Income tax
Net business income
Net business income is the profit of a business for tax purposes, being business income less the deductible expenses of running the business, which is reported in the owner's tax return.
Net business income is the figure that results from taking the income your business earns and subtracting the costs of earning it. For a sole trader or partner, this net amount flows through to the personal tax return and is added to other income such as wages or interest. It is what is effectively taxed, rather than the gross takings of the business.
The calculation starts with business income, which includes sales, fees, commissions and any other receipts from carrying on the business. From this you subtract allowable deductions, such as the cost of trading stock, wages, rent, insurance, advertising, motor vehicle expenses, depreciation and interest on business loans. The result, if positive, is net business income, and if negative, it is a business loss.
GST affects the figures in an important way. If you are registered for GST, your income is measured excluding the GST you collect, and your expenses are measured excluding GST for which you can claim credits. If you are not registered, you do not collect GST and your income and expenses include the GST amounts. Using the wrong basis is a common cause of incorrect returns.
The timing of income and expenses depends on whether you use the cash or accruals basis. Small businesses may be able to use simpler options, such as accounting for income when received. The method you choose should be applied consistently, and the same method often is used for GST, though the two can be different in some situations. Keep your records tidy to match BAS and income tax figures.
Personal services income, if applicable, is subject to special rules and may limit the deductions you can claim. Private and domestic expenses are not deductible, and mixed-use items must be apportioned. If a business makes a loss, the non-commercial loss rules may restrict whether an individual can use the loss against other income, unless certain tests are passed.
Companies and trusts also work out net income, and partnerships calculate net partnership income and distribute it among partners. In each case the figures should reconcile to your accounts. This is general information only, so confirm the correct calculation for your business with the ATO or a registered tax professional.
Worked example
A sole trader reports business income of $160,000 excluding GST. Deductible expenses excluding GST are: stock $55,000, wages $30,000, rent $18,000, vehicle $6,000 and other costs $11,000, a total of $120,000. Net business income is $160,000 - $120,000 = $40,000. This is added to any other income and taxed at personal marginal rates.
Practical tips
- Use GST-exclusive figures for income and expenses if you are registered for GST.
- Keep business and private expenses separate, and apportion mixed-use items.
- Reconcile your accounts to your BAS figures so your tax return and BAS agree.