One of the Small Business incentives delivered as part of the 2015 Budget, the Small Business tax discount for unincorporated businesses takes effect from 1 July 2015.
The “discount” is available as an offset to individual small business taxpayers up to a maximum of $1,000 per financial year.
The offset is applied against tax payable on business income.
The 2016 Budget contained measures to increase offset from 5% to 8% from 1 July 2016 for businesses with turnover up to $5 million (increased from $2 million).
In following financial years, this discount rate is increased to 16%, initially by amending legislation landing the 16% rate in 2026-27 see: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016. (see “previous offset” column in the table below).
** In October 2018 the Government announced that the scheduled introduction of the 16% offset rate would be brought forward to the 2021-22 year. For details of the amending law see Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018. See also: New Bill to accelerate tax cuts for small and medium sized businesses **
|Year(s)||Previous offset||Max. Turnover||Max. Offset||** Current offset|
|2016-17 to 2019-20||8%||$5 million||$1,000||8%|
Essential features of the Small Business offset
- It applies to small business entities with aggregated turnover less than $5 million ($2 million up to 30 June 2016)
- The offset is only available to individuals (not in a trustee capacity) who are a
- small business entity (e.g. sole traders)
- partner in a small business entity partnership
- beneficiary of a small business entity trust
- the tax offset is 8% (5% to 30 June 2016) of the tax apportionable to “total net small business income” (to a maximum of $1,000)
Total net small business income is (broadly) assessable business income less attributable deductions – see Section 328.365:
INCOME TAX ASSESSMENT ACT 1997 – SECT 328.365
Net small business income
(1) A * small business entity’s net small business income for an income year is the result of:
(a) working out the entity’s assessable income for the income year to the extent that it relates to the entity carrying on a * business, but disregarding:
(i) any * net capital gain; and
(ii) any * personal services income not produced from conducting a * personal services business; and
(b) subtracting the entity’s deductions to the extent that they are attributable to that assessable income and covered by section 328-370.
(2) However, the entity’s net small business income for the income year is zero if that result is less than zero.
The ‘net small business income’ of a small business entity is calculated by working out the assessable income of the entity that relates to it carrying on a business, and subtracting from that assessable income the entity’s deductions, to the extent its deductions are attributable to that income.
- The small business tax offset for an income year is calculated by first determining the percentage of an individual’s taxable income for the income year that is ‘total net small business income’.
- This percentage is then applied to the individual’s basic income tax liability for the income year.
- This result is multiplied by the offset percentage (see table above) to determine the offset available, to a maximum amount of $1,000.
See also: ATO small business income calculator
Small Business Tax Offset Further Qualifications:
- Net capital gains and personal services income (unless from a personal services business) are disregarded in working out net small business income
- The offset is not precluded from applying to Australian sourced income of a foreign resident, or the foreign business income of an Australian resident.
- The definition of small business entity requires that a small business entity carries on a “business” which is any ‘profession, trade, employment, vocation or calling, but does not include occupation as an employee’.
- Attributable deductions can include farm management deposits, recovery of non-commercial losses (in accordance with existing attribution rules) and deductions claimed in accordance with section 40-880.
- Deductions for gifts or contributions under Division 30, and deductions for personal superannuation contributions are excluded from the determination of net small business income.
- The total amount of net small business income cannot be greater than taxable income, nor can it be less than zero
- There are limitations on offset availability for minors
Legislation enabling the original 5% offset was passed by parliament on 13 August 2015.
Tax return: Claiming the offset
This page was last modified 2019-01-11