Your income tax is based on your taxable income, so how do you calculate your taxable income?

Taxable income is assessable income less allowable deductions

Assessable income consists of ordinary income and statutory income

Ordinary income is income according to ordinary concepts

Statutory income is anything the Assessment Act calls income

Section 4-10 tells you how to work out your tax payable.

You apply the rate of tax, which applies to your taxable income and then you take away the offsets, which you can claim. Let's use the language of section 4-10

Method statement

Step 1. Work out your taxable income for the income year.

To do this, see section 4-15.

Step 2. Work out your basic income tax liability on your taxable income using:

(a) the income tax rate or rates that apply to you for the income year; and

(b) any special provisions that apply to working out that liability.

See the Income Tax Rates Act 1986.

Step 3. Work out your tax offsets for the income year. A tax offset reduces the amount of income tax you have to pay.

For the list of tax offsets, see section 13-1.

Step 4. Subtract your *tax offsets from your basic income tax liability. The result is how much income tax you owe for the *financial year. (If your total tax offsets exceed your basic income tax liability, you are not entitled to a refund, or to offset the excess against any other liability.)

Did you notice the bit about working out your taxable income? Just to remind you it referred you to section 4_15…

Step 1. Work out your taxable income for the income year.

To do this, see section 4-15.

4-15 How to work out your taxable income

(1) Work out your taxable income for the income year like this:

 

Method statement

Step 1. Add up all your assessable income for the income year.

To find out about your assessable income, see Division 6.

Step 2. Add up your deductions for the income year.

To find out what you can deduct, see Division 8.

Step 3. Subtract your deductions from your assessable income (unless they exceed it). The result is your taxable income. (If the deductions equal or exceed the assessable income, you don’t have a taxable income.)

So the trick is to get the assessable income and then take away the deductions.

Answer this question….

Income tax is calculated by applying the tax rate to assessable income 

Yes No

 Income tax is calculated by applying the tax rate to taxable, not assessable income

 So what is assessable income?

The answer to that question can be found in section 6-1

(1) Assessable income consists of *ordinary income and *statutory income.

(2) Some *ordinary income, and some *statutory income, is *exempt income.

(3) *Exempt income is not assessable income.

(4) Some *ordinary income, and some *statutory income, is neither assessable income nor *exempt income.

assessable income=ordinary income + statutory income

So if you know what makes up…

ordinary income

statutory income

You know what assessable income is.

 

So what is ordinary income?

You will find the answer to that question in section 6-5

6-5 Income according to ordinary concepts (ordinary income)
      1. Your assessable income includes income according to ordinary concepts, which is called ordinary income.

        2. So far, so good! Ordinary income is anything that the man in the street would consider to be income

        Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

        What if the income was derived outside Australia?

        It all depends upon whether you are a resident!

      2. If you are an Australian resident, 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.

        3. If you are a resident of Australia,

        you include income from all sources,

        in or out of Australia

        Answer this question….

        A resident includes ordinary income only from sources in Australia in his assessable income

        Yes No

         

        (3) If you are not an Australian resident, your assessable income includes:

        (a) the *ordinary income you *derived directly or indirectly from all *Australian sources during the income year; and

        (b) other *ordinary income that a provision includes in your assessable income for the income year on some basis other than having an *Australian source.

        If you are NOT a resident of Australia,

        you include only income from sources in Australia unless some provision of the tax law requires you to include non Australian income

        Answer this question….

         The assessable income of a non-resident includes ordinary income from sources in and out of Australia.

        Yes No

         

         

        (4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

        Read section 6-5 (4) again, then answer this question….

        An employee authorises his employer to deduct an amount for health insurance from his salary and pay it direct to the insurance fund. The employer never receives the money which the employer pays to the fund.

        Should the employee include that money he did not receive in his assessable income?  

        Yes No

        So what is statutory income?

        You will find the answer to that question in section 6-10

        If the Assessment Act calls it income,

        then it is assessable income!

        6-10 Other assessable income (statutory income)

        (1) Your assessable income also includes some amounts that are not *ordinary income.

        Note: These are included by provisions about assessable income.
        For a summary list of these provisions, see section         10-5.

         

        Section 6-10 includes certain receipts,

        which might not be considered to be income

        according to ordinary concepts.

      3. Amounts that are not *ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

        4. These receipts are listed in section 15-1.

        It would be worth your while to have a look at these …

        Note: Many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income.

      4. If an amount would be *statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

        5. Answer this question….

        Read section 6-10 (4) again, then answer this question….

        An employee who has received a return to work payment as part of a settlement which ended a strike, authorises his employer to deduct an amount as part of a union levy from his salary and pay it direct to the union. The employer never receives the money, which the employer pays to the union.

        Should the employee include that money he did not receive in his assessable income?  

        Yes No

         

         

      5. If you are an Australian resident, your assessable income includes your *statutory income from all sources, whether in or out of Australia

 

Answer this question….

A resident includes statutory income only from sources in Australia in his assessable income

Yes No

 

 

(5) If you are not an Australian resident, your assessable income includes:

(a) your *statutory income from all *Australian sources; and

(b) other *statutory income that a provision includes in your assessable income on some basis other than having an *Australian source.

 

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