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 was 8% up to the end of the 2019-20 income year, but increased to 13% for 2020-21 and will 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 works out the income amounts to be used to ascertain 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.
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:
If your client’s total net small business income is greater than, or equal to, their taxable income, the offset will be their rate of offset of their basic income tax liability for the year. The offset amount will be shown separately on their notice of assessment.