The small business income tax offset (sometimes called the unincorporated small business tax discount) is the closest thing an unincorporated business has to the lower company tax rate. It's worth up to $1,000 a year per person, it's worked out automatically from your return, and it's easy to lose without noticing: a blank label, a trust distribution set up the wrong way, or income the rules exclude.
This guide explains who's eligible, the rate and cap for 2026–27, how the formula works, what counts as net small business income, how it works through trusts and partnerships, and the mistakes we see. The figures come from the ATO's small business income tax offset page.
Small business income tax offset at a glance (2026–27)
| Item | Rule for 2026–27 |
|---|---|
| Rate | 16% of the income tax on your net small business income |
| Maximum | $1,000 per individual per year |
| Turnover limit | Aggregated turnover under $5 million |
| Who can claim | Individuals: sole traders, and partners or beneficiaries with a share of net small business income |
| Who can't | Companies; trustees taxed on behalf of a beneficiary; most beneficiaries under 18 |
| Refundable? | No. Reduces basic income tax to nil at most |
| How to claim | Report net small business income in your return; the ATO calculates it |
| Law status | Unchanged since 2021–22; no change announced for 2026–27 |
What is the small business income tax offset?
It's a tax offset, not a deduction. A deduction reduces the income you're taxed on; an offset comes straight off the tax itself. For an eligible individual, the ATO takes 16% of the portion of their income tax that relates to business income, and reduces their tax by that amount, up to $1,000.
It exists because companies with turnover under $50 million pay tax at 25%, while a sole trader or partner pays personal rates. The offset narrows that gap a little for small unincorporated businesses. It's nowhere near equal: once a sole trader whose only income is the business earns more than about $52,400, they hit the $1,000 cap and the offset stops growing.
Small business tax offset 2026: has anything changed?
No. The rate has been 16% and the cap $1,000 since 2021–22, and both apply to the 2025–26 return you lodge now and to 2026–27. As at 23 October 2026 neither the ATO's offset page nor its list of new tax law measures shows any change.
| Income year | Turnover limit | Rate | Maximum |
|---|---|---|---|
| 2015–16 | Under $2 million | 5% | $1,000 |
| 2016–17 to 2019–20 | Under $5 million | 8% | $1,000 |
| 2020–21 | Under $5 million | 13% | $1,000 |
| 2021–22 to 2024–25 | Under $5 million | 16% | $1,000 |
| 2025–26 | Under $5 million | 16% | $1,000 |
| 2026–27 | Under $5 million | 16% | $1,000 |
Source: ATO. The ATO lists 2021–22 onwards as a single 16% rate.
Who is eligible for the small business income tax offset?
You're eligible if you're an individual and either you run a small business as a sole trader, or you're a partner in a partnership or a beneficiary of a trust that is itself a small business entity and earns business income from its own business activities. In each case the business's aggregated turnover must be under $5 million.
| Your situation | Eligible? |
|---|---|
| Sole trader, turnover under $5 million | Yes |
| Individual partner in a partnership running a business, turnover under $5 million | Yes, on your share |
| Adult beneficiary of a trust that runs the business itself | Yes, on your share |
| Beneficiary of a family trust that only receives distributions from a unit trust running the business | No. The business income belongs to the unit trust |
| Company running the business | No. Companies pay the company rate instead |
| Director or employee of your own company | No. Wages, director's fees and dividends aren't business income |
| Beneficiary under 18 who isn't an excepted person | No |
| Trustee taxed on a beneficiary's behalf | No |
| Business making a loss this year | Offset is nil (net small business income can't be below zero) |
What "aggregated turnover" means
Aggregated turnover is your business's annual turnover plus the turnover of any business connected with you or run by an affiliate. If you own a second business through a company, or control a business with your spouse, its turnover usually counts. A sole trader with $3 million of sales and a company with $2.5 million of sales under the same control is over the $5 million line.
Does personal services income qualify for the offset?
Only if you're a personal services business. Personal services income is income mainly for your own skills or effort, such as an IT contractor billing one client by the hour. If you don't pass the results test or another personal services business test, that income is excluded from net small business income, so it attracts no offset. If you are a personal services business, it counts like any other business income. Our page for consultants and agencies covers the PSI tests, and the ATO's personal services income pages have a self-assessment tool.
Delivery and rideshare drivers who operate as sole traders can qualify on their net business income after car and other expenses. The same $5 million turnover test and $1,000 cap apply.
How is the small business income tax offset calculated?
The ATO's formula is:
Offset = 16% × (net small business income ÷ taxable income) × basic income tax liability, capped at $1,000
"Basic income tax liability" is your tax at resident rates on your taxable income, before offsets and without the Medicare levy. If your net small business income is equal to or more than your taxable income, the fraction is treated as 1, so the offset is simply 16% of your basic tax.
For 2026–27 the resident rates are nil up to $18,200, 15% to $45,000, 30% to $135,000, 37% to $190,000 and 45% above (ATO). If business income is your only income, the offset reaches the $1,000 cap at a taxable income of about $52,400.
What counts as net small business income?
Net small business income is your business's assessable income less the deductions that relate to it. Several items are deliberately left out, which is why it often differs from the profit in your accounts.
| Included | Excluded |
|---|---|
| Business income, after business deductions | Net capital gains, even from business assets |
| Business-related interest or dividends | Personal services income, unless you're a personal services business |
| Net foreign business income from the business | Salary, wages, allowances and director's fees |
| Farm management deposit deductions and repayments | Interest earned on a farm management deposit |
| Deferred non-commercial losses from earlier years, when claimed | Tax agent and accounting fees for your tax affairs |
| Gifts and donations | |
| Personal super contributions you deduct | |
| Current-year business losses you can't use under the non-commercial loss rules | |
| Other prior-year tax losses |
The exclusions work in your favour more often than not. Because your tax agent fees and personal super contributions don't reduce net small business income, the business share of your tax looks larger and the offset can be higher.
Not sure your return shows the right figure? Ask us.
Worked examples for 2026–27
Hypothetical, rounded, 2026–27 resident rates. Medicare levy ignored, because the offset doesn't reduce it.
Example 1: sole trader, business is the only income
Priya is a sole trader graphic designer with net small business income of $60,000 and no other income.
| Step | Amount |
|---|---|
| Taxable income | $60,000 |
| Basic income tax ($4,020 + 30% of $15,000) | $8,520 |
| 16% of $8,520 | $1,363 |
| Offset (capped) | $1,000 |
Example 2: salary plus a side business
Ben earns a $50,000 salary and has net small business income of $20,000 from weekend photography.
| Step | Amount |
|---|---|
| Taxable income | $70,000 |
| Basic income tax ($4,020 + 30% of $25,000) | $11,520 |
| Business share ($20,000 ÷ $70,000) | 28.6% |
| 16% × 28.6% × $11,520 | $527 |
Example 3: a small business with low profit
Lee runs a market stall with net small business income of $30,000 and no other income.
| Step | Amount |
|---|---|
| Basic income tax (15% of $11,800) | $1,770 |
| Small business income tax offset (16%) | −$283 |
| Low income tax offset | −$700 |
| Income tax after offsets | $787 |
Both offsets fit within Lee's tax, so Lee gets the full value of each. Below about $25,000 of income, the tax-free threshold and low income tax offset leave little or no tax for the small business offset to reduce.
Example 4: a trust running a café, two beneficiaries
A family trust runs a café with turnover of $900,000 and net small business income of $100,000. The trustee resolves to distribute $60,000 to Sam, who has no other income, and $40,000 to Alex, who also earns a $90,000 salary.
| Sam | Alex | |
|---|---|---|
| Taxable income | $60,000 | $130,000 |
| Basic income tax | $8,520 | $29,520 |
| Business share | 100% | 30.8% ($40,000 ÷ $130,000) |
| 16% × share × tax | $1,363 | $1,453 |
| Offset | $1,000 | $1,000 |
Each individual has their own $1,000 cap, so a business run through a partnership or trust with two adult partners or beneficiaries can deliver up to $2,000 of offsets a year, where a sole trader gets $1,000. That's not a reason on its own to set up a trust, but it's part of the comparison in our sole trader vs company vs trust guide.
How does the offset work for trusts and partnerships?
The partnership or trust works out its net small business income, and each eligible individual partner or beneficiary claims the offset on their share. The trust or partnership return reports each person's share, which then flows to their individual return.
Rules worth knowing:
- The business must be run by that partnership or trust. A family trust that receives a distribution from another trust that runs the business passes on no eligible income. Our family trust guide explains how groups are usually set up.
- Mixed income. If a trust earns $50,000 from its own business and $70,000 as a distribution from a partnership, only the $50,000 is its net small business income (an ATO example).
- Your share can be zero but not negative. If the partnership makes an overall loss, every partner's share is nil.
- Some personal deductions reduce your share, such as farm management deposits you make and certain landcare and water facility expenses. Tax agent fees, gifts and personal super don't.
- Company beneficiaries get nothing. A distribution to a bucket company is taxed at the company rate and carries no offset. See our bucket company guide.
What the proposed 2028 trust tax could mean
The Treasury Laws Amendment (Tax Reform No. 3) Bill 2026, introduced on 14 October 2026, proposes a 30% minimum tax on the taxable income of discretionary trusts from 1 July 2028, with non-refundable credits for beneficiaries. It's a Bill, not law. How the small business income tax offset would sit alongside those credits for a trading trust isn't settled. If the Bill passes as introduced, a beneficiary whose credits already exceed their tax may get no practical value from the offset. We're tracking it in our guide to the discretionary trust tax changes and won't recommend restructuring on a Bill alone.
How do you claim the small business income tax offset?
You don't apply for it separately. You report your net small business income in your tax return: in the business section if you're a sole trader, or as your share from the partnership or trust return. The ATO calculates the offset and shows it on your notice of assessment.
What you need to get right:
- Report net small business income at the right label, worked out under the ATO's rules, not just copied from the profit and loss.
- Apply the non-commercial loss rules first if any business activity made a loss.
- Exclude capital gains and non-PSB personal services income.
- Check the trust or partnership return shows each beneficiary's or partner's share.
- Check your notice of assessment shows the offset. If it doesn't, the return can usually be amended.
The ATO also has an online calculator if you want to check a figure yourself.
Common mistakes with the small business income tax offset
- Leaving the net small business income label blank. No figure, no offset.
- Including wages, director's fees or capital gains in net small business income.
- Reducing it by tax agent fees and personal super, which shrinks the offset for no reason.
- Claiming through a family trust that only receives distributions from the trust or company that actually runs the business.
- Forgetting connected entities when testing the $5 million turnover limit.
- Distributing business income to children under 18 and expecting them to get the offset.
- Ignoring personal services income rules, so contracting income is wrongly treated as eligible.
- Assuming a company gets it. A company pays 25% if it's a base rate entity; see our company tax rate guide. The offset doesn't apply.
How BPAG helps
For most sole traders, partners and trust beneficiaries, the offset is small but reliable money, worth up to $1,000 a person every year. We check it as part of every individual tax return and every trust tax return we prepare, and our sole trader tax deductions guide covers the deductions that feed into the calculation.
Our deduction checklist agent pulls together your likely deductions, and our non-commercial losses agent tests whether a loss-making activity can be used this year. Your accountant reviews both, confirms the net small business income figure and signs off the return. The agents draft; a qualified accountant checks and approves before anything is lodged.
If the offset is the smaller question and the bigger one is whether you've outgrown your structure, our tax planning service models the options for you.
Frequently asked questions
Is the small business income tax offset refundable?
No. It can reduce the income tax you owe to nil, but it can't create a refund on its own and any unused part is lost. It reduces your basic income tax, not the Medicare levy. If your tax is already nil because of the tax-free threshold and the low income tax offset, the small business offset adds nothing.
Do I need to apply for the small business income tax offset?
No separate application. The ATO calculates it from the net small business income you report in your tax return and shows it on your notice of assessment. The catch is that if that figure is missing or wrong, the ATO calculates the offset on the wrong number, or not at all.
Can a beneficiary under 18 get the offset?
Generally no. A beneficiary under 18 is entitled only if they're an excepted person, such as someone working full time or entitled to certain government payments. Distributing business income to a minor to claim another offset doesn't work, and the minor's penalty tax rates usually make it a poor idea anyway.
Does the offset reduce my PAYG instalments?
Not automatically. Your instalments are usually based on last year's figures. If the offset will noticeably reduce this year's tax, you can vary your instalments, but if you vary too low you can be charged interest, so it's worth working out the numbers first.
Is the offset the same as the instant asset write-off or the small business CGT concessions?
No. They're separate concessions with different turnover limits. The offset needs aggregated turnover under $5 million, the instant asset write-off under $10 million, and most small business CGT concessions under $2 million (or net assets of $6 million or less). A business can qualify for one and not another.
Can I get the offset if I'm a contractor paid through my own company?
No. Income earned by a company isn't eligible, and director's fees, wages and dividends you receive from it aren't net small business income. If you operate as a sole trader instead, personal services income only counts if you're a personal services business.
Official sources
General information only, current as at 23 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.