The small business income tax offset is a discount on the tax you pay on your business profit, worth up to $1,000 a year. It is aimed at individuals who run a small business that is not a company, mainly sole traders and people who receive small business income through a partnership or trust. The offset is 16% of the tax that applies to your net small business income, capped at $1,000, and the ATO works it out for you automatically when you lodge your tax return. Companies do not get it, because they already pay a lower company tax rate.
Who qualifies for the small business income tax offset?
You qualify if you are an individual who earns income from a small business with an aggregated turnover under $5 million, and that business is not a company. In practice that means one of the following applies to you:
you are a sole trader, or
you have a share of net small business income from a partnership or trust that is a small business entity.
The key word is individual. The offset reduces the tax on your personal return, so it flows to people, not to companies. If you run your business through a company, the company pays tax at the company rate and this offset does not apply to it. And if you run more than one small business, the income from all of them is added together, with the single $1,000 cap still applying across the lot.
How much is the offset actually worth?
The offset is 16% of the income tax that relates to your net small business income, and it can never be more than $1,000 in a year.
A quick example shows how the cap bites. If the tax that applies to your business income comes to $4,000, your offset is 16% of that, which is $640. If the tax on your business income is higher, say $8,000, then 16% would be $1,280, but the offset is capped, so you receive $1,000 and nothing above it. Once a business is large enough that 16% of that tax passes $1,000, every eligible person lands on the same $1,000 figure.
Because it is capped at a modest amount, the offset is a welcome reduction rather than a game changer. For many sole traders it quietly takes a few hundred dollars off the final bill. It is also just one of several small business tax concessions, so it is worth reading alongside our guide to small business tax planning to see where the bigger savings sit.
What counts as small business income?
Small business income is the net profit from your business, not your total income. That is your assessable business income minus the deductions you are entitled to claim. If you are a partner or a trust beneficiary, it is your share of the net small business income from that partnership or trust.
It does not include salary or wages from a job, because that is employment income rather than business income. It also does not include net capital gains. So if you hold down a wage and run a side business, only the business part counts toward the offset, and the ATO separates that out from the figures on your return.
How do you claim it?
You do not calculate the offset or fill in a special form. You report your business income and expenses in your tax return as usual, and the ATO works out the offset from those figures. The amount then appears on your notice of assessment. Whether you lodge through myTax or a registered tax agent, the same automatic calculation runs in the background.
The one thing that does rest on you is getting the underlying numbers right. If your net small business income is wrong because expenses are missing or overstated, your offset and your overall tax position will both be off. Accurate profit figures are what make the offset land correctly. If you want a simple way to make sure nothing is missed before you lodge, our tax planning checklist for individuals and sole traders runs through it step by step.
A point that trips people up
The small business income tax offset is not a payment or a refund in its own right. It reduces the tax you owe, and it is non-refundable. If you already owe little or no tax, the offset cannot push you into a refund or hand you the difference in cash. It simply lowers the tax payable on your business income, to a floor of zero. So it does the most work when you have a real tax bill sitting there for it to reduce.
