What is the Small Business Tax Offset?

The Australian government offers the small business tax offset to small businesses or sole traders earning less than $5 million per year. This offset is an incentive for small business owners and directly reduces their income tax liability.

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Who is the small business tax offset for?

The Small Business Income Tax Offset is designed specifically for small business entities with an aggregated turnover of less than $5 million. This includes businesses operating as a sole trader, partnership, or trust. It's important to note that companies are not eligible for this offset. By targeting these specific business structures, the offset aims to provide tax relief to a significant portion of the small business sector, helping to promote growth and sustainability within this vital segment of the economy.

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How much can I claim as a small business tax offset?

A maximum offset amount of $1,000 may be claimed each financial year, and the offset rate is currently 16%.

There is nothing you need to do in order to claim the small business tax offset — the Australian Taxation Office (ATO) calculates and applies this amount automatically depending on the proportion of income tax payable in relation to your total net small business income. You'll be able to see your offset amount on your notice of assessment after lodging your income tax return.

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How do I calculate the offset amount?

To calculate your offset, follow the steps below:

1. Divide your total net small business income for the income year by your taxable income. This gives you the percentage of taxable income that comes from small business income. For example, if 100% of your taxable income comes from small business activities, the answer will be 1 (or 100%).

2. Multiply by your basic income tax liability for the income year. You'll need to know your basic income tax liability for this step (which is your taxable income (assessable income minus deductions) multiplied by your tax rate). For example, let's say your answer from step 1 is 50% (meaning 50% of your taxable income relates to small business activities) and your basic income tax liability is $50,000. Multiple $50,000 by 50% for an answer of $25,000. This means the tax payable from your total net small business income is $25,000.

3. The final step calculates the small business tax offset amount. This is 0.16 (or 16%) x the percentage from step 1 x tax liability. For our example, it would be 0.16 x 0.5 x $25,000 which equals $2,000. However, the tax offset goes up to a maximum of $1,000, so in this case, the business owner would be eligible for an offset of $1,000.

If you'd like help calculating your small business income tax offset, please get in touch with us, or find more information on the ATO's website.

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Looking for help with tax planning?

Effective tax planning comes with many benefits, such as reducing tax liabilities and enhancing after-tax income. By leveraging deductions and offsets, businesses can lower their taxable income, resulting in  tax savings.

If you're looking for help relating to compliance and taxation for your business, we'd love to help! Please get in touch with Bonerath & Co. today.

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