It reduces the tax payable on ABN income by 16% of that tax, capped at $1,000 a year. Sole traders qualify; companies and trusts do not. It is non refundable, so it can reduce tax to zero but cannot create a refund on its own, and it is not applied automatically.
What is it actually discounting?
The tax attributable to your business income, not the income itself and not your whole assessment. That is why the figure ends up small.
The calculation runs in three steps. Take your net small business income, being ABN receipts less ABN deductions. Identify the tax attributable to that slice. Apply 16% to it, capped at $1,000. So $12,000 of delivery income less $2,500 of deductions leaves $9,500 net, tax on that slice at working holiday maker rates is $1,425, and the offset returns $228.
Who qualifies?
Individuals with business income under an ABN, as a sole trader or a partner in a partnership, with aggregated annual turnover under $5 million. For a working holiday maker the turnover test is never the issue, so having ABN income is the qualification.
Companies and trusts are excluded, because the offset exists to give unincorporated businesses something in place of the lower company tax rate. Hence its other name, the unincorporated small business tax discount.
What is worth at typical backpacker income levels?
Modest, and worth having. The offset scales with the tax on the business slice, up to the cap.
- $5,000 of net ABN income: an offset in the region of $120
- $15,000: around $360
- $30,000: around $720
- Above that: capped at $1,000
Deductions reduce the offset as well as the tax, because a smaller net business income means less tax attributable to it. That is not a reason to claim fewer deductions, since a dollar of deduction saves more than the 16% the offset gives back.
Can it be combined with other offsets?
Yes, and for a working holiday maker with mixed income it usually is. Each offset is calculated separately and applied to the final position.
- The small business tax offset, on the tax attributable to business income, capped at $1,000
- The low income tax offset, which applies where you are assessed as a resident, worth up to $700
- The Medicare levy exemption, which removes the 2% levy where you are not entitled to Medicare
The residency position decides whether the low income offset is available, and the passport decides the Medicare question. Our guide to the low income tax offset sets out that side.
What happens when you had both wages and ABN income?
Both are taxed at working holiday maker rates, both go on one return, and only the ABN portion attracts this offset. Deductions and other offsets apply across the whole assessment.
That works in your favour more often than people expect, because the PAYG withheld from wages frequently covers the tax owed on the untaxed ABN income. The offset then reduces the remaining business tax, turning a small amount payable into nothing owing.
What voids it?
Income that is not genuinely business income. If an arrangement is reclassified as employment rather than contracting, the income stops being small business income and the offset goes with it, along with the deductions claimed against it.
Sham contracting, where a worker is put on an ABN for what is really a supervised hourly job, is widespread in hospitality and farm work, and the reclassification brings back award rates, superannuation and workers compensation while removing the offset. Our guide to the employee versus contractor test sets out how the line is drawn.
What if you already lodged without it?
It can generally be claimed by amending the return, and the standard amendment window is two years from the date the original assessment issued. A first year backpacker who lodged the previous October is often still inside it.
Self lodged returns miss this offset regularly, because nothing prompts for it and the ATO does not apply it on your behalf.
What is the offset worth to you?
The rate and the cap are fixed. What it is worth to you is decided by the shape of your year.
- How much of your income ran through the ABN rather than through wages.
- What your deductions came to.
- Whether you also had wages, whose withholding often absorbs the business tax before the offset is reached.
- Whether the contracting was genuine, since reclassification removes it.
- Whether you are assessed as a resident, which decides whether the low income offset stacks alongside it.
- Whether a prior year was lodged without claiming it, amendable within two years.
Every eligible offset is applied when the working holiday tax return is prepared, and you can estimate your tax refund to see how the two income types combine.