Assessable income is an essential concept in the Australian tax system. It refers to the gross income that is subject to taxation by the Australian government. Any individual or business that earns income in Australia is required to pay tax on that income. The form of income that is not capable of being taxed is known as ‘exempt’ income. Examples of exempt income include:
- Some government pensions and payments, including the invalidity pension
- Some education payments.
Some examples of ordinary income include your:
- Salary or income received for rendering personal services (see section 6.5 of the Income Tax Assessment Act 1997 (Cth)); and
- Statutory income, referring to all amounts that are not ordinary income but are included in your assessable income by way of a specific rule in tax law.
You and your family are eligible for a variety of payments and benefits under an income support payment. Regular payments as well as additional allowances to supplement your income may be part of the support.
What is Considered Assessable Income in Australia?
According to the Australian Taxation Office (ATO), this type of income includes all income received as money, goods, property, or services. It encompasses all earnings from employment, business income, investment income, and capital gains. Some common types include:
- Salary and wages
- Investment income (e.g., interest, dividends, rent)
- Capital gains
- Business income
- Foreign income
- Government payments (e.g., pensions, allowances)
It is important to note that this type of income also includes any income earned overseas, which means Australian residents must declare their worldwide income on their Australian tax return.
Deductions from Assessable Income
While all assessable income is subject to taxation, individuals, and businesses can reduce the income tax they owe by claiming deductions. These deductions are subtracted from the total of the income, reducing the tax owed. Given below are some common forms of deductions.
Superannuation Contributions
To claim the superannuation contribution as a deduction, the employee must provide their superannuation fund with a Notice of Intent to Claim a Deduction form. Before the end of the fiscal year, the claimant must submit the form to superannuation funds, and the employee must obtain an acknowledgment from the fund.
Investment Expenses
Investment expenses must be incurred while investing in shares, rental properties, or managed funds. In Australia, investment expenses are tax-deductible, meaning they are claimable as a deduction from an individual’s assessable income. This reduces the tax an individual has to pay and, in turn, increases their disposable income.
Work-Related Expenses
To claim work-related expenses as a deduction, employees must meet the following eligibility criteria:
- They must pay for the expenses individually without receiving reimbursement from their company.
- The expense must directly relate to their job responsibilities.
- The expense must have a record to support it, such as a receipt or invoice
Employees can claim various work-related expenses as deductions including vehicle, travel, clothing and uniform, and self-education expenses.
Self-Education Expenses
The self-education expenses must directly relate to the individual’s current employment or future employment that they have a reasonable expectation of obtaining. The expenses are made after the individual has started earning from their employment.
Charitable Donations
Registering a charity with the Australian Charities and Not-for-profits Commission (ACNC) is required to be eligible for a deduction. The donation must also be a gift, which means it must be voluntary and made without expecting to receive anything in return.
Income Protection Insurance
To be eligible for a tax deduction on income protection insurance premiums, the policy must cover loss of income due to sickness or injury. Moreover, the policy must not include other benefits such as a lump sum payments or death benefits and must not be bought through a superannuation fund.
Rental Property Expenses
The Australian Taxation Office (ATO) allows you to claim deductions for expenses that relate to the rental property. These expenses may include but are not limited to:
- Interest on loans used to purchase the rental property
- Council and water rates
- Insurance premiums
- Repairs and maintenance
- Property management fees
- Advertising for tenants
- Travel expenses to inspect the property
The Importance of Accurate Reporting
It is essential to report all assessable income and deductions on tax returns accurately. Failure to do so can result in penalties, fines, and even legal action. The ATO has a range of tools and resources available to help individuals and businesses accurately report their income and deductions. These tools include online calculators, tax agents, and the myTax system which allows individuals to lodge their tax returns online.
Impact on Penalties
The ATO has a range of penalties that it can apply to individuals and businesses who fail to meet their tax obligations. These penalties can range from fines to legal action. The gravity of the offence and the circumstances surrounding it will determine the penalty.
Impact on Reputation
Suppose there is a finding that an individual or company deliberately or recklessly underreported their assessable income. In that case, it can damage their reputation and make it difficult for them to conduct business or obtain credit in the future. This can have significant financial and personal implications.
Impact on Legal Action
In some cases, failure to accurately report such income can result in legal action against the individual or business. This can be costly and time-consuming, resulting in significant fines and even imprisonment. It is important to note that the ATO can prosecute individuals and companies who deliberately or recklessly fail to meet their tax obligations.
Exclusions to Assessable Income
While this income includes a broad range of income sources, some exclusions are not taxed. Some of the exclusions are as follows:
- Gifts and Inheritances. Gifts and inheritances an individual receives do not constitute as assessable income. However, any income earned from the gift or inheritance is assessable.
- Compensation for Personal Injury. The compensation payments received for personal injury is not taxable. This includes compensation for physical or mental injuries, compensation for loss of income, and compensation for medical expenses.
- Child Support Payments. Child support payments received by an individual are also not included.
- Lottery Winnings. Lottery winnings are not taxable in Australia.
- Tax-Free Government Payments. Certain government payments are tax-free, such as the Age Pension, Disability Support Pension, and Carer Payment.
- Capital Gains Tax Exemptions. Certain capital gains are exempt from tax, such as selling a main residence, small business, and personal use assets.
- Foreign Income. If an individual earns income from overseas, they may be eligible for a foreign income tax offset, which reduces their Australian tax liability.
Assessable income can also be real estate income from things like rental properties or boarders and lodgers deemed income from financial investments.
Seeking Legal Help for Tax-Related Matters
Tax laws are complex and change frequently, making it challenging for individuals and businesses to keep up with the latest regulations.
Qualified tax lawyers at JB Solicitors can provide assistance on the interpretation and application of tax laws, help you prepare your tax returns and financial assets accurately, and represent you in disputes with the Australian Taxation Office (ATO).
Contact us today.
