Are You Eligible for the Small Business Income Tax Offset?

As a small business owner, you already have a lot to keep track of when it comes to taxes; you may not have even heard of the small business income tax offset.

Small business taxes in Australia can be a pain for small business owners. However, it is worth taking note of this offset, as it is meant to help small businesses reduce the amount of tax they pay each year.

Keep reading to learn more about the small business income tax offset (SBITO) and find out whether you are eligible to receive this deduction.

What is the Small Business Income Tax Offset?

The small business income tax offset is a deduction that may provide small businesses with an offset of no more than $1,000 per year. It is also referred to as the unincorporated small business tax discount, because your business needs to be unincorporated to be eligible for it.

The SBITO is meant for unincorporated businesses, which do not have a separate legal entity from their owners. This means the owner possesses 100% legal liability for any action for debts of the business. These can include sole traders, partnerships, or trusts.

This offset was announced in the 2015 government budget and came into effect in July 2015. The SBITO is meant to support and encourage small business owners to drive growth and create jobs.

You can only receive a maximum amount of $1,000, but the Australian Taxation Office (ATO) uses your business income to determine the amount of your offset. Your offset amount will be shown separately on your notice of assessment.

Small Business Income Tax Offset Eligibility

Even though the Small Business Income Tax Offset is a popular tax deduction for small businesses, it is important to note that not all small businesses are eligible for this discount.

To be eligible for the SBITO, you must satisfy the following criteria:

• You must own a small business as a sole trader or have a share of net small business income from a partnership or trust.
• Your small business must have aggregated turnover of less than $5 million for the 2016–17 income year onward (this threshold was $2 million for 2015-16).

The ATO uses the net small business income you received as a sole trader, and the share of net small business income from a partnership or trust, to work out your offset based on your tax return. You will be able to see the resulting amount on your notice of assessment.

Working Out Your Small Business Income Tax Offset Eligibility

Although you can only receive as much as $1,000 per year, the specific rates vary by tax year. According to ATO, the offset is worked out based on the proportion of tax payable relating to your total net small business income.

If you are curious and want to try and estimate your offset before you lodge your taxes, you can use the following equation to calculate your potential offset:

• (Your total net small business income for the income year / Your taxable income for the income year) x your basic tax liability for the income year.

If your total net small business income is greater than, or equal to, your taxable income, your offset is equal to the basic income tax liability for the year.

For further assistance, the ATO provides a table to help you determine the appropriate percentage of your offset based on the above equation.

How to Apply for the Small Business Income Tax Offset

The best part about this tax deduction is that, as long as your business is eligible, you do not need to do anything special to qualify. You do not need to fill out any formal application to receive the small business income tax offset. The government will deal with it for you.

When you file your taxes, the government will automatically determine your eligibility. From there, the ATO calculates your offset using information from your tax return. It does not matter whether you use myTax or have the help of an accounting professional.

If you are using myTax, ATO has a small business income tax offset calculator available on its website. The calculator will not tell you your exact tax offset amount; this will be done by the ATO and presented to you on your notice of assessment. Instead, it will work out your income amounts to be used to work out your tax offset and tell you where to include them in your tax return.

Other Small Business Tax Deductions

The small business income tax offset is one of the ways available to lessen your tax bill, and it’s a method the government applies automatically. However, there are additional small business tax deductions that you should consider while filing your taxes every year.

You can calculate taxable income by subtracting deductions from assessable income. Therefore, the more deductions you have, the less accessible income you have. Expenses that may qualify as assessable income for small businesses include:

• Travel expenses related to business
• Workers’ salaries
• Repair and maintenance
• Vehicle expenses related to business
• Other depreciating assets

Applying these eligible deductions may greatly lessen the amount of tax that you owe every year. However, it is important to note that not all eligible deductions may be applicable to your business.

To make sure that you are keeping track of your expenses, consult an accountant to make sure that everything is in order, and to minimize your liability.

Final Note

Figuring out small business taxes in Australia can be challenging and stressful. Thankfully, there are a number of helpful deductions, such as the small business income tax offset, to help you minimize the amount you pay and take some of the stress away.

Be sure to keep up with the Australian Taxation Office to ensure you are properly lodging your taxes every year and not missing out on any benefits.