Unincorporated Small Business Income Tax Offset

To be eligible for the offset, you must be carrying on a small business as a sole trader or have a share of net small business income from a partnership or trust. The small business must have an aggregated turnover less than:

$5 million for the 2016-17 income year onwards

$2 million for the 2015-16 income year.


The offset, which is worked out on the proportion of tax payable on your business income, is:

16% for the 2022-2027 income year.

13% for the 2020-2021 income year.

8% from 2016-2017 to 2019-2020. 

5% for the 2015-2016 income year.
.

The amount of the tax offset is capped at $1000 per year per individual.

It is generally not available to Minors in receipt of small business income from a Trust or Trustees who pay tax on the income of a trust.

The Calculation

First determine 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.

If your total net small business income is greater than your taxable income (e.g. after deductions for super contributions etc.) , your offset will be 8% of your basic income tax liability for the year - not 8% of your "total net small business income".

For most individuals, “total net small business income” will be worked out by reference to their own net small business income together with their share of the net small business income of a small business that operates as a partnership or trust.

An individual’s “total net small business income” will not include:

> A share of the net small business income of a corporate tax entity

> Assessable income that is a net capital gain

> Assessable Income that is personal services income, unless the personal services income is produced from conducting a personal services business. Note: If the PSI rules don’t apply to your PSI then you are considered a personal services business (PSB).

> Any attributable deductions excluded under Sec 328-370 (e.g. managing tax affairs; gifts/contributions and personal superannuation contributions. These must be added back to determine “total net small business income”, if they have been claimed under business income.

Read the Help in the above calculator for details of all the adjustable items – there are quite a few.

Should the principal beneficiaries of Trusts who work in the trust be paid a salary/salary sacrifice?

Subject to PSI Rules, the “self-employed” individuals in an SBE operating as a sole trader or partner in a partnership may benefit more from the Small Business Tax Offset than an SBE operating from a trust, unless those “self-employed owner” individual(s),  who are working as employees of the trust,  either stop taking wages or reduce their wages and RESC so as to maximise their profit distribution up to the threshold  - see table below.

This is because the amount of the rebate relates to the “Total Net Small Business Income” of the entity. The lower the “Total Net Small Business Income” of the entity is, the lower the tax benefit will be. When the “owners’ take a wage or RESC instead of a profit distribution they reduce the “Total Net Small Business income” of the entity.

Companies

Those operating from companies are not eligible for this rebate but similarly will benefit less from the reduction in the SBE company tax rate unless those “self-employed” individual(s) who are working as employees of the company either stop taking wages or reduce their wages and RESC so as to maximise the offset.


Note: Personal Services Income that is not earned from a Personal Services Business (PSB) is not included in the definition of "Total Net Small Business Income" and like Wages, SG and RESC does not benefit from the Small Business Income Tax Offset