Are you a small business owner looking for legal ways to reduce your income tax burden? The small business income tax offset is a great place to start.
The small business income tax offset is available to individuals who have a share of net income from a small business either from a trust or a partnership. You’re also eligible if you are in business as a sole trader.
Small Businesses Are Anything But “Small”
Small businesses are the backbone of our economy. According to the Australian Bureau of Statistics (ABS), 97% of businesses in Australia are “small businesses”.
Small businesses are Australia’s largest employers and punch about their weight in innovation. Small business owners are some of the most resilient & determined people around as seen during the Covid lockdowns, despite limited resources and less financial power, small business owners made it work.
What Are Tax Offsets?
Like tax deductions, tax offsets reduce the amount of taxes you pay. But offsets are slightly different from tax deductions. Deductions reduce your taxable income before the tax has been computed on it, while an offset reduces the income tax amount payable itself.
The small business income tax offset can reduce the tax obligation by up to $1,000 each year proportionate to your income.
Other offsets include those for low and middle-income earners, super-related offsets, private health insurance offset, and seniors and pensioners.
What is the Small Business Income Tax Offset?
In 2015, the Australian government introduced the Small Business Income Tax Offset system to help small businesses get started. In FY 2021-22, the rate is set at 16% for eligible business owners, capped at $1,000 per year.
This program is designed to stimulate and support small business growth and health and encourage other small business owners to get started.
These regulations are frequently amended. For example, from 1 July 2020, businesses that cannot be categorized as small businesses as their turnover is in the $10 million range, but below $50 million can access deductions for start-up and prepaid expenditure. Similarly, several other concessions have been made in 2021.
It’s also sometimes called the unincorporated small business tax discount.
How does the Small Business Tax Offset work?
The ATO calculates your offset based on the information available on your tax return.
If your tax liability is lower than the total offset, you don’t receive a refund, but you do get a $0 tax liability. This is because the Small Business Income Tax Offset is a non-refundable one.
Another thing to remember about tax offsets is that they don’t reduce/negate Medicare Levy or Medicare Levy Surcharge costs.
Am I Eligible for the Small Business Income Tax Offset?
To be eligible, you must run your small business as a sole trader, partnership or trust and have an aggregated turnover of less than $5 million.
If you run your small business as a partnership or trust, you will be assessed on your share of the net small business income.
If you run your business as a Pty Ltd Company – No.
If you’re not sure – talk to your accountant.
How is the Small Business Income Tax Offset calculated?
The Small Business Income Tax Offset is equal to 16% of tax payable on your total net small business income, up to a maximum amount of $1,000.
This is easiest to explain with an example.
Dave works full-time as a cleaner, earning $65,000. Dave also has a small lawn mowing business running as a sole trader. The business generates a net small business income of $25,000. This means Dave’s taxable income is $90,000, which equates to a tax bill of $19,717 (ignoring other deductions).
38% of Dave’s taxable income is net small business income ($25,000 / $65,000).
So, to calculate the amount of the offset, you multiply $19,717 (Dave’s total tax bill) by 38% (the share of the tax bill relating to the small business income) to get $7,583.
You then multiply the $7,583 by 16% to get Dave’s offset ($7,583*16%) = $1,213. This is higher than the maximum, so Dave’s tax offset is $1,000.
How do I apply for the Small Business Income Tax Offset?
You don’t have to – when you submit your tax return it’s automatically calculated for you by the ATO.
If you’ve got questions about lodging your tax return, you should speak to your accountant.
Other things to know about the Small Business Income Tax Offset
The percentage of taxable small business income is capped at 100%. This means any losses that aren’t connected with the small business income but that can reduce your taxable income will not increase the ratio above 100%.
The small business income tax offset is completely non-refundable. If the offset is greater than your tax liability, you won’t get a refund.
Talk to your accountant
Tax offsets help to reduce the tax burden on small businesses to help business owners grow their businesses and make a difference in their communities.
Tax can be complicated, and nothing replaces personal advice. If you’ve got questions about the Small Business Income Tax Offset or other tax matters, we recommend you contact your accountant.
Frequently Asked Questions about the Small Business Income Tax Offset
- Is small business tax offset refundable?
No, the small business tax offset is non-refundable. If the offset is greater than your tax liability, you won’t get a refund.
- Can I get the small business tax offset if I use a company?
No, you must run your small business as a sole trader, partnership or trust and have an aggregated turnover of less than $5 million.
- How much is the small business income tax offset?
16% of tax payable on your total net small business income, up to a maximum amount of $1,000.
- Who is eligible for the small business income tax offset?
To be eligible, you must run your small business as a sole trader, partnership or trust and have an aggregated turnover of less than $5 million.
This means that if you run your business as a Pty Ltd company you won’t be eligible.
- How do I apply for the small business income tax offset?
The good news is you don’t have to, the small business income tax offset is automatically calculated for you by the ATO.
- Where can I find more information about the small business income tax offset?
You can find more information by visiting the ATO website here: https://www.ato.gov.au/business/income-and-deductions-for-business/in-detail/small-business-income-tax-offset/
- How do I calculate my net small business income?
To calculate your net small business income, you subtract your eligible deductions from your income from your business.
For example: Let’s say you earned $20,000 from your small business side hustle and had deductions of $5,000 then your net small business income is $15,000 ($20,000 – $5,000)
Don’t include income from:
- net capital gains you made from carrying on your business
- personal services income (unless you were a personal services business)
- salary and wages
- allowances and director’s fees
- government allowances and pensions
- interest and dividends unless it’s related to a business activity
- interest earned on a farm management deposit.
Don’t include the following deductions:
- tax-related expenses such as accounting fees
- gifts, donations or contributions
- personal superannuation contributions
- current year business losses, which are not deductible this year under the non-commercial loss rules
- tax losses from prior years (unless they are deferred non-commercial losses).
The ATO has a pretty handy calculator for working out the about you need to enter in your tax return which you can find here: Small business income tax offset calculator.
The calculator typically gives you a result in 5 minutes or less.
- Do I include jobkeeper when working out my net small business income?
Yes, the ATO has advised that JobKeeper payments received will form part of your net small business income for the year.
However, be aware that jobkeeper payments don’t count in working out your aggregated turnover, which needs to be less than $5 million to qualify for the small business income tax offset.
- Should I claim the small business income tax offset or the low-income tax offset?
You actually don’t need to claim either.
The ATO works out your eligibility and will apply the offset to your return.
- Am I eligible for the small business income tax offset for being an Uber driver?
Yes – ride-sharing (like Uber) is a contracted business service, meaning that it is a business in and of itself.
So, provided your Uber driving totals less than $5M turnover your business would be eligible, & if you’re making $5M from Uber driving – Wow 🤯
- Am I eligible for the small business income tax offset for being a meal delivery driver like Menulog?
Yes – for the same reason that you’re eligible as an Uber driver.
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