ATO and administration
Income Tax Assessment Act
The Income Tax Assessment Act refers to the federal Acts that set out how income tax is calculated in Australia, including assessable income, deductions, losses and offsets.
The Income Tax Assessment Act is the name given to the core legislation that governs income tax in Australia. There are in fact more than one Act under this heading, commonly referred to as the 1936 Act and the 1997 Act, and they work together. The 1997 Act restated and rewrote many of the rules in plainer language, while some provisions remain in the earlier Act. Practitioners generally refer to both.
These Acts define the basic building blocks of income tax. They describe what counts as assessable income, what is exempt or non-assessable, and what can be claimed as a deduction. They explain how capital gains are calculated and taxed, how depreciation and capital allowances work, how tax losses are carried forward, and how offsets reduce tax payable. If you have ever wondered why something is or is not deductible, the answer ultimately comes from here.
The Acts operate alongside others. The rates of income tax themselves are set in separate legislation, which is one reason they can change without altering the structure of the main Acts. The Taxation Administration Act deals with lodgment, record keeping, penalties and interest. The GST Act deals with GST. The result is that a typical small business needs to understand how its income tax, GST, super and payroll obligations fit together, even though they come from different laws.
The connection with GST is practical. Income tax and GST use different tests. For income tax, a business generally works from amounts excluding GST when calculating its income and deductions if it is registered, because GST collected is passed to the ATO and GST credits are recovered. For example, a registered business records sales at the GST-exclusive amount as income and purchases at the GST-exclusive amount as expenses, with the GST handled separately through the BAS.
Common misunderstandings include thinking that because a purchase attracts a GST credit it is automatically deductible for income tax, or the reverse. The tests are separate. An expense might be deductible but not give a credit, or give a credit but only partly be deductible, such as where private use is involved. The two should be considered side by side, not assumed to match.
Because tax rates, thresholds, offsets and some concessions change over time, it is important to check current rules on the ATO website rather than rely on an old article. When a question turns on how a specific provision applies to your facts, such as a deduction for a mixed-use asset or the treatment of a business sale, professional advice is worthwhile. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered sole trader buys a $3,300 GST-inclusive tool used only for business. The GST credit is $3,300 divided by 11, which is $300. The income tax deduction, assuming it is claimed in full in the year, is based on the GST-exclusive cost of $3,000. If the tool were used half for private purposes, both the credit and the deduction would be reduced by apportionment.
Practical tips
- Remember that GST credits and income tax deductions follow separate rules. Check both when deciding how to treat a purchase.
- Use the ATO's current-year guidance for rates and thresholds, since they are set by legislation and can change.
- Seek help for complex matters such as business sales, restructures and capital gains.