Income tax
Assessable income
Assessable income is the total of all income and gains that are subject to income tax in a year, before any deductions are subtracted.
Assessable income is the starting figure in the income tax calculation. It is made up of all the amounts you receive or that are credited to you during the year that the law treats as taxable. Deductions are subtracted from it to give your taxable income, so getting this figure right is the foundation of an accurate tax return.
There are two broad categories of assessable income. Ordinary income covers amounts that are income according to ordinary concepts, such as wages, business takings, interest, rent, and fees for services. Statutory income covers amounts that the legislation specifically includes, even if they would not be income in the ordinary sense. A net capital gain is a key example of statutory income.
Most people include salary and wages, bank interest, dividends, rental income, business income, and government payments that are taxable. Some items are explicitly excluded. Non-assessable income and exempt income are not part of assessable income. This means they are not taxed, but the way each is treated differs, particularly when it comes to losses.
For a business, assessable income depends on the accounting method used. On a cash basis, income is recognised when you receive payment, and on an accruals basis it is recognised when you earn it, which is generally when you issue the invoice or are entitled to payment. The choice affects which income year the amount falls into, so it must be applied consistently.
GST affects how assessable income is measured. If you are registered for GST, the GST you collect on sales is not part of your assessable income, because it is owed to the ATO. Your income is the GST-exclusive amount. If you are not registered for GST, you do not collect GST and your whole receipt is income. Mixing GST-inclusive and GST-exclusive figures is one of the most common reporting errors.
Keep records of every source of income, including bank statements and invoices, for five years. Under-reporting income can lead to penalties and interest. Remember that income does not have to be cash, since barter and benefits can also count. This is general information only, so confirm what counts as assessable income for you with the ATO or a registered tax professional.
Worked example
Mia earns $70,000 salary, $1,200 bank interest, $800 in dividends and makes a net capital gain of $5,000 during the year. Her assessable income is $70,000 + $1,200 + $800 + $5,000 = $77,000. She then subtracts allowable deductions of $2,500 to reach taxable income of $74,500. A $400 tax-free gift from a relative is not assessable income.
Practical tips
- Include all sources of income in your return, including interest, dividends and net capital gains, not just salary.
- If you are registered for GST, report business income excluding the GST you collected.
- Keep bank statements and invoices for five years in case the ATO checks your reported income.