In Australia, taxable income is the amount of assessable income left after allowable deductions are subtracted. In simple terms, it’s the figure your tax rate is applied to.
So, is taxable income gross or net? It’s closer to a net figure than a gross figure, because allowable deductions have already been taken into account. However, taxable income has a specific meaning under Australian tax law and shouldn’t be confused with take-home pay, net profit or business turnover.
Assessable income can include ordinary income, such as wages or business sales, as well as statutory income, such as net capital gains. Exempt income and non-assessable non-exempt income sit outside the taxable income calculation.
This article contains general information only and isn’t personal tax advice. Speak with a registered tax agent or accountant about how these rules apply to your specific circumstances.
Key takeaways
- Taxable income = assessable income − allowable deductions. It’s the figure your tax rate is applied to.
- Assessable income has two parts — ordinary income (salary, business sales) and statutory income (like net capital gains).
- Exempt income and non-assessable non-exempt (NANE) income are both excluded from assessable income, but they come from different provisions.
- Turnover isn’t taxable income. Turnover is gross revenue; taxable income is what’s left after deductions, and it’s usually far smaller.
- The same basic formula applies across entity types, but what counts as assessable or deductible differs between individuals, companies, partnerships and trusts.
- Deductions and offsets aren’t the same thing. Deductions reduce taxable income; offsets reduce the tax payable afterward.
- A company’s tax rate (25% or 30%) is applied to its taxable income, decided separately from the turnover-based tests used to work out which rate applies.
On this page
- The basic formula
- Is taxable income gross or net?
- What is assessable income?
- What is statutory income? Ordinary vs statutory income
- What is exempt income?
- What is non-assessable non-exempt (NANE) income?
- What are allowable deductions?
- How tax is calculated from taxable income
- Taxable income isn’t turnover
- Does the formula change for businesses?
- A worked example
- Getting help
The basic formula
Every calculation of Australian income tax, for an individual or a business, starts from the same relationship:
| Term | What it includes |
|---|---|
| Assessable income | Ordinary income plus statutory income, excluding exempt and NANE amounts |
| Less: allowable deductions | Costs and expenses the tax law allows to be subtracted |
| = Taxable income | The figure the applicable tax rate is applied to |
The ATO’s own description of the relationship — taxable, assessable and exempt income — sets out the basic relationship used throughout this article. Whether you’re an employee or running a company, the same basic calculation applies.
To work out your taxable income, start with your assessable income and subtract the allowable deductions you’re entitled to claim.
Is taxable income gross or net?
Taxable income is not your gross income. It is the amount left after allowable deductions are subtracted from your assessable income.
For example, if you have $100,000 of assessable income and $15,000 of allowable deductions, your taxable income would generally be $85,000.
That means taxable income is calculated after deductions, not before them. However, it isn’t necessarily the same as “net income” or take-home pay. Taxable income is a specific tax calculation used to determine how much income tax applies.
For a business, the distinction is particularly important. Gross revenue or turnover is the amount earned before expenses, while taxable income is based on assessable income after allowable deductions have been taken into account.
What is assessable income?
Assessable income is the starting figure, before any deductions are applied. Understanding assessable income helps explain what taxable income means in practice. It’s made up of ordinary income and statutory income, with exempt income and non-assessable non-exempt income carved out.
Assessable income can include more than what most people would normally think of as income. Some amounts that don’t feel like income in ordinary conversation — certain government payments, or a capital gain on selling an asset — are still assessable income under the tax law because a specific provision brings them in.
What is statutory income? Ordinary vs statutory income
Statutory income is an amount that isn’t necessarily income in the ordinary sense but is included in assessable income because Australian tax law specifically says it should be.
| Income category | What it means | Example |
|---|---|---|
| Ordinary income | Income in the everyday, common-sense meaning of the word | Salary and wages, business sales, rent received |
| Statutory income | Not ordinary income, but included in assessable income because a specific tax law says so | Net capital gains, some government payments |
The distinction matters because it explains why some amounts that don’t feel like “income” still count. A capital gain on selling a business asset isn’t wages or trading revenue, but the tax law specifically brings net capital gains into assessable income as statutory income.
What is exempt income?
Exempt income is an amount that would otherwise be ordinary or statutory income, but a specific provision of the tax law says it isn’t taxed. Certain pension payments and some components of employment termination payments are examples.
Exempt income being excluded from taxable income doesn’t necessarily mean it’s ignored for every purpose. Some means tests and other calculations still take exempt income into account, even though it doesn’t form part of the taxable income figure.
What is non-assessable non-exempt (NANE) income?
Non-assessable non-exempt income is a separate category again — it’s not included in assessable income, and it isn’t classified as “exempt” either. It sits outside assessable income under separate tax rules.
Examples of NANE income include the tax-free component of certain genuine redundancy payments and specific government business support grants that legislation expressly treats as NANE income. Other amounts, such as ordinary lottery winnings, may also fall outside assessable income but are not necessarily classified as NANE. Businesses have their own list of amounts to exclude from assessable income. It is worth checking that list instead of assuming a receipt is assessable just because money came in.
What are allowable deductions?
Allowable deductions are the costs and expenses the tax law permits to be subtracted from assessable income to arrive at taxable income. For an individual, that might include work-related expenses incurred in earning income. For a business, it’s the range of costs genuinely incurred in carrying on the business, provided the expense is connected with earning income and you have the records required to support the claim.
Not every cost a business or individual incurs is automatically an allowable deduction, and not every deduction has the same record-keeping requirements. Deductions are also one of the areas where mistakes can have a significant effect on taxable income, so good records matter. Our business tax return checklist focuses heavily on documenting deductions correctly.
How tax is calculated from taxable income
Once taxable income is worked out, the applicable tax rate is applied to it — the individual marginal tax rates for a person, or 25% or 30% for a company depending on its base rate entity status. That produces gross tax payable.
Tax offsets and credits are then applied after that step, reducing the tax payable itself rather than the taxable income figure. This is where deductions and offsets often get confused: a deduction lowers the amount tax is calculated on, while an offset lowers the tax bill directly, after the rate has already been applied. Two taxpayers with identical taxable income can still end up with different final tax payable if one has offsets the other doesn’t.
Taxable income isn’t turnover
Turnover — gross business revenue before any costs are subtracted — gets used in the same conversations as taxable income, and the two are easy to conflate.
Turnover is used for different purposes. It’s the figure tested against thresholds like the $50 million aggregated turnover threshold that helps decide whether a company qualifies for the 25% company tax rate. Taxable income is the figure that rate is then applied to, once assessable income has had deductions subtracted from it. This is also why taxable income shouldn’t be treated as a gross-income figure. A business can have a large turnover figure and a modest taxable income in the same year. They’re two different figures used for different purposes.
Does the formula change for businesses?
The underlying formula — assessable income minus allowable deductions — is the same across individuals, sole traders, partnerships, trusts and companies. What differs by entity type is what’s counted as assessable, what’s deductible, and who ultimately pays tax on the result.
- A sole trader’s business income and deductions flow into their individual return, alongside any other income they have.
- A partnership works out its net income for the year, but the partnership itself generally doesn’t pay tax on it — each partner includes their share in their own return.
- A trust works similarly, with beneficiaries generally assessed on their share of the trust’s net income.
- A company calculates its own taxable income on its own return and pays tax on it directly, at 25% or 30% depending on its base rate entity status.
Our guide to lodging a business tax return covers how each of these structures actually lodges, once the taxable income figure for each has been worked out.
A worked example
After deductions, the company’s taxable income is $80,000 ($420,000 − $340,000). Assuming the company satisfies the base rate entity requirements, the 25% rate would apply to that $80,000, producing $20,000 of tax before any offsets. The turnover figure used for the base rate entity test is closer to the $400,000 sales figure, not the $80,000 taxable income figure. They’re used for different parts of the tax calculation.
Getting help
In practice, working out taxable income comes down to getting both sides of the calculation right: including the income that needs to be declared and claiming only the deductions you’re entitled to. Getting either side wrong changes the figure the tax rate is applied to. One common point of confusion is GST — our guide to whether taxable income includes GST covers why it’s excluded from both sides of the calculation.
If you’d like help getting your business’s income and deductions right before lodgment, our tax accountant and small business accounting pages cover how we approach it, and our business tax return checklist sets out what to gather first.
Want help working out your taxable income correctly?
We’ll review your income and deductions and confirm the figure your return is built on.
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Frequently asked questions
What is taxable income in simple terms?
Taxable income is assessable income minus allowable deductions. It's the figure your tax rate is actually applied to, not your total income, your turnover or your take-home pay. For an individual, it might be salary plus other assessable amounts, less deductions like work-related expenses. For a business, it's assessable business income less the deductions the business is entitled to claim.
What's the difference between assessable income and taxable income?
Assessable income is the starting figure — ordinary income like salary or business sales, plus statutory income like net capital gains, before any deductions are subtracted. Taxable income is what's left after allowable deductions are taken off that assessable income figure. Assessable income is always equal to or larger than taxable income, since deductions only reduce it, never increase it.
Is taxable income gross or net?
Taxable income isn't gross income. It's the amount left after allowable deductions are subtracted from assessable income, so it's closer to a net figure. However, taxable income is a specific tax calculation and isn't necessarily the same as net profit, take-home pay or other figures commonly described as net.
Is taxable income before or after deductions?
Taxable income is calculated after allowable deductions. You first determine your assessable income and then subtract the deductions you're entitled to claim. The amount remaining is your taxable income, which is then used to calculate income tax.
Is turnover the same as taxable income?
No. Turnover is gross business revenue — the total value of sales before any costs or deductions are taken out. Taxable income is what's left after allowable deductions, and for most businesses it's a much smaller figure than turnover. Turnover is also used for separate purposes, like testing eligibility for the small business company tax rate, and shouldn't be confused with the figure tax is actually calculated on.
What is exempt income?
Exempt income is an amount that would otherwise count as assessable income, but a specific tax law says it isn't taxed. Certain pension payments and some components of employment termination payments are examples. Exempt income is still relevant for some other calculations, such as some means tests, even though it isn't included in taxable income.
What is non-assessable non-exempt (NANE) income?
NANE income is income that isn't included in assessable income at all, and isn't formally classified as exempt either — it simply sits outside the tax system for that purpose. Examples include the tax-free component of certain genuine redundancy payments and specific government business support grants that legislation treats as NANE income. Other amounts, such as ordinary lottery winnings, may also fall outside assessable income but are not necessarily classified as NANE.
Do individuals and businesses calculate taxable income the same way?
The underlying formula is the same — assessable income minus allowable deductions — but what counts as assessable and what's deductible differs by entity type. A sole trader's business income and deductions flow into their individual return alongside their other income. A company works out its own taxable income on its own return, and a partnership or trust calculates a net income figure that's then generally taxed at the partner or beneficiary level rather than the entity level.
Does a lower taxable income always mean less tax?
Generally yes, since the tax rate is applied to taxable income, but the final tax payable also depends on tax offsets and credits, which are applied after the rate, not before. Two taxpayers with the same taxable income can end up with different final tax payable if one has offsets or credits the other doesn't. Confusing a deduction, which reduces taxable income, with an offset, which reduces tax payable directly, is a common source of misunderstanding.
Why does taxable income matter for a business owner?
It's the figure that actually drives the tax bill, which makes it more useful to track through the year than turnover or gross profit alone. A business can have strong turnover and still have a modest taxable income once deductions are applied, or the reverse in a year with fewer deductible costs than usual. Understanding the components lets an owner see roughly where they'll land before the return is finalised, rather than being surprised by the result.
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