New Individual Small Business Entity Offset
(June 2015 Final Legislation)
On 24 June 2015, the Tax Laws Amendment (Small Business Measures No. 3) Bill 2015 was introduced into Federal Parliament (refer Tax Laws Amendment (Small Business Measures No. 3) Bill 2015 – Parliament of Australia) to implement a new non-refundable tax offset available to individuals deriving Small Business Entity ("SBE") Income from an unincorporated SBE from 2015/16 onwards calculated as the lower of:
- 5% of the individual’s ‘basic income tax liability’ (i.e. marginal tax rate) relating to their:
- SBE taxable income derived as an SBE sole trader; and/or
- share of SBE taxable income derived as a partner or beneficiary in a SBE partnership or SBE trust, or
Importantly, this Tax Astute Snapshot provides only a brief overview of the new SBE offset provisions. Tax Astute clients should access their next training session to review more detailed issues and examples regarding the new offset.
See below for a brief example which broadly explains how to calculate an individual’s non-refundable SBE income offset from 2015/16.
Tax Astute Clients can access further detail and examples in relation to numerous further important issues arising from this new legislation including:
- How to calculate the NET SBE INCOME upon which the individual offset is based.
- Individual SBE income offset issues for NON-RESIDENTS.
- The limited application of the Individual SBE income offset to < 18 YEAR OLD INDIVIDUALS.
- NON-CORPORATE SBE STRUCTURES likely to receive THE MOST (OR LEAST) BENEFIT from the new individual offset.
- OTHER MEASURES included in the Tax Laws Amendment (Small Business Measures No. 3) Bill 2015 including the immediate write-off for eligible SBE start-up costs from 2015/16 (including some professional fees and Australian Government agency charges relating to business start-ups) and the expanded SBE FBT exemption for portable electronic devices from 1 April 2016.
Proposed Non-Refundable Individual SBE Offset from 2015/16
The following diagram illustrates how the new non-refundable individual tax offset will apply to an individual who:
- is a sole trader SBE in their own right (see A below); and/or
- includes a share of the net income of an SBE Partnership and/or a SBE Trust in their personal assessable income (i.e. they derive income as a partner or beneficiary of an unincorporated SBE) (see B and C below).
The offset will be calculated by:
- dividing the individual’s net SBE taxable income from > 1 of the sources shown at A, B and C (broadly the SBE’s taxable income attributable to its business activities, subject to some adjustments – e.g. the $160,000 shown below) by the individual’s total taxable income (e.g. the $200,000 shown below);
- multiplying the result by the individual’s ‘basic income tax liability’ under s 4-10 ITAA 1997 (broadly the individual’s marginal tax rate applied to their total taxable income , subject to some adjustments – e.g. the $63,547 marginal tax on $200,000 shown below); and
- multiplying the entire result by 5%.
This process results in the individual SBE offset amount for the year if the result is < 1,000. If instead, the result is > $1,000 (e.g. the $2,541 result at D below) the SBE offset claim must be capped at $1,000 maximum per individual per year.
- The above treatment does not apply to dividends received from SBE companies. SBE companies will instead receive a 1.5% company tax cut to 28.5% from 2015/16, primarily delivering a benefit to the corporate SBE rather than its stakeholders (see the Tax Astute Tax Snapshot ‘Two-Tier Company Tax Rate from 1 July 2015’ for more details).
- < 18 year old individuals (i.e. children) who are subject to Div 6AA ITAA 1936 penalty rates cannot count SBE trust distributions towards an SBE offset calculation. Such children can only claim an SBE offset (subject to special calculation rules) if they genuinely derive SBE income as a sole trader or partner in an SBE trust or partnership.
- If the individual derives no SBE taxable income (e.g. the SBE incurs a loss and therefore nil SBE taxable income) then no offset may be claimed.
NOTE: There is no requirement in the legislation that an individual must control the SBE partnership or trust in which they are a partner or beneficiary. As a consequence, subject to the amount of net SBE taxable income involved and other important trust distribution restrictions (e.g. Part IVA, s 100A ITAA 1936 and similar restrictions), multiple beneficiaries may be able to access the new offset through an SBE discretionary or hybrid trust.
WANT MORE DETAILS?
In addition to details available at www.taxastute.com.au, Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of their:
- Tax Astute training session;
- Tax Astute reference notes; and
- detailed multimedia recording.
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