An offset account is usually a transactional account linked to your home loan. The balance held in this account "offsets" the balance in the mortgage, helping to reduce the interest paid and overall term of the loan.
Many lenders offer a 100% offset account as a feature with standard variable home loans. Regular repayments are made to the loan as required, and a separate transaction account is set up with the same financial institution.
You can deposit your income into this transaction account and use it for day-to-day expenses. Any money in this account is offset against the amount owing on the home loan, and interest payable on the mortgage is then calculated on the loan balance less funds held in the offset account, reducing the amount of interest paid on your loan.