The small business income tax offset (also known as the unincorporated small business tax discount) can reduce the tax a business pays by up to $1,000 each year. The offset is worked out on the proportion of tax payable on business income.
To be eligible, a taxpayer must be carrying on a small business as a sole trader, or have a share of net small business income from a partnership or trust, and have an aggregated turnover of less than $5 million.
The rate of the offset is 8% up to the end of the 2019-20 income year, but will increase to 13% for 2020-21 and again increase to 16% for 2021-22 and then remain at that level.
The ATO calculates the offset using information from the business’s tax return, with the offset amount shown on the notice of assessment.
The ATO's Small business income tax offset calculator work out the income amounts to be used to work out the tax offset, and will inform the taxpayer where to include this information in their tax return. It doesn’t work out the tax offset; this is done by the ATO when it processes the tax return. A taxpayer can also access the calculator from within myTax.
The net small business income is the sum of the assessable income from carrying on a business minus any deductions. If net small business income is a loss, it is treated as zero, and the taxpayer will not entitled to the offset.
A taxpayer should not include the following income amounts in working out net small business income:
net capital gains made from carrying on a business
personal services income (unless they were a personal services business)
salary and wages
allowances and director's fees
government allowances and pensions
interest and dividends unless it's related to a business activity
interest earned on a farm management deposit.
They should also not include the following deductions in working out net small business income:
tax-related expenses such as accounting fees
gifts, donations or contributions
personal superannuation contributions
current year business losses, which are not deductible this year under the non-commercial loss rules
tax losses from prior years (unless they are deferred non-commercial losses).
If the total net small business income is greater than, or equal to, taxable income, the offset will be 8% of the business’s basic income tax liability for the year. The formula is as follows:
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