Small business income tax offset guide

Small businesses are always looking for ways to reduce their tax bills, whether through tax offsets or deductions. If you run an unincorporated small business, you may be eligible for the small business income tax offset (also known as the unincorporated small business tax discount).

If you are eligible, it can reduce the tax you pay by up to $1,000 a year. The Australian Taxation Office (ATO) works it out from the proportion of your tax that relates to your business income, and the business must have an aggregated turnover of less than $5 million.

This guide explains how tax offsets and deductions differ, who can claim this offset and how it is calculated, using the rules that apply from the 2021–22 income year onwards.

What Is a Tax Offset?

A tax offset reduces the amount of tax you owe, dollar for dollar. So, if you owe $1,000 in tax and have a $200 offset, you pay $800.

An offset can reduce your tax payable to zero. There are two types of offsets: refundable and non-refundable.

• Refundable offsets: can reduce the tax you owe to zero, and if any of the offset is left over, you receive it as a refund.
• Non-refundable offsets: can only reduce the tax you owe to zero. They can’t give you a refund.

The small business income tax offset is non-refundable.

What Is a Small Business Income Tax Offset?

The small business income tax offset is available to individuals with income from an unincorporated small business: sole traders, and individuals who receive a share of net small business income from a partnership or trust. It is capped at $1,000 a year per person, across all your sources of small business income.

Companies can’t claim it. The business must have an aggregated turnover of less than $5 million. Aggregated turnover includes the turnover of connected entities and affiliates.

It is one of several tax concessions for small business. Others, such as the small business capital gains tax (CGT) concessions and the instant asset write-off, work differently: they are concessions and deductions, not offsets.

Small Business Income Tax Offset vs. Tax Deduction

Offsets and deductions both reduce your tax bill, but at different points in the calculation.

A tax offset reduces the tax you owe. If you owe $10,000 in tax and have a $1,000 offset, you owe $9,000.

A tax deduction, on the other hand, reduces your taxable income before tax is calculated. If you earn $100,000 of assessable income and can deduct $10,000 in business expenses (not private costs), you pay tax on $90,000.

Business expenses may include:

• Employee salaries
• Marketing expenses
• Financing expenses

Who Is Eligible for a Small Business Tax Offset?

The offset is available only to individuals. To be eligible, you must either carry on a small business as a sole trader, or have a share of net small business income from a partnership or trust that is a small business entity and carries on its own business.

From the 2021–22 income year onwards, the aggregated turnover threshold is less than $5 million and the offset rate is 16%, up to the $1,000 cap.

Eligibility requirements are:

• aggregated turnover of less than $5 million for the income year
• you are an individual who is a sole trader, or a partner or beneficiary receiving a share of net small business income
• your net small business income for the year is more than zero (a loss is treated as zero)

Who Is Not Eligible?

If you do not meet the criteria above, you will not be eligible for the small business income tax offset.

The following are not eligible:

• Companies
• Businesses with an aggregated turnover of $5 million or more, including connected entities and affiliates
• Beneficiaries of a trust whose income came from another partnership or trust’s business, rather than the trust’s own business activities
• Individuals whose net small business income is a loss for the year

Some income doesn’t count towards net small business income, including salary and wages, personal services income (unless you are a personal services business), net capital gains and most interest and dividends.

How Is the Tax Offset Calculated?

The ATO calculates the offset using the rate and turnover threshold for the relevant income year (16% and less than $5 million from 2021–22). It uses the net small business income you report in your tax return.

For positive taxable income, divide net small business income by taxable income and cap that proportion at 100%. Multiply it by basic income tax liability and then by 16%, with a maximum offset of $1,000. A business-income amount above taxable income does not increase the proportion beyond 100%. The offset is shown on your notice of assessment, but you can estimate it yourself.

Example:

Oliver is a sole trader. For the 2025–26 income year he has a taxable income of $60,000, of which $30,000 is net small business income. His basic income tax liability at 2025–26 resident rates is $8,788.

Oliver first works out what proportion of his taxable income comes from his business (net small business income divided by taxable income):

• $30,000 / $60,000 = 0.5 (50%)

He applies this proportion to his basic income tax liability:

• $8,788 x 0.5 = $4,394

He then applies the 16% offset rate:

• $4,394 x 0.16 = $703.04

Oliver’s offset is about $703, below the $1,000 cap. If the calculation had come to $3,000, his offset would be limited to $1,000. The offset is non-refundable, so it can reduce his tax to zero but cannot create a refund.

What Is a Tax Offset Calculator?

The ATO’s small business income tax offset calculator helps you work out the income amounts to report and where to put them in your return. It doesn’t work out the offset itself: the ATO does that when it processes your return.

How Do You Claim Your Small Business Tax Offset?

You claim the offset by lodging your tax return for the year and reporting your net small business income at the small business income tax offset question, as well as reporting your business income in the usual place. You don’t need a separate form.

Final Take

The offset is worth up to $1,000 a year for eligible sole traders, partners and trust beneficiaries. For advice on your circumstances, speak to a registered tax agent.

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