Small Business Income Tax Offset

The Small Business Income Tax Offset offers unincorporated small businesses in Australia the opportunity to reduce their tax payable by up to $1,000 per year. The offset is calculated based on the proportion of tax payable on the business income. To determine the amount of the offset, the Australian Taxation Office (ATO) assesses the business income reported in the tax return.

Eligibility Criteria for the Small Business Income Tax Offset

To be eligible for the Small Business Income Tax Offset, you must meet the following criteria:

1. Carrying on a small business as a sole trader: As a sole trader, you must be actively engaged in running a small business.
2. Share of net small business income from a partnership or trust: If you are a partner or beneficiary of a partnership or trust, you must have a share of net small business income.
3. Aggregated turnover of less than $5 million: Your small business must have an aggregated turnover of less than $5 million for the income year.

Working Out the Small Business Income Tax Offset

The Small Business Income Tax Offset is calculated based on the proportion of tax payable related to your total net small business income. The offset rate and threshold depend on the income year of your tax return.

If your total net small business income is equal to or greater than your taxable income, the offset will be the rate of offset multiplied by your basic income tax liability for the year. The offset amount will be clearly indicated on your notice of assessment from the ATO.

Claiming the Small Business Income Tax Offset

To claim the Small Business Income Tax Offset, you do not need to perform any additional calculations. The ATO calculates the offset amount using the information provided in your tax return. The offset amount will be displayed on your notice of assessment.

If you are a sole trader, your net small business income is used to calculate your Small Business Income Tax Offset. Calculating your net small business income involves subtracting any allowable deductions and expenses related to your business from your total business income. The resulting amount is your net small business income. Once you have calculated your net small business income, you can determine your Small Business Income Tax Offset using the following steps:

1. Calculate your basic income tax liability: This is the tax payable on your taxable income before applying any offsets or deductions. You can use the tax rates and thresholds provided by the ATO to calculate this amount.
2. Determine the proportion of tax payable related to your net small business income: Divide your net small business income by your taxable income. This will give you the proportion of tax payable related to your business income.
3. Calculate the offset amount: Multiply the proportion of tax payable related to your net small business income by the applicable offset rate for the income year. The result is your Small Business Income Tax Offset.

It’s important to note that the ATO will automatically calculate the offset amount when processing your tax return. The information you provide in your tax return, including your net small business income, will be used to determine the offset.