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.
The ETO can only reduce the amount of tax you must pay in one particular year. That is, it 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.
‘Business’ means the individual, partnership, company or trust that carries on the business activity.
‘Small Business’ we means ‘small business entity’, which is an individual, partnership, trust or company with aggregated turnover less than $2 million.
Who is eleigible for the offset?
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, you first must know your:
- taxable income – total assessable income minus all allowable deductions, and
- basic income tax liability – the tax payable on your taxable income taking into account any special rules that apply and before reducing it by any offsets.
Then you must work out your small business turnover and your net small business income.
Small business turnover
Your small business turnover is the total ordinary income you earned in the ordinary course of carrying on your business in an income year.
Use your small business turnover to work out the amount of your ETO. In most cases, your small business turnover will be the same as your aggregated turnover amount. However, there are some special rules for working out aggregated turnover that do not apply when you work out your small business turnover.
If you have already worked out your aggregated turnover, you may have to make adjustments to it to work out your small business turnover.
If you:
- have included another business’ turnover in your aggregated turnover amount, you must:
- exclude that business’ turnover, and
- add back any income you derived from your affiliates or connected entities
- operated a business for part of the year, you only include your actual turnover amount (you do not need to use the estimate of your full year turnover), and
- have retail fuel sales, you must add back your retail fuel sales.
Net small business income
Your net small business income is your small business turnover less the sum of the deductions that directly relate to that turnover.
The following do not reduce small business turnover:
- tax losses from prior years
- personal superannuation contributions
- gifts or donations
- costs of managing your tax affairs under
- non-commercial losses that have been deferred to a later year
Example: Working out your net small business income
Lizzie operates a small business and is not grouped with any other business under the aggregation rules. The business has a turnover of $35,000 for the year. Lizzie claims deductions for business expenses (including materials, stationery, postage and electricity) relating to her home office totalling $5,000.
Lizzie earns a salary of $60,000 for the year as well as her business income. Her work-related expenses total $1,200.
She also has a negatively geared share portfolio from which she receives $5,000 dividend income and has $6,000 of interest expenses related to borrowings to acquire the shares. Lizzie makes a loss of $1,000 from her share investments.
Lizzie’s net small business income only includes the amount she earns in carrying on a business. This is her small business turnover of $35,000 less her business deductions of $5,000 that directly relate to that turnover, giving her net small business income of $30,000.
The income and expenses relating to her salary and share investments do not affect her small business turnover.
Multiple business activities
If you carried on more than one business activity (as a sole trader or within the same entity), to work out your net small business income you need to:
- combine your small business turnover from all business activities, and
- reduce that amount by the deductions attributable to that turnover.
Example: multiple business activities
Kaitlin is a sole trader operating a shoe shop. She also runs a part-time hairdressing business from her home. She derived ordinary income of $15,000 from the first business and made a profit of $10,000. She derived ordinary income of $20,000 from the second business but made an overall loss of $5,000.
The small business entity turnover is the total ordinary income that the entity derives – $35,000 ($15,000 + $20,000). The deductions attributable to that turnover are $30,000 ($5,000 +$25,000). Therefore, Kaitlin can claim the ETO for the amount of $5,000 ($35,000 – $30,000).
Non-commercial losses
If you are an individual or a partner in a partnership and you make a net loss from your business activity, you can only claim a deduction for that loss if you meet certain criteria. If you do not meet the criteria, defer the loss to a later income year.
Losses you cannot deduct because of the non-commercial loss rules do not reduce your net small business income in the loss year.
Similarly, if you have two separate business activities and made a deferred loss in one and a profit in the other, you cannot offset the deferred loss from the loss activity against the profitable activity. This is because amounts you defer are taken not to have been incurred in the loss year and, therefore, are not a deduction that directly relates to small business turnover in the loss year.
You can reduce your small business turnover for an activity in an income year if amounts you deferred from that activity in an earlier year are a deduction in that later year. This is provided the total of all deductions relevant to that activity, including the deferred losses, does not exceed the assessable income from that business activity. If the total deductions exceed the assessable income from the business activity and you again defer the excess, you cannot reduce your small business turnover by the deferred amount in the year that it is deferred. Accumulated deferred losses and other amounts that are deductions against your small business turnover can only reduce your net small business income to nil.
Partnership distributions and deferred losses
Deferred non-commercial losses from a partnership activity that become deductible in a later year are the partner’s deduction and, therefore, do not reduce the partnership’s net small business income. The deferred losses that the partner can claim for income tax purposes do not reduce the partner’s net small business income share from the partnership for ETO purposes.
About The Author
Warren Kruger is an Australian Tax Specialist and Advisor.
For a FREE Report "7 Essential Strategies to Reduce Your Taxation NOW!",
Sign Up RIGHT NOW in the Opt In Box located on the top right hand side of this article.
Similar Posts:
- Entrepreneurs’ Tax Offset.
- Entrepreneurs’ tax offset – income test for non-small business income
- Everything You Need To Know About Capital Gains Tax (CGT) – Episode 1
- Is it a Business or is it a Hobby ?
- Business Tax Break – How Does It Work?
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.
Comments on this entry are closed.