Concepts
Small business income tax offset
The small business income tax offset is a reduction in tax payable for eligible individuals who receive income from an unincorporated small business, calculated as a percentage of the tax on that income.
The small business income tax offset is a tax concession available to individuals who run a small business through an unincorporated structure, such as a sole trader, or who receive a share of net small business income from a partnership or trust. It reduces the income tax payable on the portion of your tax that relates to your net small business income. It is not available to companies.
The offset is calculated as a percentage of the income tax payable on your net small business income, and it is subject to an annual cap. Both the percentage and the cap are set by legislation and have been changed over time, so check the ATO website for the current figures rather than relying on an older source. The ATO calculates the offset when you lodge your tax return, so you do not usually need to work it out yourself.
To be eligible, you need to be a small business entity or to receive income from one, which means your aggregated turnover must be under the legislated threshold. You must also have income from carrying on the business, and your own tax must be payable. Because it is an offset, it can reduce your tax down to zero but it does not produce a refund beyond that, and unused amounts generally cannot be carried forward.
The offset applies only to the tax on your net small business income, which is the assessable income from the business less the deductions relating to it. If you also have salary, interest or investment income, the offset is worked out by reference to the share of your tax that relates to the business. It reduces the amount payable after other offsets are considered. A sole trader with a modest profit might get most of the benefit, while a high-profit business would reach the cap.
In the return, you report your business income and expenses as normal, and the ATO works out the offset based on your information. Individuals who are partners or beneficiaries of a trust see the business income included in the distribution details they receive. If you use the offset, it is a good idea to keep the records of the business income and the total aggregated turnover that support your eligibility.
A common misunderstanding is believing the offset is a deduction from income or that it applies to all small businesses. It applies after the tax is calculated, and it is for unincorporated businesses. A company in the same position would not qualify. Another is thinking that GST affects the offset. GST is not part of the net business income for a registered business, since the GST is excluded from income and expenses. This is general information only, so confirm your eligibility with the ATO or a registered tax professional.
Worked example
A sole trader has net business income of $60,000, and the income tax on that income is, say, $9,000 under the rates that apply for the year. If the offset percentage for that year is applied to that tax, the offset would be that percentage of $9,000, subject to the annual cap. The ATO calculates the exact amount when the return is lodged using the rates and cap set for that year.
Practical tips
- Check the current percentage and cap on the ATO website, since the legislated amounts have changed over time.
- Remember it is for unincorporated businesses. A company cannot claim it.
- You normally do not need to calculate it, but make sure your business income and turnover are reported correctly in the return.