If you are an individual or a company
Step 1
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Work out your taxable income for the year.
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Step 2
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Work out 25% of the basic income tax liability on that taxable income (use the applicable tax rates and take into account any special rules that affect the liability, but do not take any tax offsets into account).
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Step 3
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Work out the small business percentage using the formula:
If the result is more than 100%, the small business percentage is 100%.
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Step 4
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If the aggregated turnover is $50,000 or less, the tax offset is:
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Step 5
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If the aggregated turnover is more than $50,000, adjust the offset by the small business phase-out fraction. Work this out using the formula:
$75,000 - the aggregated turnover for the year
$25,000
The tax offset is:
Step 2 amount x small business percentage x small business phase-out fraction
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If you are not an individual this is the end of your calculation.
If you are entitled to an ETO as an individual (other than in your capacity as a trustee) go to Step 6 to apply the income test.
Income test
Step 6
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Work out your income for ETO purposes.
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Step 7
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Go to step 8 if your income for ETO purposes exceeds:
- $70,000 if you are single with no qualifying dependant, or
- $120,000 if you had a qualifying dependant on any day of the income year or you had a spouse on the last day of the income year.
If your income for ETO purposes does not exceed the relevant threshold, the amount you worked out at Step 4 or Step 5 is your ETO.
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Step 8
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Reduce the amount you worked out in Step 4 or Step 5 by the amount you calculated using the formula:
Income for ETO purposes for the income year - the threshold amount
5
You are not entitled to any tax offset if the reduction amount is equal to or more than the amount you worked out in Step 4 or Step 5
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Example: Company
For the year ended 30 June 2011, Elpin Pty Ltd has:
- aggregated turnover of $50,000
- net small business income of $40,000
- taxable income of $80,000.
The step 1 amount
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= $80,000 (taxable income)
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The step 2 amount
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= 25% of Elpin's basic income tax liability of *$24,000
= $6,000
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The step 3 percentage
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= $40,000/$80,000 X 100
= 50% (the small business percentage)
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The step 4 amount
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= $6,000 x 50%
= $3,000
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Step 5 does not apply as the company's aggregated turnover is not more than $50,000. The additional income test does not apply to companies.
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Elpin Pty Ltd is entitled to a tax offset of $3,000.
* Taxable income of $80,000 multiplied by the 30% company tax rate
Example: Sole trader with other non-business income
In the 2010-11 income year, Jenny runs a physiotherapy practice from her home. The net income from her practice is $18,000 (that is, $30,000 turnover less $12,000 business expenses). This is Jenny's net small business income. She also has a part-time job from which she receives salary and wages of $27,000. She is married to Geoff, who earns $96,000 per year. Geoff has no other income.
The step 1 amount
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= $18,000 + $27,000
= $45,000 (taxable income)
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The step 2 amount
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= 25% of Jenny's basic income tax liability of *$7,050
= $1,762.50
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The step 3 percentage
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= $18,000/$45,000 x 100
= 40% (the small business percentage)
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The step 4 amount
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= $1,762.50 x 40%
= $705
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Step 5
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Does not apply as her aggregated turnover is not more than $50,000.
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Step 6
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Jenny's income for ETO purposes is: ($45,000 - $18,000) + $96,000.
= $123,000
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Step 7
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Jenny's income for ETO purposes of $123,000 exceeds the family threshold of $120,000
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Step 8
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The reduction amount is:
$123,000 - $120,000
5
= $600
Reduce the amount from Step 4 by the reduction amount
$705 − $600 = $105
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Jenny is entitled to a tax offset of $105.
* Resident individual tax rates applying to taxable income of $45,000.
Example: Company turnover between $50,000 and $75,000
For the year ended 30 June 2011, Mitzi Pty Ltd has net small business income of $20,000 (representing small business entity turnover of $60,000 less expenses of $40,000) and no other source of income.
Kalico Pty Ltd is grouped with Mitzi Pty Ltd under the aggregation rules and has turnover of $10,000, but is making a loss.
The aggregated turnover of the two companies is $70,000. Mitzi Pty Ltd can, therefore, claim the tax offset.
The step 1 amount
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= $20,000 (Mitzi's taxable income)
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The step 2 amount
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= 25% of Mitzi's basic income tax liability of *$6,000
= $1,500
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The step 3 percentage
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= $20,000/$20,000 x 100
= 100% (the small business percentage)
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Step 4
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Does not apply as the aggregated turnover is more than $50,000. Therefore, Mitzi must adjust the tax offset by the small business phase-out fraction.
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The step 5 amount
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= ($75,000 - $70,000)/$25,000
= 0.2 (the small business phase-out fraction)
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The additional income test does not apply to companies.
Mitzi is entitled to a tax offset of:
$1,500 x 100% x 0.2 = $300.
* Taxable income of $20,000 multiplied by the 30% company tax rate
Sections within How to work out the ETO
Last Modified: Tuesday, 3 July 2012
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