What Is The Small Business Income Tax Offset?


Companies categorized as small businesses take a big share and contribute just as much to the economy annually. It is right to say that small businesses are the backbone of any economy because, in most settings, they are the biggest employers and carry the weight of innovation. Owners of small businesses tend to be determined and resilient despite being limited in resources and financial power; they always find a way to make it work.

But even with the challenges most small businesses encounter, they still face business taxes. Whereas taxes are legal and in order, they can derail or slow down growth prospects for small companies, especially those just starting to penetrate the market. However, there are legal ways that small business owners can use to reduce the income tax burden they face. The small business income tax offset is among the best ways this can be done. 

The tax offset for small businesses reduces the amount of taxes payable to the government but differs from a tax deduction. Whereas tax deduction reduces the taxable income before the tax is computed, the tax offset reduces the income tax amount itself. The offset reduces tax obligations by a huge percent annually proportionate to the business income. 

The Australian government introduced the income tax offset as a way of stimulating small businesses to grow, thus growing the economy overall. The program also encourages other interested parties to enter into different fields and this, in turn, takes the economy even higher. The program has regulations that go through frequent amendments depending on the economic temperatures. 

How it works 

The small business income tax offset discount depends on how much the business makes in a tax year. The Australian Tax Office reaches the discount on the income tax payable on income received by sole traders, partners in partnership businesses, and beneficiaries in the case of a trust arrangement. The maximum amount is usually $1000 per year, although the rate can vary from year to year. 

The information you provide on your tax return is what ATO uses in the calculations. If the tax liability is lower than the total offset, you get no refund but receive a $0 tax liability. It is because the tax offset is non-refundable. It is also important to note that the offset does not reduce or negate Medicare levy and surcharge costs. 


Like any other program, not all businesses considering themselves small are eligible for tax relief. To qualify, you need to have an unincorporated business and an annual turnover that is less than $5 million. The word unincorporated in this context means that the business does not have its own legal entity separate from you. As the owner of such businesses, you have full legal responsibility for the debts and activities of the business, as is the case with sole traders, partnerships, and trusts. 

Whereas these are the two main eligibility criteria, it is important to remember:

  • The aggregate turnover is the total annual income earned in a fiscal year and the turnover of entities connected to you or affiliated with you. The income should not be earned from the ordinary business running, special circumstances, or unusual events. 
  • ATO defines a small business in multiple ways because it applies different tax legislations and acts. You must have less than $5 million aggregate turnover to qualify for the tax offset. 
  • The tax offset is not refundable. And so, if the offset amount exceeds the tax liability, the remaining balance will not be disbursed to you. 
  • The eligibility criteria for the business tax offset is fluid in that it keeps changing. It is, therefore, helpful to always keep a close eye on ATO as a small business so you know of any updates and changes. 
  • For small businesses, the percentage of taxable income is capped at 100%. What this means is that any losses not connected to the business income but with the potential of reducing the taxable income do not increase the offset scan. 

Applying for the tax offset 

When you want to apply for the small business income tax offset, you do not need to submit any formal application. As soon as your tax return is lodged for the year, the tax office works it out to see whether you are qualified for the tax offset. If you do qualify, then the discount is automatically applied. From your income tax return, ATO uses information on the business’s net income earned as a sole trader and the net income share from a partnership or trust. 

With the information, you will receive an offset based on tax liability proportion to the total net income for the small business. If the total net income is equal to or greater than taxable income, then the offset will be equal to a basic income tax liability for that year. Instead of paying the income-based business tax in full, you enjoy discounts that ease the burden on your small business. You will get a notice of assessment from the tax office with all calculations clearly shown.

This tax offset is one way you can minimize the tax burden your small business faces. There are additional tax deductions your business can enjoy, and it helps to be aware when filing your returns. Some of the most common expenses that could also qualify for deductions include the following:

  • Business motor vehicle expenses 
  • Maintenance and repairs 
  • Business travel expenses 
  • Depreciating assets 
  • Workers’ salaries, wages, and contributions 


With the small business tax offsets, there should be no reason why your business fails. The government also offers other reliefs, grants, support schemes, and concessions designed to empower your small business. The more you know, the better placed your business will be and the higher the chances of growing and thriving even in hard economic times. Researching what’s available for your business can go a long way in opening opportunities that will improve your business. 

Let your accountant advise you on the options and which way is best for the business. The information you need is also readily available on official websites; keep yourself in the know. 



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