone tax offset. Live in a remote or special area? There’s a fixed offset from $57 to $1,173 depending on your zone and dependants — one of the least-claimed offsets in the country, because people move regional and never realise their postcode changed their tax. Check it before you lodge.
Private health insurance offset. The rebate on your hospital cover premiums is technically a tax offset — and it’s one of the few that’s refundable, meaning it can increase your refund. It usually flows through automatically from your insurer’s reporting, but cross an income-tier boundary mid-year and you may owe some of it back at tax time.
Low Income Superannuation Tax Offset (LISTO). If you earn $37,000 or less, the government refunds 15% of your concessional super contributions (up to $500) straight into your super fund. It happens automatically. And it’s about to get better: from 1 July 2027 the threshold rises to $45,000 and the maximum to $810 — though that change is proposed, not yet law.
What’s changed for 2026-27 (and what’s coming)
- The 16% → 15% rate cut. From 1 July 2026, income between $18,201 and $45,000 is taxed at 15% instead of 16% — worth up to $268 a year. The offsets are unchanged, but every worked example from last year is now slightly wrong.
- The $1,000 standard work deduction. Confirmed in the 2026 Budget for the 2026-27 year: employees can claim a flat $1,000 for work-related expenses without receipts. Because it’s a deduction, it lowers your taxable income — which can nudge you into a better LITO band. Someone on $38,000 who claims the full $1,000 drops to $37,000 of taxable income and picks up the maximum $700 LITO instead of $675.
- The $250 Working Australians Tax Offset (WATO). Proposed from 1 July 2027, not yet legislated. If it passes, it would lift the effective tax-free point for workers by nearly $1,800. Watch this space.
- The ghost of LMITO. The low and middle income tax offset (worth up to $1,500) ended after the 2021-22 year. If your refund has felt smaller the last few years, that’s usually why — and no, it’s not coming back.
Common mistakes with tax offsets
1. Expecting the offset as cash. LITO and SAPTO are non-refundable. If your tax bill is already zero, the offset is worth zero to you. It reduces tax; it doesn’t create money.
2. Waiting for the LMITO to return. Every tax season brings a fresh wave of “where’s my $1,500?” It’s gone. The offsets that remain are LITO, SAPTO and the smaller ones in this guide.
3. Thinking offsets cut the Medicare levy. They don’t. The levy is calculated on your taxable income separately, with its own low-income thresholds. You can owe levy in a year your income tax is zero — see our Medicare levy guide.
4. Assuming SAPTO is pensioners-only. Self-funded retirees who’d pass the Age Pension rules but for the means test qualify too — and it’s the single biggest offset on this list.
5. Sole traders not checking the small business offset. Because it’s automatic, nobody tells you about it. Look for it on your notice of assessment.
6. Forgetting the zone offset after a move. Regional moves change your zone status. The offset won’t find you if your address details are stale.
Tips: squeeze every dollar out of your offsets
- Read your notice of assessment properly. The “non-refundable tax offsets” line tells you exactly what the ATO gave you. Compare it against the tables above — if LITO is missing and your income is under $66,667, something’s off.
- Time your deductions to protect your offset. Concessional super contributions and the new $1,000 standard deduction both lower taxable income, which can keep you inside the full-$700 LITO band or under a SAPTO shading-out threshold.
- Couples: mind the SAPTO transfer. If one partner has little taxable income, their unused SAPTO can flow to the other — automatic, but only if both returns are lodged.
- Remote workers: check your zone. The zone offset is small but it’s free money for one extra label filled in correctly.
- Don’t use last year’s examples. The 15% rate changes every worked number. Our 2026-27 income tax rates guide and deductions checklist are both updated for the new year.
FAQ
Do I need to claim the low income tax offset myself?
No. The ATO calculates LITO automatically when you lodge your return and applies it to your tax bill. The only thing you need to do is lodge. You’ll see the amount on your notice of assessment under “non-refundable tax offsets”.
What happened to the $1,500 LMITO?
The low and middle income tax offset ended after the 2021-22 income year. It was temporary and it isn’t returning. The permanent low income tax offset (LITO, up to $700) continues unchanged.
I earn $20,000. Do I get an extra $700 on top of my refund?
Not as cash. At $20,000 your income tax before offsets is ($20,000 − $18,200) × 15% = $270. LITO covers that $270 and brings your tax to zero — but the remaining $430 of the $700 maximum simply goes unused, because offsets can’t take your tax below zero or create a refund by themselves.
I’m 70, self-funded, and don’t receive the Age Pension. Can I still get SAPTO?
Quite possibly. You don’t need to actually receive the pension — you need to have reached Age Pension age and meet the qualifying conditions (you’d be eligible but for the income or assets test), be a resident for tax purposes, and have rebate income under the cut-out threshold ($53,874 for singles in 2026-27). Many self-funded retirees qualify and don’t realise it.
Does the low income tax offset reduce my Medicare levy?
No. Tax offsets reduce your income tax only. The Medicare levy is worked out separately on your taxable income, with its own low-income reduction thresholds. This is why you can owe levy even in a year your income tax is zero.
I’m a sole trader. How do I get the small business income tax offset?
You don’t apply for it — the ATO calculates 16% of the net small business income shown in your return (capped at $1,000) once your business turnover is under $5 million. The key is reporting your business income in the right labels so the ATO can identify it. Check your notice of assessment; if you had business income and no offset appeared, talk to your accountant before next year’s return.
The bottom line
For 2026-27, the offset landscape is stable but the ground shifted underneath it: a 15% bottom rate, a $1,000 standard deduction, and the long shadow of the departed LMITO. The playbook is simple — lodge, check the “non-refundable tax offsets” line on your notice of assessment, and make sure the ATO gave you everything the tables above say you’re owed. Between LITO’s $700, SAPTO’s $2,230, the sole trader’s $1,000 and the smaller offsets, there’s real money in the part of the return most people never read.
Figures in this article are checked against the ATO’s published guidance for the 2026-27 income year, including the low income tax offset, seniors and pensioners tax offset, and small business concessions pages. Tax law changes — if you’re near a threshold, confirm the current figures before you lodge.
