Income tax
Taxable income
Taxable income is your assessable income less allowable deductions, and it is the amount on which your income tax is calculated.
Taxable income is the figure at the bottom of the income tax calculation. You reach it by taking your total assessable income for the year and subtracting every deduction you are entitled to claim. Once you have that number, the tax rates are applied to it to work out how much income tax you owe before offsets and credits.
For an individual, the figure includes everything from salary and wages to interest, dividends, rent and a net capital gain, less deductions such as work-related expenses, donations to deductible gift recipients, and the costs of managing your tax affairs. For a business operator it also includes net business income, which is business income minus business expenses such as stock, wages, rent and depreciation.
A company has its own taxable income, calculated in the same way and taxed at the company tax rate. A trust works out its net income, and the amount is then taxed in the hands of beneficiaries or the trustee, depending on how it is distributed. A partnership does not pay income tax itself. It works out net partnership income, and each partner reports their share in their own return.
If deductions are greater than assessable income, the result is a tax loss rather than taxable income. A tax loss for a business may be carried forward to be used in a later year, subject to conditions. For individuals who are not in business, special rules, including the non-commercial loss rules, may stop a loss from being used against other income.
Taxable income is used for more than the basic tax calculation. It helps determine your Medicare levy and whether you owe the Medicare levy surcharge. It can also be one factor in entitlements to some government payments and other income-tested amounts. Different tests use slightly different measures, so a figure called income in one place may not equal your taxable income.
For GST-registered businesses, deductions are generally claimed for the GST-exclusive cost of purchases, because the GST is recovered through input tax credits on the BAS. If you are not registered, the full GST-inclusive amount is the deductible cost. Keep records to support each deduction. This is general information only, so confirm how to calculate your taxable income with the ATO or a registered tax professional.
Worked example
Sam is a sole trader with business income of $95,000, interest of $600 and a net capital gain of $4,000. His assessable income is $95,000 + $600 + $4,000 = $99,600. His allowable deductions total $27,400, including stock, vehicle costs and insurance. Taxable income is $99,600 - $27,400 = $72,200, and the resident tax rates are applied to this amount.
Practical tips
- Subtract deductions from assessable income to get taxable income, and do not apply the tax rates to gross income.
- If you are registered for GST, claim deductions on the GST-exclusive amount because you recover the GST through the BAS.
- Remember that other income tests, such as for government payments, may use a different definition of income.