The Small Business Income Tax Offset Explained

Anitra Issa

The small business income tax offset is a valuable tax relief measure designed to reduce the tax burden for small business owners like you in Australia. By taking advantage of this offset, you could lower your tax liability and potentially pay less tax overall. In this post, we’ll walk you through what the offset is, who’s eligible to claim it, and how you can calculate it to estimate how much you could save.

What is the Small Business Income Tax Offset?

The small business tax offset, sometimes called a tax credit or rebate, reduces the amount of income tax you need to pay, based on the profits your business generates.

The small business income tax offset continues to provide relief for eligible small businesses. If your business qualifies, you can receive an offset of up to 16% of your income tax, with a maximum benefit of $1,000 per year.

Small business owners should make the effort to stay up to date with any changes to the offset and tax laws, as the rules and eligibility criteria can evolve over time. While the offset itself has been capped at $1,000 since 2015, it's important to regularly check the Australian Taxation Office (ATO) website for any updates or potential adjustments to the scheme.

Alternatively, if you're unsure about how these changes may apply to your specific circumstances, you can always contact us for personalised advice.

How Does the Small Business Income Tax Offset Work?

Let’s say your business has a taxable income of $50,000, and you owe $5,000 in income tax. If you qualify for the offset, the 16% rebate would reduce your tax liability by $800, bringing your total owed tax to $4,200.

Calculation Example:

Taxable Income: $50,000

Tax Payable: $5,000

Offset (16% of $5,000): $800

New Tax Liability: $4,200 (after applying the offset)

Eligibility for the Small Business Tax Offset

To qualify for the small business tax offset, you must satisfy all of the following criteria:

Your business must be an unincorporated entity such as a sole trader, partnership, or trust.
Your business must have an annual turnover of $5 million or less.
The offset applies to the income tax paid on your business's taxable income, after deductions and expenses are accounted for.
You must be paying income tax on your business’s taxable income to be eligible for the offset.

How to Get the Small Business Tax Offset

Confirm that your business meets the eligibility criteria outlined above.
Accurately calculate your business’s taxable income, factoring in all deductions and expenses related to your business activities. This is the amount on which your income tax will be based.
Once you know your taxable income, calculate the amount of income tax you owe. This is the amount on which the tax offset will apply.
Make sure to file your small business tax return accurately and on time. The ATO will apply the offset during their assessment process and provide you with a reduced tax bill, or possibly a refund if you've overpaid.

Maximising Tax Savings with Proper Filing and Deductions

To further reduce your tax liability and maximise your savings, it's essential to file your tax return accurately and on time. Ensuring that all deductions and expenses are correctly accounted for can make a significant difference in the amount of income tax your business owes.

Deductible Business Expenses

Operational Costs
- Rent for office, retail, or warehouse space
- Utilities such as electricity, water, and internet services
- Office supplies like stationery, printer ink, and other consumables
- Insurance premiums for business insurance, including liability and property coverage
Employee Costs
- Salaries and wages paid to employees
- Superannuation contributions or retirement plan contributions made on behalf of your employees
- Payroll taxes, including federal and state taxes
- Employee benefits, such as health insurance, bonuses, and fringe benefits
- Recruitment expenses if you’re expanding your team
Business Travel
- Flights or other transportation costs
- Accommodation while traveling for business
- Meals and entertainment related to business meetings or conferences (note that meal deductions may be limited or have specific conditions)
- Business-related conference fees and seminars or training costs
- Shipping and freight costs for business-related goods during travel
Capital Equipment and Depreciation
- Office equipment like computers, printers, and phones
- Vehicles used primarily for business purposes (note that personal use of a vehicle can affect the amount that’s deductible)
- Furniture such as desks, chairs, and storage units
- Leasehold improvements, such as modifications to a rented business space
Marketing and Advertising Costs
- Advertising
- Website development and maintenance costs
- Social media management and any related software or services
- Marketing research or consumer surveys that help you understand your market
Professional Services
- Accounting and bookkeeping services
- Legal fees related to business operations
- Consulting fees for business strategy, operations, or technology services
- Tax preparation fees for filing returns
Home Office Deductions (if applicable)
- Rent or mortgage interest
- Utilities
- Internet and phone bills
- Home office supplies and equipment

Non-Deductible Business Expenses

Personal Expenses
- Personal travel (even if you mix personal and business travel, only the business portion is deductible)
- Personal phone bills or personal vehicle use
- Non-business-related meals or entertainment
Fines and Penalties
- Traffic tickets incurred while driving for business purposes
- Penalties for late filing of taxes or other compliance failures
Political Contributions
Life Insurance Premiums
Capital Losses on Investments
Commuting Costs

Tax laws are complex and ever-changing. If you need specific advice on your own situation, it’s always best to speak to a tax professional or accountant. Get in touch at 1300 728 875 or fill out a contact form to get started.

More on Taxes for Small Businesses

In addition to income tax, small business owners may need to consider other taxes depending on their business structure and activities. These could include:

Goods and Services Tax (GST): For businesses that provide goods or services, and have a turnover over $75,000.
Payroll Tax: If your business has employees and meets the payroll tax threshold.
Fringe Benefits Tax (FBT): If your business provides benefits to employees (other than salary) such as cars or entertainment.

Staying compliant with all tax obligations and understanding which taxes apply to your business structure can help you avoid penalties and reduce your overall tax liability.

Need help calculating GST? We’ve got your back with our GST calculator.

Not sure if you need to register for GST? We have a whole blog about this so you can sort it out once and for all.

Company Tax for Small Business

Businesses structured as companies are not eligible for the small business income tax offset. Instead, they are subject to company tax rates, which are applied to their profits. However, companies may still be eligible for other tax offsets or rebates that can help reduce their tax burden.

For small businesses that qualify as base rate entities (those with an aggregated turnover of less than $50 million), the company tax rate is set at 25% as of the 2024-25 financial year. This rate is lower than the standard corporate tax rate of 30% for larger businesses.

Entrepreneurs and Small Business Taxes

In Australia, entrepreneurs are typically subject to income tax on the profits generated by their business (or businesses), and they may also be eligible for various tax offsets, rebates, and credits that can reduce their tax liability.

For entrepreneurs operating as sole traders, partnerships, or trusts, the ability to claim these tax-saving opportunities can free up more capital to reinvest into the business and fuel growth.

Staying Compliant with the ATO and Reducing Tax Liabilities

To keep your small business compliant with ATO rules and regulations, it’s important to understand your eligibility for the various credits, rebates, and tax offsets available, including the small business income tax offset. By accurately calculating revenue, expenses, and taxable income, and ensuring that all eligible deductions are claimed, you can significantly reduce your overall tax liability.

Take Advantage of the Small Business Income Tax Offset

The small business income tax offset is a valuable tool that can reduce your tax liability and provide significant savings.

As a small business owner, partnering with a small business tax accountant can make a significant difference in how you manage your taxes. Tax laws can be complex, and an experienced accountant will help ensure you're applying all eligible deductions for your business expenses, staying compliant with ATO regulations, and maximising tax savings.

By letting professionals handle the complicated details of tax management, you can concentrate on keeping your small business running. If you need guidance on tax obligations, rebates, or deductions, don’t hesitate to reach out to our team at Darcy Bookkeeping or give us a call on 1300 728 875.