Running a small business is an exciting venture, but it comes with a lot of responsibilities; one such task is staying tax-compliant. Organising your tax isn’t fun, but when done right, it can save your business a significant amount of money.
Understanding tax management for small businesses is vital, especially in their first few years when they need every bit of income to flow back into their business. One potential tax saving opportunity is small business tax offset, a government programme that reduces the amount of tax payable by a small business.
In this guide, we’ll take you through the fundamentals of small business tax offset, how it works and the eligibility criteria you’d need to meet to qualify for it.
What is a small business tax offset?
Small business tax offset was introduced by the Australian government in 2015 to relieve the tax burden on small businesses for the financial year. Currently, small businesses can save up to 16% of their turnover, allowing them to save up to $1000 on their income tax. The small business tax offset was established to help stimulate economic growth by helping small businesses grow, and it seems that their plan worked.
Data shows that in the Australian economy, small businesses made up almost 60% of businesses in the private sector for employment growth and that the Industry Value Added (IVA) created by small businesses increased by 24% between 2012-13 and 2017-18.
Which businesses are eligible to claim the small business tax offset?
For small businesses to be eligible for the small business tax offset, they need to be either a sole trader, part of a partnership or trust where they own a share of net small business income. There are two ways the ATO will work out your small business tax offset.
For a sole trader, they’ll use your net small business income, and for a partnership or trust, they’ll use your share of net small business income. They must also have an aggregated turnover of less than $5 million from 2016-17 onwards.
Eligible Income-based considerations for Sole Traders
- Farm management deposits or repayments can be included as income
- net foreign business income related to your sole trading business
- For sole trading businesses, net foreign income will also be considered
Income you cannot include:
- Net gains derived from conducting your business operations
- Income from personal services (excluding cases where you functioned as a personal services enterprise)
- Compensation and remuneration for services rendered
- Allowances and fees received as a director
- Benefits from government allowances and pensions
- Profits from interest and dividends, unless connected to a business endeavour
- Earnings from interest on a deposit related to farm management
Eligible Deductible expenses for a Sole Trader
- Deposits for farm management
Deductible expenses you cannot include:
- Expenses associated with taxes, such as accounting fees
- Contributions made as gifts, donations, or personal superannuation
- Business losses for the current year are not eligible for deduction under non-commercial loss regulations
- Tax-related losses from previous years, unless they are deferred non-commercial losses.
Eligible Income-based considerations for a Partnership or trust
- You can claim the offset for business income from a small business partnership or trust only on the portion derived from its independent business activities.
Income considerations you cannot include:
- Offset applies to income from partnerships/trusts where you’re a partner/beneficiary in their business, not to others where you lack that role. This means income associated with the other trust or partnership won’t apply.
- Your portion of a net capital gain from a trust asset remains claimable, even if utilized in the business.
- You can claim any personal services income attributed to you from a trust classified as a personal services entity.
Eligible Deductible considerations for a Partnership or trust
For Partners:
- Any deductions you claim as an individual partner will reduce your share of the net small business income. These deductions include Landcare expenditure, expenditure of a water facility, farm management deposit, and your prior year’s non-commercial losses that were claimed in prior years when you were a partner
- For beneficiaries, include repayments of farm management deposits and other business amounts if you’re a partner in a small business entity
Deductible considerations you cannot include:
- Tax-related expenses are eligible for a claim
- Contributions, gifts, or donations and personal superannuation contributions can be claimed
How do you calculate your small business tax offset?
When you need to calculate your small business tax offset, the ATO provides a small business tax offset calculator, which will help you determine your final deduction. Now, this doesn’t calculate the offset, but it does determine the input figure for “Net small business income” on your tax return.
When calculating your small business tax offset, you’ll need:
For a sole trader:
- Your business income
- Any losses shown in your income tax return
- Deductions
For a partner or trust:
- The share of net small business income received from your distribution statement
- Deductions
How to apply for the small business tax offset?
Here’s the good news: if you’re eligible for the small business tax offset, you don’t have to apply for it. When you submit your tax return, the ATO will check if you qualify based on the information you provide and then apply the offset amount. You’ll get the offer in your notice of assessment.
Does the small business offset change based on company structure?
The small business tax offset does change based on your company structure. For example, sole trader businesses and partnerships and trusts will have several differences that need to be considered when claiming small business tax offsets.
Small business tax offset for sole traders
Sole trader’s small business tax offset will be measured by their net small business income. If your net income is zero, then you won’t be eligible for an offset. With more than one small business, you’ll combine your assessable income and then subtract deductions.
Small business tax offset for partnerships and trust distributions
With partnership and trust distributions, your claims and eligible deductions are different regarding trusts and partnerships and trusts. It’ll also be based on how you are affiliated with the partnership or trust; for example, you’ll be eligible for a tax offset if you have a share of net small business income that comes from a partnership or trust that’s a small business entity or the business income generated came from an existing business connected to a partnership or trust.
Why is it important to keep accurate financial records and documentation?
Keeping accurate financial records and documentation is a critical strategy you can use to help you minimise your losses, manage your cash effectively, meet any legal, regulatory and taxation authority requirements and improve your financial analytics. For help setting up a record-keeping system, you can ask one of our expert accountants.
Strategies to maximise the small business tax offset
With the maximum offset being $1000 dollars, you’re going to want to try to get as much as you can out of it. Here are some ways that you can maximise your small business tax offset:
Keep Accurate Records
Because your eligibility for the small business tax offset relies on the accuracy of what you’re sending to the ATO, this makes keeping accurate records a priority. Ensure that all your records are up to date with nothing missing so that when you submit your forms for a tax return, the process is smooth and quick.
Claim all your business deductions
Make sure that you’re claiming all of your legal business deductions so that your annual turnover results are an accurate representation of what you’ve earned and spent. This includes what you spent to run the business on a day-to-day basis and any assets you may have purchased.
Pay more into your superannuation contributions
Planning for retirement is always a wise move. Making contributions to your superannuation is an effective way to save on tax. Contributions made from your income before tax may potentially lower your taxable income and could allow you to be eligible for a higher tax offset.
Plan your offset amount with the offset tax calculator
Tax planning has always been recommended for small business. This is because you can plan your tax in a way that you pay as little as possible while building your small business. With the ATO’s tax calculator, you calculate your tax offset based on your net small business income on your tax return to get an idea of what offset you’d get based on your income. From there, you can plan around your offset goal for the financial year to come.
How to keep up to date with changes to the small business tax offset?
To keep up to date with the changes to small business offset, you’ll need to visit the ATO website to check for any changes. The ATO’s small business income tax offset calculator is frequently updated and will give you an estimation of your final offset amount. The cap of $1000 has remained since 2015. Alternatively, you can also contact us at Walker Hill, and your expert accountant will gladly help.
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When it comes to your finances, it’s important to have a team that’ll prioritise not only your business but your personal resources, too. Contact us today so we can help you strategise how to know, grow, and succeed when it comes to everything related to finances.
