Small business income tax offset: How to claim up to $1,000 back

Published Friday 10 July 2026

Table of contents

• What is the small business income tax offset?
• Who is eligible and what is the rate?
• How do you calculate your offset?
• Manage your small business tax with Xero
• FAQs on the small business income tax offset

Key takeaways

• The small business income tax offset reduces the tax you pay on eligible income from an unincorporated business you run, with a maximum benefit of $1,000 per year.
• You qualify when you run a small business as a sole trader, partner, or trust beneficiary and include net small business income in your individual tax return.
• The Australian Taxation Office (ATO) calculates the offset automatically from your lodged return, so you do not apply separately, but you must correctly report your net small business income and keep supporting records.
• Keeping clear, linked records in your accounting software ensures you claim correctly and lodge with confidence, while avoiding common mistakes like mixing business and non-business income or missing the annual cap.

What is the small business income tax offset?

The small business income tax offset (SBITO) is an Australian tax concession designed to reduce the income tax you pay on profits from an unincorporated business. If you run a business as a sole trader, partner in a partnership, or receive distributions from a trust, this offset can put money back in your pocket at tax time.

Also called the unincorporated small business tax offset, the SBITO applies a legislated rate to the portion of your income tax that relates to your net small business income. This valuable concession can reduce the tax you pay by up to $1,000 each financial year, as set out in the ATO guidance on the small business income tax offset.

This tax concession recognises the contribution small businesses make to the economy and helps lower the effective tax rate for individuals who earn income through their own trading activities. It's available to sole traders, partners, and adult trust beneficiaries who meet the eligibility criteria, and the ATO applies it automatically when you lodge your individual tax return.

It benefits a large number of taxpayers across various industries, with 1.5 million taxpayers receiving a benefit from the offset in the 2022-23 income year.

While it is broadly available, analysis shows that in 2022–23, 69% of the benefit went to people with above-median income.

Understanding how the offset works, who qualifies, and how to calculate your entitlement helps you maximise your tax savings and claim correctly.

Who is eligible and what is the rate?

You are eligible for the small business income tax offset if you are a small business entity and include net small business income in your individual tax return. The ATO applies the legislated rate and cap based on the figures you report.

To qualify, you must carry on a business and have net small business income for the year. The offset applies to individuals only, so companies cannot claim it. The rate of the offset is 16% from the 2021–22 income year onwards, which provides more relief to eligible business owners. The offset is capped at $1,000 per year.

Generally, the Australian Taxation Office defines a small business as one with aggregated turnover of less than $10 million. However, for this specific offset, the threshold is lower, requiring an aggregated turnover of less than $5 million. You only qualify for the offset if your aggregated turnover is below this threshold, even when you include business income in your return.

The offset is non-refundable, meaning it can reduce your tax payable to zero but won't generate a refund if the offset exceeds the tax you owe.

For sole traders

You can claim the offset as a sole trader if you run a business in your own name and include net small business income in your individual tax return. If you run a trade, professional practice, or other business activity in your own name, you're likely a sole trader for tax purposes.

You calculate your net small business income by taking your business revenue and subtracting directly related deductions, such as cost of goods sold, operating expenses, and depreciation on business assets. This net figure forms the base for working out the portion of your income tax that attracts the offset.

For example, if you earn $60,000 from your sole trader business and $30,000 from other sources, the ATO will apportion your total tax to identify the tax on your business income, then apply the 16% rate to that amount (subject to the $1,000 cap).

For partners and trust beneficiaries

Individual partners and adult beneficiaries may claim the offset on their share of net small business income distributed from a small business entity. If you're a partner or receive a distribution from a trust that carries on a business, you include your share of that income in your individual return.

The partnership or trust must be a small business entity for the income to qualify. Your share of the net small business income is then added to any sole trader income you earn directly, and the combined amount is used to calculate your offset entitlement.

For partners, your distribution statement will show your share of partnership income and deductions. For trust beneficiaries, the trustee's distribution statement details your share of trust income. Keep these documents safe, as they support your claim and help you apportion your tax correctly.

If you are a trustee or a minor beneficiary

Only individuals who include net small business income in their own assessable income can claim the offset, not the trustee. The trustee is assessed on behalf of the trust, not as an individual taxpayer, so the offset doesn't apply at the trust level.

Minor beneficiaries can only qualify if their amounts are treated as excepted income under the trust tax rules. Excepted income includes amounts derived from a business in which the minor is actively engaged, or income from a deceased estate. If a minor's share of trust income doesn't meet these exceptions, it won't qualify for the offset.

Always check with your tax advisor if you're unsure whether a minor beneficiary's income qualifies, as the rules are technical and depend on the source and nature of the income.

How do you calculate your offset?

Calculating the small business income tax offset involves a high-level process: determine your net small business income, apportion the tax to that income, then apply the ATO's rate and cap. Follow these steps to work out your entitlement:

1. Identify all assessable small business income for the year. Start by listing your business trading income from sole trader activities, partnership distributions, and trust distributions that qualify. Don't include salary, wages, or passive investment income.
2. Subtract deductions that directly relate to earning that income to get net small business income. Deduct expenses like cost of goods sold, rent, utilities, depreciation, and other operating costs that are directly connected to your business activities. The result is your net small business income.
3. Work out the share of your income tax that relates to that net small business income. Calculate your total taxable income (including business and non-business income), then work out the proportion of your total tax that applies to your net small business income. This apportionment step is critical because the offset only applies to the tax on your business income.
4. Apply the legislated offset rate to that tax amount and then apply the annual cap. Multiply the apportioned tax by 16% to get your offset. If the result exceeds $1,000, the offset is capped at $1,000. If your apportioned tax is low, your offset will be lower than the cap.
5. Include any partnership or trust share of net small business income in your figure. If you receive business income from partnerships or trusts, add your share to your sole trader income before performing the apportionment. This ensures all your business income is captured in the calculation.

Worked example

Let's say you're a sole trader with $50,000 of net small business income and $20,000 of other income (such as interest or part-time wages). Your total taxable income is $70,000.

Assume your total income tax on $70,000 is $12,000. To apportion the tax, divide your net small business income by your total taxable income: $50,000 ÷ $70,000 = 71.4%. Multiply your total tax by this percentage: $12,000 × 71.4% = $8,571.

Now apply the 16% offset rate: $8,571 × 16% = $1,371. Because this exceeds the $1,000 cap, your final offset is $1,000, which reduces your tax payable from $12,000 to $11,000.

This example shows how the rate applies and how the annual cap can limit the final offset, even when your business income is substantial.

What to include and exclude

You need to know exactly what belongs in net small business income so you report the right amount of offset. Here's what you need to consider:

• Include business trading income that you earn from your activities, such as sales revenue, service fees, and other amounts derived from carrying on your business.
• Include deductions that directly relate to earning your small business income, such as cost of goods sold, rent, utilities, depreciation, and other operating expenses.

Manage your small business tax with Xero

Staying on top of your records makes it much easier to work out your net small business income and claim the right offset. Xero helps you track income and expenses, reconcile bank accounts, and share information with your accountant or bookkeeper so you can lodge with confidence.Get one month free and see how Xero can simplify your small business tax tasks.

FAQs on the small business income tax offset

Here are some common questions business owners ask about the small business income tax offset.

How do I know if my business turnover qualifies for the offset?

You qualify if your aggregated turnover is less than $5 million and you meet the other small business entity tests set out by the Australian Taxation Office. Your accountant or bookkeeper can help you confirm this using your financial reports.

Can I claim the offset if I also have salary or wage income?

Yes. You can still claim the offset on your net small business income, even if you also earn salary or wage income, as long as you meet the eligibility rules.

Do I need to apply separately for the small business income tax offset?

No. The Australian Taxation Office works out the offset automatically from the information in your individual tax return, provided you report your net small business income correctly.