To calculate the small business income tax offset, multiply your basic income tax liability by the ratio of your net small business income to your total taxable income, then multiply by 16%. The result is capped at $1,000 per person per year.1Australian Taxation Office. Small business income tax offset The formula is short. Getting the three inputs right is where the work sits.
The Formula
Written out:
Offset = 16% × (net small business income ÷ taxable income) × basic income tax liability
One shortcut is built in. If your net small business income equals or exceeds your taxable income, the ratio becomes 1 and the offset is simply 16% of your basic income tax liability, still capped at $1,000.1Australian Taxation Office. Small business income tax offset The cap applies once per person across every small business source combined, not per business.2Australian Taxation Office. myTax 2025 Small business income tax offset
The Three Inputs You Need
Your basic income tax liability is the tax on your taxable income at the standard individual rates, before any offsets and before the Medicare levy.3Australian Taxation Office. Simple tax calculator
Your taxable income is the figure already on your return: total assessable income minus all deductions.
Your net small business income is the one you have to build. It is your assessable business income minus deductions directly attributable to earning that income, but the ATO’s definition strips out several categories that would otherwise sit in your business result.
Income to Leave Out
When calculating net small business income, exclude:1Australian Taxation Office. Small business income tax offset
- Net capital gains, even from assets used in the business
- Personal services income, unless your business qualifies as a personal services business
- Salary, wages, allowances, and director’s fees
- Government allowances and pensions
- Interest and dividends, unless directly related to a business activity
- Interest on farm management deposits
Deductions to Leave Out
Some deductions you claim elsewhere on your return do not belong in this calculation:1Australian Taxation Office. Small business income tax offset
- Tax-related expenses such as accounting and tax agent fees
- Gifts, donations, or contributions
- Personal superannuation contributions
- Current-year business losses that fail the non-commercial loss rules
- Prior-year tax losses, unless they are deferred non-commercial losses
Ordinary operating costs stay in. Rent, utilities, stock, and employee wages that directly relate to running the business all count as deductions against your business income. The line the ATO is drawing is between costs of running the business and costs that are personal or tax-administrative.
A Worked Example
Say you are a sole trader with $30,000 in net small business income. You also earn $15,000 in wages from a part-time job, giving a total taxable income of $45,000. Using the 2025–26 individual rates, the basic income tax liability on $45,000 is $4,288.4Australian Taxation Office. Tax rates – Australian resident
- Step 1: $30,000 ÷ $45,000 = 0.6667
- Step 2: 0.6667 × $4,288 = $2,858.67
- Step 3: $2,858.67 × 0.16 = $457.39
The offset is $457, well under the cap.
Change the numbers. Keep the $30,000 of business income but add $40,000 of other taxable income, taking the total to $70,000. The basic income tax liability on $70,000 is $11,788 ($4,288 plus 30 cents for each dollar over $45,000).4Australian Taxation Office. Tax rates – Australian resident Running the formula: $30,000 ÷ $70,000 × $11,788 × 0.16 = $808.23. Still under the $1,000 cap, so you get the full amount. As other income grows and business income becomes a smaller slice of the total, the offset shrinks. A sole trader whose entire taxable income is business income reaches the cap fastest.
Losses and Multiple Businesses
If your net small business income comes out as a loss, treat it as zero. You get no offset that year, and you cannot carry it forward.1Australian Taxation Office. Small business income tax offset
With more than one sole trader business, combine assessable income and deductions from every business before running the formula. The non-commercial loss rules act first. A loss that is deductible in the current year reduces your combined net small business income. A loss quarantined by the non-commercial loss rules is treated as zero for offset purposes, so it does not drag down the profitable business’s contribution.1Australian Taxation Office. Small business income tax offset
Shares From Partnerships and Trusts
If your business income comes through a partnership or trust that qualifies as a small business entity, work with your share of the entity’s net small business income, which the entity should give you on a distribution statement.1Australian Taxation Office. Small business income tax offset Several rules shape that share:
- Your share cannot go below zero. If the partnership or trust made a loss, treat your share as zero.
- Any deductions you can claim personally against that income reduce your share. If those deductions exceed the share, treat it as zero.
- If the partnership had a business loss and your share of it is not deductible under the non-commercial loss rules, add that share back, increasing your net small business income.
- Capital gains from partnership or trust assets are excluded, even when the asset was used in the business.
Income from multiple sources — a sole trader business plus one or more partnership or trust shares — is added together, and the single $1,000 cap applies to the combined figure.2Australian Taxation Office. myTax 2025 Small business income tax offset
Who Qualifies
The offset is for individuals earning income from an unincorporated small business, as a sole trader or through a partnership or trust share.5Australian Taxation Office. Tax Laws Amendment (Small Business Measures No. 3) Act 2015 The business must be a small business entity, which mainly means aggregated turnover under $50 million, tested at the entity earning the income. Company income received as dividends or salary does not qualify. Beneficiaries under 18 are excluded unless they are excepted persons, and a trustee cannot claim the offset on a beneficiary’s behalf.1Australian Taxation Office. Small business income tax offset
Where the Number Goes
Report your net small business income at label A of question 15 in the supplementary section of your individual return.6Australian Taxation Office. 15 Net income or loss from business 2025 If you completed the Business and Professional Items schedule, the figure carries across from item P8. If your only business income comes through question 20 (partnerships and trusts), the ATO’s online small business income tax offset calculator works out the figure for label A.
You do not calculate the final dollar amount yourself. The ATO applies the 16% and the $1,000 cap during processing and shows the offset as a line on your notice of assessment.7Australian Taxation Office. Income tax return Your job is to get the net small business income figure right and put it in the correct label. From there the rest is automatic.