The ATO has issued tips for avoiding common errors when reporting net small business income and claiming the small business income tax offset for unincorporated small businesses.
While the aggregated turnover threshold to qualify as a small business entity is $10 million, the threshold for accessing the small business income tax offset is $5 million. The offset (up to $1,000) is worked out by the ATO on the proportion of income tax payable on an individual's taxable income that is net small business income. For 2018–2019 and 2019-2020 the rate of offset is 8%; this will increase to 13% for 2020–2021 and 16% for 2021–2022 onwards (to complement the reductions in the company tax rate for base rate entities).
To avoid errors when reporting net small business income in a tax return, the ATO offers the following tips:
- Item 13: Include net income derived by the small business partnership or trust at either item 13D or 13E, not at 15A. The amounts to include at item 13D or 13E are the: (i) share of net small business income from a small business partnership (in which they are a partner); and (ii) share of net small business income from a small business trust (in which they are a beneficiary). The amounts reported at these items must be reduced for any related deductions, such as landcare operations, decline in value for water facilities and prior year deferred non-commercial losses of partners claimed this year. The ATO says it uses these labels to calculate the offset but they are not counted towards the taxpayer's taxable income. This means that a distribution from a partnership or a share of net income from a trust must be included at the relevant item – 13N, 13L, 13O or 13U.
- Item 15A: Don't include the following types of income at item 15A, as they are not eligible for the offset: (i) personal services income – this is reported at item 14A (although income from carrying on a personal services business is included at item 15A); (ii) salary, wages or directors fees; (iii) dividend income of directors. Also, don't include any share of net small business income from partnerships and trusts at item 15A. This is reported at item 13D or 13E.
- Complete all relevant fields: Enter the taxpayer's net small business income from sole trading activities at item 15A so the ATO can calculate the offset. This item does not contribute towards their taxable income. This means that sole trader business income must be included at item 15A, as well as at P8 (Business income and expenses) and 15B or 15C (Net income or loss from business).
- Net income, not gross income: Include the taxpayer's net small business income at item 15A for sole traders (and share of net small business income at item 13D or 13E for partnerships and trusts). Do not use gross income.