Introduction
The entrepreneurs’ tax offset (ETO) is a tax offset equal to 25% of the income tax payable on your business income if you have aggregated turnover of $50,000 or less.
If your aggregated turnover is more than $50,000, the ETO is phased out so that the offset stops once your turnover reaches $75,000.
In the 2008 Budget, the government announced that an additional income test will apply to the entrepreneurs’ tax offset (ETO). This will further restrict access to the ETO for taxpayers with high alternative sources of income.
The government has deferred the application of this new income test. As a result, ETO claims will not be affected for the 2008-09 income year, but this will commence from 1 July 2009.
The existing reduction that applies where aggregated turnover exceeds $50,000 will continue to apply for the 2008-09 income year
The ETO can only reduce the amount of tax you must pay this year. That is, the ATO cannot:
- refund any unused tax offset
- defer it to reduce your tax in a later income year, or
- transfer it to another taxpayer to reduce their tax.
When I say ‘business’ I mean the individual, partnership, company or trust that carries on the business activity.
When I say ‘small business’ I mean ‘small business entity’, which is an individual, partnership, trust or company with aggregated turnover less than $2 million.
Who is eligible for the ETO?
You may be eligible for the ETO if:
- Your aggregated turnover for the year is less than $75,000, and
- You have net small business income for the year (that is, your small business turnover is more than the deductions that directly relate to that turnover).
The ETO is available to:
- an individual or a company that is a small business
- a partner in a partnership that is a small business
- a beneficiary of a trust that is a small business, where the beneficiary is liable to pay the tax, and
- a trustee of a trust that is a small business, where the trustee is liable to pay the tax.
To work out the amount of ETO you can claim.
Contact Taxwise on 9248 8124.
Being eligible for more than one ETO
If you are entitled to net small business income from more than one source, you may be eligible for more than one ETO in the same income year.
For example, if you are a sole trader carrying on a business, and are also a partner in a separate business partnership, you may be entitled to an ETO for your:
- income as a sole trader, and
- share of the net small business income from the partnership.
ETO and PAYG instalments
The ATO do not take the ETO into account when they work out your PAYG instalment rate (the ETO is an excluded tax offset under the tax laws).
If you expect to claim the ETO when the ATO assesses your income tax return, you may vary the amount or rate of your PAYG instalments. However, if you choose to vary and you underestimate the instalments you must pay by more than 15%, you may have to pay the general interest charge on the shortfall.
For more information about variations contact Taxwise on 9248 8124.
Definitions
Affiliate: An affiliate is any individual or company that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you.
Aggregated turnover: Aggregated turnover is your annual turnover plus the annual turnovers of any business entities you are connected with or are your affiliate. These are referred to as relevant business entities.
Annual turnover: Your annual turnover includes all ordinary income you earned in the ordinary course of business for the income year.
Assessable income: Assessable income is your ordinary income and statutory income.
Associate: The definition of associate is very broad. As an individual, your associates include, but are not limited to:
- your relatives, such as your spouse or children
- a partnership you are a partner in
- another partner in that partnership and that partner’s spouse and children
- a trustee of a trust that you, or your associate, are a beneficiary of, and
- a company that you, or your associate, control or influence.
There are similar rules to work out who is an associate of a company, partnership and trustee.
Connected with: An entity is connected with you if:
- you control or are controlled by that entity, or
- both you and that entity are controlled by a third entity
Net small business income: This is the amount for an income year by which your annual turnover exceeds the sum of your deductions attributable to that turnover.
Net small business income share: Your share of a partnership or trust’s net small business income.
Ordinary income: Ordinary income is income according to ordinary concepts.
Ordinary course of business: In general, you derive income in the ordinary course of carrying on a business if you:
- regularly or customarily derive the income in the course of carrying your business, not from any special circumstance or unusual event, or
- don’t regularly derive the income but you do derive it directly from your normal business activities.
You may derive ordinary income in the ordinary course of carrying on your business even if the income is not the main type of ordinary income you derive. The income does not need to account for a significant part of your business’ overall receipts. It is sufficient that the ordinary income is of a kind derived regularly or customarily in the course of carrying on your business.
Relevant business: A business entity that is your affiliate or that is connected with you
Small business entity: You are a small business entity if you carry on business with less than $2 million aggregated turnover. When we say ‘you’ we are referring to the individual, partnership, company or trust that carries on the business.
Small business: In this guide, when we say ‘small business’ we mean ‘small business entity’.
Small business turnover: Small business turnover is the total ordinary income that you derive in the income year in the course of carrying on your business.
Statutory income: Statutory income is income that is not ordinary income and that you include in assessable income because of a specific rule in the tax legislation. A net capital gain is statutory income.
More information
Contact Taxwise on 9248 8124 to speak with one of our registered Tax Profesionals.
About the Author
Warren Kruger is an Australian Tax Specialist and Advisor.
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Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report “7 Essential Strategies to Reduce Your Taxation NOW!”,enter your name and email address in the Opt In Box located on the top right hand side of this article.
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