61 Entrepreneurs tax offset

The entrepreneurs tax offset is an incentive to encourage small business growth. Certain small business entities are eligible to receive this tax offset, which can be up to 25% of their income tax liability in respect of their business income.

The entrepreneurs tax offset is provided under Subdivision 61-J of the ITAA 1997. It is a non-refundable tax offset and cannot be transferred to other entities or carried forward to later income years.

The tax offset is available to:

• an individual or a company that is a small business entity
• a partner in a partnership that is a small business entity
• a trustee or beneficiary of a trust that is a small business entity, depending on who is liable for tax on the trust income.

A partner in a partnership that is a small business entity may be entitled to the tax offset in respect of net small business income earned by the partnership through its business activities provided the partner's assessable income includes a share of that net small business income. However, partners are not entitled to the tax offset in respect of a share of net small business income that the partnership received from another partnership or a trust.

The amount of the partner's tax offset will vary depending on the aggregated turnover of the small business entity. If the aggregated turnover is $50,000 or less, the partner can claim a tax offset equal to 25% of the income tax liability attributable to the income of the small business entity. The tax offset begins to phase out when the aggregated turnover of the small business entity exceeds $50,000 and is reduced to zero when the aggregated turnover reaches $75,000.

From the 2009-10 income year, an individual with net small business income that is eligible for the entrepreneurs tax offset as a sole trader, partner in a small business partnership or beneficiary of a small business trust will also need to meet an additional income test.

The income test will restrict the eligibility of individuals whose income for entrepreneurs tax offset purposes is over a threshold amount of $70,000 for singles or $120,000 if they have a family. This reduction will operate in addition to the current eligibility requirements applicable to the entrepreneurs tax offset (in particular, the aggregated turnover test phase out where aggregated turnover of the small business exceeds $50,000).

For further information see Entrepreneurs tax offset.

Table 8 summarises where a partner in a partnership that is a small business entity may be entitled to an entrepreneurs' tax offset for different sources of net small business income.

Table 8
Entrepreneurs tax offset entitlement	Source of net small business income
	Derived from the partnership business activities	Received by this partnership from another partnership or trust that is a small business entity
For a partner in a partnership that is a small business entity	Possible entitlement (subject to the eligibility criteria)	No entitlement

Small business entity aggregated turnover

Show at D the small business entity aggregated turnover of the partnership. This is the annual business turnover of the partnership plus the annual business turnovers of its affiliates and any entities it is connected with. There are aggregation rules to help you determine who is an affiliate and when an entity is connected with you for the purpose of calculating your aggregated turnover. Certain transactions, such as income from dealings between the partnership and any entities it is connected with, or are its affiliates, are excluded from aggregated turnover.

If the partnership is not affiliated or connected with any other entities under the aggregation rules, the aggregated turnover of the partnership will be equal to its annual business turnover.

Small business entity turnover

This is the amount of total ordinary income earned in the income year in the ordinary course of carrying on a business and is used in determining the net small business entity income, see below.

It includes amounts such as: payments for goods or services supplied, professional fees, commissions, interest received on amounts deposited in business banking accounts, and holding or security deposits forfeited by customers.

It excludes amounts such as GST you have charged on a transaction, rental income where rental activities do not form an ordinary part of the business, amounts resulting from realisation of an investment (such as the proceeds from the sale of a capital asset used in the business), payments received under an insurance recovery, and the principal component of a loan repayment.

In most cases, the aggregated turnover amount for the partnership will be the same as its small business entity turnover. However, if any of the following circumstances apply you will need to make the following adjustments to calculate the small business entity turnover:

• If you have included another entity's turnover in the aggregated turnover amount for the partnership, you will need to:
  
  • subtract that entity's turnover, and
  • add back any income the partnership derived from its affiliates or connected entities.
   
• If the partnership operated a business for part of the year, you only include the actual turnover amount for the partnership; you do not need to use the estimate of its full year turnover.
• If the partnership derived income from retail fuel sales, you must add back the sales amount.

Net small business entity income

Show at E the net small business entity income of the partnership. Net small business income is the small business entity turnover of the partnership less the allowable deductions attributable to that turnover.

Do not include any net small business income amounts received from partnership distributions.

There must be an amount of net small business income included in the partner's assessable income before an entitlement to an offset arises for that entity.

The entrepreneurs tax offset and PAYG

The entrepreneurs tax offset is not taken into consideration when determining the rate of PAYG instalments.

If an entity anticipates it will be entitled to the offset on assessment, the entity may vary its instalments during the year. However, the entity may be liable to the general interest charge where a variation results in an underestimation of the instalments of more than 15%.