The tax benefits of owning and operating a small business through any entity other than a company now extends beyond the capital gains tax concessions. Eligible small business owners, who do not operate through a company, will be paying up to $1000 a year less in income tax on business profits.
This has been achieved by increasing the tax offset discount from 5 per cent up to 8 per cent from July 1, 2015, with a maximum reduction in tax of up to $1000 each year, and an increase in the annual threshold test for business to qualify for the offset from $2 million a year to $5 million from July 1, 2016.
Although small businesses operated through companies, as was explained in last week's article, do not really benefit from the reduction in the small business company tax rate down to 27.5 per cent, the tax discount only applies to individuals who receive small business income from operating as a sole trader, in partnership, or as a beneficiary of a trust.
As a part of the legislation introducing the increase in the small business tax offset, further increases in the discount have been built including with the 8 per cent applying until the 2024 financial year, then increasing to 10 per cent for the 2025 year, 13 per cent for the 2026 year, and 16 per cent for the 2027 year. Although the tax discount percentage increases the maximum tax offset of $1000 remains the same.
Q. You recently wrote that there would be an increase in the offset to 8 per cent to a maximum of $1000 a year; could you please provide an example of how this would work in real life?
A. The small business tax offset only applies to net small business income and does not apply to salaries and wages received, or any other income such as interest and dividends.
The first step in calculating the tax offset is working out how much of the income tax payable relates to net small business income. This is done by working out what percentage a person's small business income is of their total assessable income.
For people whose taxable income is only made up of net small business income, 100 per cent of the tax payable is eligible for the discount. Once the tax payable on the small business income is calculated this is multiplied by the discount rate. The discount reduces the income tax payable in that year up to the $1000 limit.
If you ran a business which had a turnover of $2.9 million through a family trust in the 2017 financial year, received a salary of $40,000, dividend and interest income of $20,000, a distribution of net small business income from your trust of $50,000, and had tax deductions of $10,000, this would result in total taxable income of $100,000 and tax payable of $24,947.
As your small business income would be 50 per cent of your total taxable income the 8 per cent discount would apply to $12,473, and would result in a tax offset of $998. This would mean for the 2017 year, if you are not eligible for any other tax offsets or imputation credits, your net tax payable after the small business offset would be $23,949.
Questions can be emailed to max@taxbiz.com.au. Follow MySmallBusiness on Twitter, Facebook and LinkedIn.Â
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