Published on 11 Aug, 2021

Australian Small Business Tax Offset | Who Is Eligible?

Written by:
Thomas S Phabmixay
General Manager

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Page Contents

As an Australian sole trader or small business owner, you’ve probably heard about the small business tax offset. However, knowing what you and your small business are entitled to under this offset can be challenging. We will show you some of the basics in this article.

What is the small business tax offset for sole traders and individuals?

The small business income tax offset, known as the unincorporated small business tax discount, is an excellent way for sole traders and small business owners to reduce their income tax bills. This offset reduces the amount of tax payable by individuals who carry out a business as a sole trader or generate a share of their net small business income from a trust or partnership by up to $1000 each year. The small business income tax offset bases on the proportion of tax payable on the total net small business income, which increased from 13% to 16% on July 1, 2021.

Who is eligible for the small business tax offset?

As mentioned, the Australian small business tax offset targets individuals carrying out small businesses as sole traders and those who receive part of their net small business income through trusts and partnerships. The small business must also have an aggregated turnover of less than $5 million to be eligible for the Australian small business tax offset. The company must also have not benefitted from their tax cut in recent years (the amount reduced from 30% to 25% in the 2021-22 financial year).

The small business income tax offset, known as the unincorporated small business tax discount, is an excellent way for sole traders and small business owners to reduce their income tax bills. This offset reduces the amount of tax payable by individuals who carry out a business as a sole trader or generate a share of their net small business income from a trust or partnership by up to $1000 each year. The small business income tax offset bases on the proportion of tax payable on the total net small business income, which increased from 13% to 16% on July 1, 2021.

Who is eligible for the small business tax offset?

As mentioned, the Australian small business tax offset targets individuals carrying out small businesses as sole traders and those who receive part of their net small business income through trusts and partnerships. The small business must also have an aggregated turnover of less than $5 million to be eligible for the Australian small business tax offset. The company must also have not benefitted from their tax cut in recent years (the amount reduced from 30% to 25% in the 2021-22 financial year).

How to calculate small business tax offset?

The Australian small business tax offset is worked out based on the proportion of tax payable concerning the total net income of a small business for the income year. When calculating the aggregated turnover threshold and rate of offset for your small business, it is essential to note that this will depend on the income year of your return.

Up to a maximum of $1000, you calculate the offset using the following formula:

For instance, let’s say that you are a sole trader and operate a single small business entity in the primary production sector, from which your net income is $50,000. Let’s assume that you don’t have any farm management deposits and repayments or any foreign income. However, you have $5000 in other business deductions, after which your net small business income will be $45,000.

Based on this, you might work out your taxable income for the year to be $13,500. So, you would divide $45,000 (your total net small business income) by $13,500 (your taxable income), which would give you 3.33.

You would then multiply this by your basic income tax liability for the income year. Let’s say that’s $100, so 3.33 x $100 is $330.

Thus, you are likely to receive around $330 under the Australian small business tax offset. Remember, the maximum that you can receive under the offset is $1000, meaning that even if the result of your calculation exceeds this amount, the ATO will cap your offset at this amount.

How do you apply for the small business tax offset?

The amount that you are eligible to receive under the Australian small business tax offset will be calculated automatically by the Australian Taxation Office from your tax return, with the offset amount shown in your notice of assessment.

If you complete your tax return yourself using myTax, you will use the small business income tax calculator. Whilst this doesn’t work out the amount you are eligible to receive under the tax offset for you, it will tell you where to include it in your tax return.

We hope that this guide helps your business to take advantage of the Australian small business tax offset. However, we know it can be tricky, especially if this is your first time claiming. If you would like assistance with calculating how much your small business can receive under the offset, or if you need professional help setting up a company, trust, or self-managed super fund, look no further and contact TMS Financial. TMS Financial has a team of accounting and finance professionals to assist with your accounting needs. Find out how by calling (02) 9725 6169.

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