How the small business income tax offset works

The Small Business Income Tax Offset, often shortened to SBITO, is a tax reduction for unincorporated entities, allowing sole traders, partners, or beneficiaries with an aggregate turnover under $5 million to reduce their personal income tax by up to $1,000 annually. It is calculated as 16% of the tax payable on net business income, applied directly by the ATO upon tax return lodgement. 

Here is how it works

• You must be an individual with small business income, a sole trader, partner, or beneficiary and have an aggregated turnover under $5 million.

• The ATO calculates 16% of the income tax payable on your net small business income.

• The maximum benefit is capped at $1,000 per person per year, even if your 16% share exceeds this amount.

• When filing your individual tax return, you report your business income and deductions. The ATO uses this data to automatically apply the offset to your tax assessment. 

Here are some things you need to think about 

• The offset is based on net small business income (income minus deductions), not gross turnover.

• The offset does not apply to salary/wages, as an employee, director’s fees, or personal services income (PSI) that is not fully generated by the business entity.

• This offset is only available to unincorporated businesses, sole traders, partnerships and trusts.

If you need more information the ATO has put together a guide. This has detailed instructions on reporting and to check specific eligibility requirements. As always you can reach out to me paul@congdonfuzi.com.au if you have any questions.