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Guide to Small Business Tax Offset in Australia

If you have a small business, a small business income tax offset can reduce your tax liability considerably. You can save up to $1,000 per year through a small business tax offset. Many businesses in Australia are sole traders or partnerships. The Australian government introduced a small business tax offset to reduce the tax burden on small businesses. The objective is to stimulate economic growth and create an enabling environment for small businesses.

In this article, we are going to focus on what is small business tax offset, its eligibility, and who can claim it.

What is Small Business Income Tax Offset?

A small business tax offset is a tax discount or relief for unincorporated small businesses. Small businesses get an offset of up to $1,000 per year. Tax offset is set at 16% of the tax payable by your small business, but it is capped at $1,000 per income year.

Related: Working from home tax deductions Australia. 

Small Business Income Tax Offset Eligibility  

To qualify for a small business income tax offset, you need to meet the following eligibility requirements:

  • Have a small business like a sole proprietor or have a share in a small partnership business
  • Have an aggregated turnover of less than $5 million beginning 2016/17 income year onwards

Who Can Claim Small Business Tax Offset?

The small business tax offset is only available to individuals. It is not available to companies, since they also get their own tax subsidies. You must have a small sole trader, or have a share in a partnership trust and make less than $5 million per income year from the business.

How to Calculate Small Business Tax Offset Example 

Effective 1st July 2021, small business tax offset increased from 13% to 16% of total net small business income. The maximum tax offset is capped at $1,000 per income year.

To calculate small business tax offset, follow these simple steps.

  • First, determine the proportion of the individual’s basic income tax liability in relation to his small business income. (net small business income ÷ taxable income)
  • Calculate the tax payable in total net business income. (Proportion x tax liability)
  • Calculate small business tax offset (16% x tax payable in total net business income)

Example

Arnold is a sole trader. In the income year 2021/22, Arnold’s taxable income was $80,000 and his net small business income was $30,000. His basic income tax liability was $20,000. What is his small business tax offset?

Solution

  • Determine the proportion of Arnold’s basic tax liability in relation to his business.

         ($30,000/$80,000 = 0.375)

         This means that 0.375 of Arnold’s taxable income relates to his small business.     

  • Calculate the tax payable in total small business income.

         (0.375 x $20,000 = $7,500)

         $7,500 of Arnold’s basic income tax liability comes from his net business income.  

  • Calculate Arnold’s business tax offset.

          (0.16 x $7,500 = $1,200)

Arnold’s sole trader gross business offset is equal to $1,200. However, the small business tax offset is capped at $1,000. Therefore, Arnold's sole trader net small business tax offset is $1,000 for the year 2021/22.

How to Claim Small Business Tax Offset

To claim offset small business, you don’t even need to apply for it. You just have to lodge your business tax return with Australian Taxation Office (ATO). Of course, you will need to provide the ATO with an amount of your small business income. Based on the information you provide them with, they will calculate small business tax offset automatically.

However, you can still use ATO’s small business tax offset calculator and get to know if you qualify for a tax offset. You can also calculate the amount of tax offset by entering your net small business income.

Read also: Guide to low income tax offset in Australia.

Benefits of Offset Small Business Tax 

Sole traders and business partners get to enjoy the following benefits from small business tax offset.

  • Tax discount. Unincorporated businesses can benefit from up to $1,000 tax relief every income year.
  • Stimulates economic growth. Small business tax offset reduces the tax burden on small businesses and stimulates economic growth by encouraging entrepreneurship.

Summary of Small Business Income Tax Offset in Australia

Small business tax offset ATO is an initiative aimed at promoting economic growth in Australia. Many businesses in the country are sole traders and the tax offset relieves their tax liability burden. Small businesses can benefit from a tax offset of up to $1,000 per income year. Only sole traders and those with a share in a partnership can benefit from this initiative. 

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