Taxable Income

 

In the Australian income tax system, income tax is levied on taxable income received during the income year of 1 July to 30 June.

Taxable Income is essentially Assessable Income less allowable Tax Deductions.

Assessable Income is briefly described below. See our Assessable Income article for more details on assessable income.

Also see our Tax Deductions article for details on how tax deductions work, tax deduction eligibility and more.

Note that taxable income is not necessarily the same as net income for accounting purposes.

Assessable income

Assessable income includes ordinary income, which is income according to ordinary concepts, and statutory income, or income specifically made assessable by the Income Tax Assessment Act 1997 (Tax Act). If you’re a resident of Australia, your assessable income includes the ordinary income you derived directly or indirectly from all sources (whether in or out of Australia) during the income year.

Ordinary income

The term ‘ordinary income’ is not defined. Its meaning must be determined by reference to case law.

These cases have determined the following re income:

  • Certain receipts falling into traditionally recognised categories such as rent, interest, wages, annuities, dividends, royalties, business profits, compensation and reimbursement for revenue expenses and loss of income are (with rare exceptions) classed as income.
  • Certain receipts will usually not be income unless they are the proceeds of employment or a business. For example, gifts and bequests, proceeds from the sale of capital assets, gambling and lottery wins etc. are not normally classed as income.
  • Income is either money or something that can be converted into money. For this reason, section 21A was inserted into the Tax Act to catch non-cash business benefits.
  • A taxpayer cannot receive income from himself/herself. This is called the mutuality principle. For this reason, clubs are not taxed on subscriptions and contributions from members. However, they are taxed on receipts from non-members (e.g. bank interest; poker machine proceeds and other payments by non-members).
  • Where a receipt ‘replaces’ a revenue loss, it is income. Where it replaces a capital loss, it is capital.

The cases have also established that income according to ordinary concepts includes the following types of receipts:

  • Income from the carrying on of a business. This includes all proceeds from the normal carrying on the business. Other proceeds made when carrying on a business will be income if a profit-making purpose can be inferred. In some cases, it may be necessary to determine whether a business is being carried on versus a hobby.
  • Income from carrying on a profit-making scheme or isolated business venture, so long as the taxpayer entered into the transaction with the dominant (or at least significant) purpose of making a profit or gain from the transaction, and the transaction was not a mere realisation of a capital asset at a profit.
  • Income received from the rendering of personal services (e.g. wages, bonuses, commissions, tips, gratuities and other payments incidental to employment), or concerning the rendering of personal services.
  • Income received from the holding of property (e.g. rent, interest, dividends).
  • Consideration received for an assignment of the right to future income.

Receipts that are capital in nature are not income according to ordinary concepts. These receipts may be assessable under other provisions, such as the capital gains tax provisions. Generally, the test applied is whether the receipt falls within any of the categories of income discussed above. If not, it will be regarded as capital and not included in income as ordinary income.

The cases have established other tests with respect to the revenue or capital nature of expenses incurred. These may also be used to determine whether a receipt is an income or capital in nature. The main test is contained in Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337. It states that a distinction must be made between the business entity, structure or organisation set up for the earning of profit and the process by which such an organisation operates to obtain its regular returns.

Statutory income

The Tax Act has sections that include specific amounts in assessable income. These are referred to as statutory income. One example is the way the Tax Act states that capital gains are to be included in assessable income.

A list of all the provisions that include amounts in assessable income is provided in section 10-5 of the Tax Act.

 

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.