As a time-poor business owner, it’s always helpful to get easy access to income deductions and concessions. The Small Business Income Tax Offset (SBITO) is one such benefit for Australian small business owners. It’s a simple way to reduce the amount of tax you pay on your business income when it’s time to lodge your tax return.
Especially given inflation and the rising cost of living, this offset can be a huge help for your small business’s financial health. Not only will it lower your tax liabilities for the financial year, but it will increase your available capital for future growth and investments.
Want to learn more about how the offset works and how to claim it? We’ve got everything you need to know to make the most of this financial relief.
What is the small business income tax offset?
The Small Business Income Tax Offset is a tax benefit that’s available to all eligible small businesses in Australia.
Introduced as part of the government’s efforts to support small businesses now and into the future, the offset consists of a percentage reduction in the income tax payable on business profits. It’s calculated based on net small business income and applies to sole traders, partnerships, and individuals with small business income from a trust.
For the 2024–25 financial year, the SBITO allows eligible businesses to claim a tax offset of up to $1,000. It’s a particularly helpful tool for small businesses that want to free up more cash flow, whether that’s for reinvesting in their operations, expansion plans, or simply managing their day-to-day expenses more easily.
The best part is that the offset is automatically applied when lodging your individual tax return, which really simplifies the process for time-strapped business owners.
What are the eligibility criteria for the offset?
Your business must meet specific eligibility criteria set out by the Australian Taxation Office (ATO) to qualify for the Small Business Income Tax Offset.
The main requirement is that your business must be regarded as a small business entity, which is defined as having an aggregated turnover of less than $10 million. ‘Turnover,’ in this case, includes the total income of the business as well as any connected or affiliated entities.
Your business must also operate as a sole trader, partnership or trust with net small business income. Companies and other incorporated entities aren’t eligible for this particular offset but may be able to take advantage of other tax incentives.
If you’re unsure, speak to a tax professional who can make sure your business structure and operations align with the ATO’s definitions to qualify for the SBITO.
Another important criterion is that your business must be in active operation throughout the financial year. Passive income-generating activities, like making money from your investments or rental properties, won’t qualify you for the offset.
In general, you should keep accurate financial records and comply with all relevant tax obligations to support your eligibility for the offset (and other potential tax benefits).
What is the tax offset for small businesses in 2024–25?
For 2024–25, eligible small businesses can get a tax offset of up to 16% on the tax payable on their business income. However, be aware that the maximum offset amount is capped at $1,000. This percentage applies to the net income from your business activities.
The offset should be particularly attractive to sole traders and small business owners who are looking to reduce their tax burden and increase their cash flow. By reducing the tax payable on your net small business income, you can instead spend your earnings on growth initiatives, take care of operational expenses or send any extra funds straight to your business savings account.
Whatever you decide to do, just keep good records of how you are managing your business income to get the most benefits from the offset.
How to calculate your small business tax offset amount
The first step in calculating your Small Business Income Tax Offset amount should begin with figuring out the eligible income from all your business activities. This is not to be confused with your income in the context of a personal services business, which relates to your fees for skills or labour as a sole trader, as opposed to goods or materials.
Start by making a list of your net small business income, which is the total business income minus any allowable deductions. Once you have this figure, you can then apply the 16% offset rate to calculate the potential savings.
For example, if your taxable income for your small business is $5,000, the offset would be calculated as follows:
0.16 (current offset rate) x $5,000 (your small business taxable income) = $800 (small business tax offset)
Since the maximum offset is capped at $1,000, if you earn more through your small business, you can only claim $1,000 — no higher.
Applying for the small business income tax offset
Getting the Small Business Income Tax Offset is a fairly straightforward process, since everything happens when you lodge your individual tax return.
The ATO will automatically calculate the amount you will be offset and subsequently apply this figure based on the business income you reported in your tax return. To make sure you get the full benefit, you’ll need to create and hold onto your business’s financial records and report all business income and deductions accurately.
If you’re a sole trader, partnership or trust beneficiary, then make sure to include your business income on your tax return in the relevant sections. It might be helpful to take advantage of the ATO’s online tools and vast resources to see that you are meeting all reporting requirements and can maximise your entitlement.
If you are relatively new to small business ownership or simply uncertain about the process itself, you can always consult with a tax professional for guidance on tax regulations and your obligations.
It’s also a good idea to stay up-to-date with any changes to the offset, as it may be liable to change at budget time. Staying informed about your tax obligations is never a bad thing, as it will help your business make the most of all the available benefits and concessions, as well as avoid any potential issues with the ATO.
Now that you know how the Small Business Income Tax Offset works and how you can take advantage of it, it’s time to revise the eligibility criteria and keep good records of your business income throughout the financial year. With some extra money in your pocket, you can enjoy better cash flow and potentially even strengthen your small business’s financial position in the short term.
