Small businesses have undoubtedly played a significant role in developing the Australian economy. In addition to empowering local communities and contributing towards GDP, they have created numerous job opportunities in recent decades. According to the ASBFEO Small Business Counts report from December 2020, small businesses account for over 97% of all Australian businesses and employ over 4.7 million people, making them Australia’s largest employer. It's also worth noting that, amidst the COVID-19 crisis, many small businesses still managed to thrive despite having less financial power and resources compared to large organisations.
Over the years, the Australian Government has taken various measures to support small businesses, one being the small business tax offset. In this blog, we share details on how the small business tax offset works along with other useful links to help you understand how you could benefit from it.
Tax offsets vs tax deductions
If you are a small business owner who has done some research on how to reduce your taxes, we're sure that you've heard the terms ‘tax offsets’ and 'tax deductions' quite often. While both have the same purpose of reducing a small business owner's tax burden, it's essential to understand how they differ so you can benefit from both.
According to the Australian Taxation Office (ATO), a tax offset can help reduce your taxes payable on your taxable income in the given financial year. For example, say you have to pay $4,000 in taxes, but are also eligible for $500 in tax offsets. You would then only pay the ATO $3,500 as tax.
On the other hand, a tax deduction can help reduce your taxable income. For example, if you earn $50,000 in a fiscal year and claim $8,000 in tax deductions, your taxable income will only be $42,000. Income tax is then calculated as a percentage of that reduced income, so you end up paying less in taxes overall.
What is the small business tax offset in 2022?
The Australian Government introduced the small business tax offset in 2015 to help small business owners reduce their tax burden. For the 2021-22 financial year, the rate of this small business tax offset is 16%, where eligible business owners can save up to $1,000 on their income tax bills. During 2019–20 financial year, the offset was 8% of your turnover. This jumped to 13% in 2020-21. The amount of offset you receive will be determined in correspondence with taxes payable on your business income.
Who can benefit from small business tax offsets?
At present, there are two main criteria to be eligible for the small business tax offset:
1. You must run a small business as a sole trader or share the net small business income from a partnership or trust.
2. Your aggregated turnover for the given year must not be more than $5 million.
Given that you meet these requirements, you might be entitled to receive a tax discount. However, here are a few important points we'd like you to keep in mind:
Your aggregated turnover is the sum of the total annual income you earn in the fiscal year and the annual turnover of any entities you are connected to or affiliated with. You should've earned this income in the ordinary course of running your business, and not from any special circumstance or unusual event.
The ATO has multiple definitions for the term "small business" as it applies to different acts and tax legislations. To qualify for the small business tax offset, you must have an aggregated turnover of less than $5 million.
The eligibility criteria to receive the small business tax offset changes each year, so keep a close watch on the ATO website to keep yourself updated on these changes.
The small business tax offset is non-refundable. So if the amount of the offset exceeds your tax liability, the balance remaining will not be distributed to you.
Check out the definitions section of the ATO website learn more about any specific business terms you may be unfamiliar with.
How to claim the small business tax offset
The best part of the small business tax offset is that you don't need to apply for it separately. All you have to do is lodge your tax return for the relevant year as usual and, based on the information you provide, the ATO will assess your eligibility and calculate the offset automatically. You will know the exact amount of offsets you were eligible for once you receive your notice of assessment.
The ATO uses the following information to work out your offset amount based on how your business operates:
Net small business income you earned as a sole trader
Share of net small business income you received from a partnership or trust
You can make use of the ATO's small business income tax offset calculator to check if you are entitled to a tax offset and calculate the amount you need to enter in the 'Net small business income' field while filing your tax return. This calculator will not help determine your final offset amount, however.
Visit the ATO website to learn more about how tax offsets are computed.
While small business tax offsets are one way to minimise your tax bill, the government also offers various other concessions, grants, and support schemes to empower your business. Thoroughly researching and applying for the right opportunities will improve your chances of saving money and growing your business.
We hope this post gives you some clarity about small business tax offsets and what to expect from them. Have any other tax topics you'd like us to cover? Let us know in the comments!
Note: This article is intended only to help small business owners gain a basic understanding of the small business tax offset. It should not be interpreted as legal advice for making business decisions. We recommend you directly reach out to the ATO through their business self-service portal or seek help from a tax professional for specific advice.