Non-Refundable Tax Credits in Australia: 2025 Guide

Non-refundable tax credits are a key part of Australia’s tax system, but many taxpayers are unsure how these credits affect their annual tax bill. With several policy updates and increased scrutiny on deductions in 2025, it’s more important than ever to understand what non-refundable credits mean for your finances—and how to maximise your benefits without running afoul of the ATO.

Understanding Non-Refundable Tax Credits

Unlike refundable credits, which can result in a cash refund even if you owe no tax, non-refundable tax credits can only reduce your tax liability to zero. If your credits exceed the tax you owe, the excess is simply lost; it doesn’t generate a payment from the government.

• Example: If you owe $1,000 in tax and have $1,500 in non-refundable credits, your tax bill drops to zero—but you don’t receive the extra $500.

• Contrast: Refundable credits (like some low-income offsets) could provide a refund in that scenario.

Common non-refundable credits in Australia include the private health insurance rebate (when claimed as a tax offset), franking credits (in some cases), and the Seniors and Pensioners Tax Offset (SAPTO).

Key Non-Refundable Credits for 2025

With the 2025 financial year comes some notable changes to tax offsets and credits:

• Seniors and Pensioners Tax Offset (SAPTO): Still non-refundable, SAPTO can reduce tax for eligible seniors and pensioners but cannot create a refund. Income thresholds have been indexed for 2025, so check if you qualify.

• Low Income Tax Offset (LITO): Remains non-refundable. The maximum offset is $700 for 2025, phasing out as income rises above $37,500.

• Private Health Insurance Rebate: If claimed via tax return, this offset is non-refundable and capped based on age and income. The ATO has adjusted thresholds for 2025, impacting eligibility for higher-income earners.

• Zone Tax Offset: For those living in remote or regional areas, this offset remains non-refundable, though the rules were tightened in 2023 and continue into 2025.

It’s worth noting that some credits, such as franking credits attached to dividends, can be refundable for individuals and super funds—an exception rather than the rule in Australia. However, proposals to limit franking credit refunds have re-emerged in political debate for 2025, so it’s an area to watch closely.

Who Benefits Most—and Who Misses Out?

Non-refundable credits primarily benefit taxpayers with enough taxable income to use the full offset. If you have little or no tax liability—such as retirees with low assessable income—you may not be able to take advantage of these credits, even if you technically qualify.

Here’s how to maximise your position:

• Monitor income thresholds: Many offsets phase out above certain income levels. Make sure your reported income doesn’t inadvertently reduce your entitlement.

• Combine with other offsets: You can use multiple non-refundable credits in a single year, but only up to the amount of tax you owe.

• Plan withdrawals: For retirees, strategic timing of superannuation withdrawals can help ensure you have enough taxable income to benefit from SAPTO or LITO.

• Check eligibility annually: Policy changes and indexation of thresholds can alter your entitlement from year to year.

For example, if you’re a part-time worker earning $20,000 and eligible for LITO, you’ll benefit from the full offset, reducing your tax to zero. But if you also qualify for SAPTO, any unused offset is lost—it won’t boost your refund.

2025 Policy Updates and What to Watch

Several important policy trends are shaping the landscape for non-refundable credits in 2025:

• ATO Compliance Focus: The ATO has ramped up data matching and audit activity around tax offsets, especially following the controversial ‘Stage 3’ tax cut adjustments. Expect closer scrutiny of claims.

• Low and Middle Income Tax Offset (LMITO): This temporary offset ended in 2022, and its absence means more taxpayers are relying on non-refundable credits alone.

• Political Debate on Franking Credits: The future of refundable franking credits remains uncertain. While most non-refundable credits are unchanged, any policy shift could affect retirees and self-funded investors.

Keep an eye on the federal budget and ATO announcements for any mid-year adjustments to thresholds or eligibility criteria.

Conclusion

Non-refundable tax credits can be a powerful way to reduce your tax liability, but they have their limits—especially for low-income earners and retirees. Understanding how these offsets work, monitoring your eligibility, and keeping up with 2025 policy changes can help you make the most of what’s available. Review your income and credits early in the year to ensure you don’t leave money on the table—or miss out due to overlooked eligibility.