Income tax
Business income
Business income is the money a business earns from its trading activities, such as sales and fees, and it forms part of assessable income for income tax purposes.
Business income covers all the amounts a business receives from carrying on its activities. That includes sales of goods, fees for services, commissions, and other receipts that arise from the business. It also includes amounts that are not strictly from sales but arise in the course of the business, such as insurance recoveries for lost income, grants related to trading in some cases, and the sale of trading stock.
For tax purposes, business income is part of assessable income, and when you subtract deductible business expenses you arrive at net business income. It is reported in the tax return of the person or entity carrying on the business. A sole trader reports it in their individual return, a company in its company tax return, and a partnership or trust in its own return.
An important distinction is between business income and capital receipts. Selling an item you trade in is ordinary income, but selling a business asset such as a van or a piece of equipment may be a capital transaction subject to the CGT or depreciation rules. Getting the label right matters, because the tax consequences of the two types of receipt are different.
GST registration affects how you measure business income. If you are registered, GST you collect on sales is not part of your income because you owe it to the ATO, so you report income excluding GST. If you are not registered, you charge no GST and report the full amount. Your GST turnover, which relates to sales, helps decide whether you must register, with the threshold at $75,000 for most businesses.
Timing depends on your accounting basis. On a cash basis you include income when you receive it, and on accruals you include it when you earn it, which often means when you invoice. Small businesses may have choices available. Whichever you choose, apply it consistently, and make sure your BAS reporting basis for GST and your income tax basis are understood together.
Not everything that goes into your bank account is business income. Loans, owner contributions and GST collected are examples that are not. Keep records so that you can show how deposits were classified. Hobbies are also treated differently from businesses, since a hobby usually produces no taxable income and no deductions. This is general information only, so confirm your classification with the ATO or a registered tax professional.
Worked example
A graphic designer invoices clients $88,000 plus $8,800 GST during the year, and also receives a $20,000 bank loan and sells her old computer for $600. Her business income is the $88,000 of fees, excluding GST. The loan is not income, the $8,800 GST belongs to the ATO, and the computer sale is dealt with under the depreciating asset rules.
Practical tips
- Report business income excluding GST if you are registered, and do not count loans or owner contributions.
- Treat sales of business assets separately from trading income, as they follow the CGT or depreciation rules.
- Use the same accounting basis consistently, and keep bank deposits matched to invoices.