Journal of the Australasian Tax Teachers Association 2006 Vol. 2 No. 1 107 THE TAX OFFSET FOR ENTREPRENEURS: A CRITICAL REVIEW OF THE 25 PER CENT TAX OFFSET FOR SMALL BUSINESS JOHN MCLAREN* From 1 July 2005, small business taxpayers using the Simplified Tax System and with a turnover of $50,000 or less are allowed a tax offset of 25 per cent on their tax payable. If turnover exceeds $50,000, the tax offset phases out at 1 per cent until the turnover reaches $75,000. This tax concession was part of the government’s election statement made on 26 September 2004 in which the government stated that it wanted to assist and encourage small business entrepreneurs, particularly those set up from home. The steps involved in calculating the amount of tax offset that can be claimed are complicated where the business is structured as a trust or partnership and also where the taxpayer earns other income not just from the business. The offset also requires the small business taxpayer to be in a position to actually pay income tax before the tax offset provides any advantage, so that non-taxpaying small businesses receive no assistance. This paper critically reviews the 25 per cent tax offset and suggests alternative ways in which entrepreneurs could have been assisted by the tax system, for example, a reduced rate of income tax. I I NTRODUCTION The Australian government recognises that an important driver of a strong economy is growth in small to medium enterprises (‘SMEs’). In the 2004 federal election policy statement promoting an Enterprise Culture, the government announced a number of measures designed to foster the entrepreneurial spirit of small businesses. The government stated that it would provide further incentive and encouragement to small businesses — particularly those that set up and operate from home — through the introduction of a tax offset for entrepreneurs. The proposed new tax benefit is targeted at very small, micro and home-based businesses that are in the Simplified Tax System (‘STS’). This approach is in line with the view of the OECD that ‘innovative start-ups or small firms have played an important role in spurring productivity growth in OECD countries in the 1990s’. 1 From 1 July 2005, small business taxpayers using the STS and with a turnover of $50,000 or less are allowed a tax offset of 25 per cent on their tax payable. If the turnover exceeds $50,000, the tax offset phases out at 1 per cent or every $1,000 until the turnover reaches $75,000. This means that when taxpayers prepare their tax returns after 30 June 2006, for the financial year 2005-2006, they will claim the 25 per cent tax offset as a reduction in the amount of tax payable. The Australian financial year runs from 1 July to 30 June, unless the Australian Taxation Office, ATO, allows a business to adopt a substituted accounting period. * LLB (Tas), MBA (Mon), LLM (Mon), Lecturer, School of Accounting and Law, RMIT University. 1 OECD Directorate for Science, Technology and Industry, ‘Entrepreneurship and Growth: Tax Issues’ (2002) 7 < http://www.oecd.org/dataoecd/10/19/2079715.pdf > at 15 March 2006.