The small business tax offset: what you should know

Yours for the taking

For many people running their own business, tax time can be a bewildering maze of complex paperwork and lost receipts. One of the best tax breaks for small businesses is the small business tax offset.

Getting your head around what small business tax concessions you’re eligible for is vital.

So what exactly is the small business tax offset and how can it work for your business? Here we’ll answer five questions:

  1. What is the small business tax offset?
  2. Who is eligible to claim it?
  3. How do I work out my net business income?
  4. How can I claim the small business tax offset?
  5. What other small business tax concessions should I know about?

We get it — you’re busy. But you really owe it to yourself to take advantage of all the tax concessions open to your small business. So keep reading.

Related: 9 small business tax deductions to claim in 2019

What is the small business tax offset?

Small Business Tax Offset Handyman at Work
As a small business owner, every tax break goes a long way.

A rebate for small business entities, the small business tax offset can reduce the amount of tax you pay by 8% or up to $1000 per person, each financial year. The offset is also known as the unincorporated small business tax discount.

Who is eligible to claim it?

To qualify you simply need to be a small business sole trader or be receiving a share of a small business income from a partnership or trust with an annual turnover of less than $5 million. The ATO will calculate your offset based on your net business income after deductions.

How do I work out my net business income?

Your net business income is your income after deductions; however not all income or deductions qualify for the small business tax offset. Only income and deductions derived specifically from your business are eligible. You can find out more about what can and can’t be included here.

If you had more than one source of small business income in one year, you’ll need to add up all of your assessable business income then subtract any legitimate deductions.

If your net business income is a loss, this is treated as a zero. You won’t be entitled to the offset.

If you need help working out the income amounts and where to include them in your tax return, you can use the ATO’s handy small business tax offset calculator.

Note: The calculator won’t work out the amount of your tax offset; the ATO will calculate that for you when they process your tax return.

How can I claim the small business tax offset?

Small Business Tax Offset Display of Ceramic Bowls
The ATO automatically calculates and applies the offset for you if you qualify for it.

The good news is there’s no need to apply for the offset, as the ATO will take care of that for you based on the information you provide. The offset is applied after you have submitted your tax return. The offset amount will be shown separately on your notice of assessment.

What other small business tax concessions should I know about?

Aside from the small business tax offset, you may also be eligible for other small business tax concessions such as:

The instant asset write-off

If you’re operating a small to medium sized business with a turnover of less than $10 million, you may be eligible for the instant asset write-off. This deduction has been extended and increased from $20,000 to $30,000.

The threshold is applicable on a per-asset basis, so you can write off multiple assets.

This means that as a small business owner, you can write off the total taxable amount of the business portion of any asset purchased within the same financial year, up to the threshold of $30,000. As with the small business tax offset, the instant asset write-off is applied when you lodge your tax return for the relevant year.

Immediate deductions for prepaid expenses

Small businesses can also claim an immediate deduction for prepaid expenses where the payment covers a period of 12 months or less that ends in the next income year. What this means is that you don’t have to wait until the next financial year to claim the expense as a deduction. A win-win.

Deductions for professional expenses for startups

Small Business Tax Offset Bike Shop
Some business startup costs can be deducted from your business taxes.

If you’re in the process of starting a small business, you can claim certain deductions for professional expenses and startup costs such as professional, legal and accounting advice and government fees and charges. As long as the expenses are associated with starting a new business, they’re a valid deduction.

Related: How to start a business in Australia

Simplified trading stock rules

Under the simplified trading stock rules, if you’re running a small business and the estimated value of your trading stock has not changed by more than $5000 by the end of the income year, you’re not required to do a stocktake or account for any changes in the stock value. This applies to both increases and decreases in value.

As long as you make a reasonable estimate of the value of your stock at the year’s end, by maintaining a constant stock level each year, the simplified trading stock rules apply.

Tax breaks are there for the taking

There are many legitimate ways to reduce your small business tax bill and improve your cash flow, and the small business tax offset is just one of them. Do your research and take advantage of all the measures in place to support small businesses.

If you’re not sure what you’re eligible for, consult a tax accountant or professional.

Getting it right from the start means you’ll avoid any issues when it’s time to lodge your tax return. Happy tax time!