What is the small business tax offset and how to claim it

Lodging a tax return is never fun. It's time-consuming, often stressful, and can get pretty confusing. But with the right tax strategies, you can actually save some money.

Did you know, for example, that if you meet certain criteria, you may be able to reduce how much tax you need to pay on your business income? This is thanks to a tax benefit named the small business income tax offset—and in a time of surging inflation and cost of living pressures, it can be an incredible help for SMEs all across Australia.

So, who qualifies, how much can you offset, and what can you do to plan for maximum benefit? Let us explain.

What is the small business tax offset?

The small business tax offset is a tax benefit that was introduced by the Australian government in 2015 as a way to relieve the tax burden on small business owners.

Also known as an unincorporated small business tax discount, it is a percentage-based reduction in the tax payable on your business income. Eligible businesses can get an offset of up to 16%, capped at $1,000 per person.

Who's eligible for the small business income tax offset?

To be able to claim the small business tax offset, you must either be a sole trader or own a share of net small business income from a partnership or trust.

Additionally, you must have an aggregated turnover—in other words, total income—of less than $5 million this financial year [1].

How to calculate your small business tax offset

To calculate your small business tax offset, you divide your total net small business income for the income year by your taxable income for the income year, then multiply it by your basic income tax liability for the income year [1].

Depending on which category you fall under—sole trader, or partnership or trust—there are different amounts you can and can't include in your net small business income, which will influence your offset.

Sole traders

You can include:

• Farm management deposits claimed as a tax deduction
• Repayments of farm management deposits reported as income
• Net foreign business income earned from your sole trading business
• Other income or deductions, such as interest or dividends earned while conducting your business activities.

You can't include:

• Net capital gains you made from carrying on your business
• Personal services income (unless you were running a personal services business)
• Salary and wages
• Allowances and director's fees
• Government benefits like allowances and pensions
• Interest and dividends unless they're related to a business activity
• Interest earned on a farm management deposit
• Tax-related expenses like accounting fees
• Gifts, donations, or contributions
• Personal superannuation contributions
• Current-year business losses that aren't deductible this year under the non-commercial loss rules
• Tax losses from prior years (unless they're deferred non-commercial losses).

Partners or beneficiaries

Partner deductions that help lower your net small business income include:

• Landcare expenditure
• Expenditure on a water facility
• Deductible farm management deposits
• Prior year non-commercial losses claimed in the relevant year as a partner.

Deductions that don't lower your net small business income include:

• Tax-related expenses such as accounting fees
• Gifts, donations, or contributions
• Personal superannuation contributions.

Beneficiaries shouldn't include:

• Tax-related expenses
• Gifts, donations, or contributions
• Personal superannuation contributions
• Share of a net capital gain from a trust asset even if it’s been used in the business
• Personal services income attributed from a trust that was a personal services entity.

The Australian Taxation Office (ATO) has a handy calculator to help you determine if you are eligible for a tax offset, as well as calculate any amount that you are required to enter on your income tax return.

How to apply for the small business income tax offset

If you're eligible for the offset, you actually don't need to submit a separate application. Instead, when you lodge your tax return, the ATO will confirm your eligibility, calculate your offset, and apply it directly to your tax liability.

Tips for maximising your small business tax offset

Firstly, you need to confirm your eligibility for the offset. If you do qualify, there are a few things you can do to plan for maximum benefit:

• Keep accurate financial records. Submitting incorrect records may lead the ATO to deem you as ineligible, when it reality, you qualify. Make sure everything is up-to-date and that there is not information missing. Using accounting software can come in handy here, as you can keep all income, expenses, receipts and invoices in one place.
• Make sure you’re claiming all eligible deductions. Doing so can lower your taxable income and as a result, increase your small business tax offset.
• Identify opportunities for growth. Since the offset is based on a percentage, the higher your taxable income, the more you can reduce your tax obligation (up to the $1,000 limit). Offering promotions, upselling, cross-selling, launching a loyalty program and investing in marketing are all great strategies for increasing revenue.
• Keep up with ATO guidelines. Tax laws are subject to change at any time, so it's important to stay informed. Getting into the habit of checking the ATO website is an easy, convenient way of staying in the loop.

Make sure to speak with your accountant before making any tax-related decisions. While we specialise in finance, your accountant is best-placed to inform your tax strategy.

EOFY and tax season can be a great time to level your business. If you want to do so without draining your cash flow, Valiant offers a wide range of asset financing solutions to suit your needs. Receive free, tailored quotes in less than two minutes.

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References

1. https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/concessions-offsets-and-rebates/small-business-income-tax-offset