Small business tax offset

Most companies in Australia are categorised as small businesses, which together contribute over $330 billion to the economy each year. Government programs like the small business tax offset provide a way to cut down on the small business tax burden, stimulating economic growth. Learn more about these small business tax deductions and how they work below.

What is the small business tax offset?

The small business tax offset gives a form of tax relief or discount to qualifying individuals on their small business tax returns. Announced in 2015’s government budget, it came into effect on 1st July 2015. Like grants, the idea behind the offset is to reward small businesses for creating jobs and helping to grow the economy.

Eligibility for small business tax relief

To qualify for the small business tax offset, you must have an unincorporated business with an annual turnover of less than $5 million. Unincorporated means that your business doesn’t have its own legal entity that’s separate to your own. As an unincorporated business owner, you bear full legal responsibility for the business’s activities and debts. Examples include business structures like trusts, partnerships, and sole traders.

Small business tax rates

So, how big of a discount does the small business tax offset give? It depends on how much you make during the tax year. The Australian Tax Office (ATO) works out a discount on your income tax, payable on any income received by individuals operating as sole traders, partners in a partnership, or beneficiaries of a trust. The maximum amount you can receive is $1,000 per year, but the specific rates vary by tax year.

Here’s a look at the progressive changes to this small business income tax offset since it was launched in 2015:

As you can see from the table above, small businesses received 5% discount business tax rates in 2015-2016 and there has been a progressive increase over time. For the 2021-2022 tax year, these rates are 16% although the maximum offset remains $1,000.

How to apply for small business tax offset

You don’t need to submit any formal application to receive this discount on your business tax. When you lodge your tax return for the year, the ATO will work out whether you’re eligible and automatically apply the discount. The tax office uses the following information from your income tax return, depending on the type of business you operate:

1. Net small business income earned as a sole trader

2. Share of net small business income from trust or partnership

The offset you’re given is based on the proportion of tax liability to total net small business income. If your total net small business income is either equal to or greater than your taxable income, your offset is equal to the basic income tax liability for the year. All these calculations will be shown on your notice of assessment from the ATO.

Rather than paying the full amount of income-based business tax, you’ll be liable for the discounted or offset amount. Find the latest information about this discount on the ATO website.

Additional small business tax deductions

The small business tax offset is one way to minimise your tax burden, automatically applied when you submit returns. However, there are additional small business tax deductions to be aware of when filing. Taxable income is calculated by subtracting deductions from assessable income. Here are a few common expenses that may qualify as deductions:

• Business travel expenses

• Workers’ salaries, wages, and super contributions

• Repairs and maintenance

• Motor vehicle expenses

• Depreciating assets

When in doubt, consult with an accountant and be sure to track all expenses carefully throughout the year. By taking all of these factors into consideration, you’ll further minimise your tax liability.

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