Taxable income

What Is Taxable Income?

Taxable income is the amount of income on which an individual or business must pay income tax in Australia. It is not the same as gross income or gross pay. Instead, it is a final figure calculated by subtracting all allowable deductions from a person's assessable income. The Australian Taxation Office (ATO) uses an individual's taxable income to determine their final tax liability for a financial year, which in turn dictates whether they receive a tax refund or have a tax bill to pay.

The formula is: Taxable Income = Assessable Income - Allowable Deductions.

Components of Taxable Income

Understanding the components of taxable income is crucial for both employers and employees:

• Assessable Income: This is the starting point. It includes all income that an individual is required to declare in their annual Tax Return. For employees, the primary source of assessable income is their employment, which includes:
  • Salary and wages
  • Commissions and bonuses
  • Overtime and allowances (that are not genuine reimbursements)
  • Paid leave and sick leave
  • Lump sum payments (e.g., for unused leave on termination)Assessable income also includes other sources like bank interest, dividends, rental income, and business income.
• Allowable Deductions: These are expenses an individual can claim to reduce their taxable income. To be claimed, an expense must typically be directly related to earning an individual's assessable income, not be reimbursed, and have a supporting record (e.g., a receipt). Common examples of allowable deductions include work-related expenses (e.g., travel between workplaces, professional memberships, tools and equipment), and charitable donations.

The Difference Between Gross Pay and Taxable Income

It's common for an employee's gross pay to be confused with their taxable income, but they are different.

• Gross Pay is the total amount an employer pays an employee before any deductions are taken out for tax, superannuation, or other pre-tax contributions. This amount forms the basis of an employee's employment-related assessable income.
• Taxable Income is the final figure that an employee reports to the ATO after they have added all other assessable income sources and subtracted all their allowable deductions.

For example, an employee's gross income from their job might be $80,000. On their tax return, they might claim $2,000 in work-related expenses. Their taxable income would then be $78,000, and this is the figure on which their final income tax will be calculated.

The Role of Employers and Payroll Systems

Employers play a central role in providing the data that forms the largest part of an employee's taxable income. Through Tax Reporting, specifically via Single Touch Payroll (STP), employers report an employee’s gross pay to the ATO with each pay run. This data then appears on the employee’s online income statement and is used to pre-fill their annual tax return.

The accuracy of an employer's payroll system in reporting all components of an employee's assessable income (including wages, allowances, and bonuses) is crucial for ensuring the pre-filled tax return data is correct, simplifying the process for the employee.

How Microkeeper Data Relates to Taxable Income

Microkeeper's integrated Workforce Management platform provide the foundational data for an employee's taxable income calculation:

• Accurate Wage Reporting: The system correctly identifies and reports all assessable income components—including wages, commissions, allowances, and bonuses—to the ATO via STP. This ensures that the employee's main income source is accurately reflected on their income statement.
• STP Phase 2: Microkeeper’s compliance with STP Phase 2 enables a granular breakdown of payments, which assists employees and the ATO in correctly identifying different types of income for tax purposes. This is especially helpful for complex pay structures in industries like Construction or Mining.
• Employee Records: The system provides secure digital records of all payments, accessible by employees via their portal, allowing them to verify their reported income against their own records before lodging their tax return.

FAQs About Taxable Income

Is my gross income the same as my taxable income?‍

No. Your gross income is your total earnings before any deductions. Your taxable income is what you get after you subtract any allowable deductions from your assessable income.

What is the difference between assessable income and taxable income?‍

Assessable income is the total income you must declare on your tax return. Taxable income is the final figure after you subtract all your allowable deductions from your assessable income. Taxable income is the figure used to calculate your final tax bill.

Can I get a tax refund if my employer has taxed me correctly?‍

Yes. You can receive a tax refund if your employer has withheld the correct amount of tax but you are eligible for tax offsets or have claimed enough deductions to reduce your overall tax liability.

How do allowances impact my taxable income?‍

Most allowances (e.g., for clothing, travel, or tools) are considered part of your assessable income and are therefore taxable. However, if the allowance is used to pay for a legitimate work-related expense, you can claim a deduction for that expense, which will reduce your taxable income.

What if my employer reports incorrect income on my income statement?‍

If the information on your income statement is wrong, you should first contact your employer and ask them to lodge an amendment to their STP report. This will update the data with the ATO.

Best Practices for Managing Taxable Income

• For Employers: Ensure all components of an employee’s assessable income are correctly identified and accurately reported to the ATO via STP. Provide employees with transparent payslips that clearly show their gross pay and deductions.
• For Employees: Keep records of all work-related expenses throughout the year. Review your income statement via myGov and check that the reported amounts are accurate before lodging your tax return.

Final Thoughts

Taxable income is a foundational concept for every Australian taxpayer. While employers are responsible for reporting the primary component of an employee’s income, the final calculation is a personal obligation. Accurate payroll reporting and transparent data access are essential for a smooth and correct tax process for both the business and its employees.

Disclaimer: This entry is intended for informational purposes only and does not constitute legal or tax advice. For tailored guidance, consult with a qualified professional or the Australian Taxation Office (ATO).

‍