In the new normal we are operating in 2020, every tax deduction available for small business is crucial to make sure cash flow can be maximised. One great initiative that was introduced by the government is the small business income tax offset. This benefit also goes by the name of the “unincorporated small business tax discount” and was introduced to give small businesses a cash flow boost around EOFY tax time. For some businesses it can be a little confusing to know if they are eligible, and how to claim it if they are. Firstly lets talk about why the government introduced it in more detail.
Why Was the Small Business Tax Offset introduced?
Over 95% of all businesses in Australia are classified as small businesses. In Australia (Pre COVID) there was on average 280,000 small businesses started in Australia every year. Those small businesses employ almost 5 Million people and contribute over $300 Billion a year into the Australian economy. From these statistics It’s quite clear that small business is and will always remain the engine room of the Australian company when it comes to job creation.
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In relation to this in 2015 the Abbot government introduced the offset scheme designed to motivate and reward small businesses. From the 1sJuly 2015 it allowed individuals running an unincorporated business with an annual turnover of less than $2 Million to be eligible for a tax discount limited to a maximum of $1000 a year. One important call out that sometimes gets misunderstood is that this discount can be applied to both small businesses or sole traders and to partnerships or trusts (those who might be involved in an unincorporated business basically).
Whats changing with the offset in 2020?
As per the below image from the ATO the percentage claimable for this current financial year 20/21 is increasing from 8% to 13%, although the caveat being the maximum offset is still set to $1000. This means that those businesses that have historically been well below the cap stand to benefit the most due to this increase of percentage claimable.
How to calculate the small business income tax offset?
The calculation to work this out is as follows:
You need to take your Net Small Business Income for the Financial Year and divide this by Your taxable income for the financial year . Then multiply that by Your basic income tax liability for the financial year.
The Small Business Income Tax Offset Calculator
To take this a step further the ATO has developed a small business income tax offset calculator which does the whole calculation for you. It does not tell you the actual offset amount you will get, rather it will work out the amount you need to enter first under “Net small business income”.
To use this calculator if you are a sole trader you will need: a) your business income and farm management repayments (if relevant, b) tax deductions you can claim as well as farm management deposits (if relevant) and c) any losses you have in your income tax return.
To use this calculator if you are a partner or beneficiary you will need:
a) your percentage share of net small business income from any distribution statement
b) any tax deductions you can claim against your share (including farm manegement deposits (if relevant)
c) details of your farm management repayments or other amounts included in your income due to you being a partner or beneficiary.
What you can’t include for Net Small Business Income
Bear in mind that when you go through the calculator exercise above that there are some items which are ineligible to be claimed against your net small business income and therefore the income tax offset. These items include wages, government allowances and any net capital gains you benefited from growing your business. Note that this list may not be exhaustive and you should discuss with your financial advisor or accountant for more information on any specific conditions relevant to you business.
How to claim the Small Business Tax Offset?
The best part of this benefit is that you do not need to do anything to request it. As part of completing your standard tax return the offset will be automatically shown on your notice of assessment. It does not matter if you do your own tax return via MyTax or whether you rely on an accountant to complete your return for you.
Other Small Business Tax Concessions that Launched in 2020
In closing I felt it helpful to also point out some of the other tax concessions which have been introduced as part of the stimulus package in 2020 in response to COVID to help with cashflow. This is all for tax year 2019/2020 so useful in the the case you are yet to submit your tax return.
– Prepaid Expense reduction – Any standard business expenses that ewre paid before June 30thbut extend into this current financial year (2020/2021) can be claimed as a deduction in last years tax return. Examples of these are rent, advertising and insurance.
– Instant Asset Writeoff – This allows you to claim an immediate deduction for the business portion of the cost of an asset in the year its first used. e.g You bought an asset and used it on 30thJune 2020, you can claim the full business portion as a deduction in your FY 19/20 tax return,
– Accelerated depreciation for primary producers – If you are a primary producer you can claim for any fodder storage assets as well as water and fencing facilities.
– Easier Trading Stock Rules – If the difference between your 2019-2020 trading stock is less than $5000 you can simply report the same amount in your opening and closing stock return,
– Improved Start Up Expense Deductions – If your business does less than $10 Million annual turnover you can claim for certain start up expenses (examples of these are Government fees, legal and accounting advice). These can be claimed in the 2019/2020 tax return.
Tax concessions are a major contributor to the future viability of small business in Australia and the small business income tax offset was and continues to be a great help for many. A lot of the information is readily available via the ATO site, however its advisable that you seek professional advice in the form of an accountant to make sure you can maximise the concessions that are relvant to your own business situation.