What is Taxable Income?

The simple formula

Assessable income minus allowable deductions equals taxable income. Assessable income is every dollar the ATO considers taxable, salary, rental income, interest, dividends, capital gains and more. Allowable deductions are the expenses you're legally permitted to subtract before tax is worked out. Taxable income isn't the same as your gross salary, and it definitely isn't the same as your bank balance, it's a specific figure calculated once a year for tax purposes.

What counts as assessable income

The obvious ones: salary and wages taxed through PAYG, investment income like interest and dividends (including any franking credits attached), and gross rental income. Net capital gains count too, though if you've held the asset over 12 months, only half the gain from the sale gets added, thanks to the 50% CGT discount, see our capital gains tax glossary page for how that works. Some government payments are assessable too, JobSeeker is, and the Age Pension generally is as well, though most pensioners end up paying little to no tax on it thanks to the tax-free threshold and seniors offsets. A handful of things are excluded entirely, some Centrelink disability payments and the tax-free component of a genuine redundancy payout, for example.

What reduces it

Deductions bring the number down. Work-related expenses, investment property costs like loan interest, rates, insurance, repairs and depreciation (a big one for landlords, see our negative gearing glossary page for how a loss offsets other income), self-education expenses tied to your current role, donations to registered charities, and income protection premiums if you hold the policy outside super. Extra super contributions matter too: anything you salary sacrifice on top of your employer's compulsory Super Guarantee comes out of your salary before tax, taxed at a flat 15% in the fund instead of your marginal rate. Someone on a 30% marginal rate who salary sacrifices an extra $5,000 saves roughly $750 in income tax. It's worth remembering deductions aren't a dollar-for-dollar refund though, a $1,000 deduction saves you $1,000 multiplied by your marginal rate, not $1,000 flat.

A worked example

Salary of $85,000, plus $600 in bank interest, plus $18,000 in gross rental income, plus a $4,000 net capital gain after the 50% discount, comes to $107,600 in total assessable income. Deductions: $1,200 in work-related expenses, $14,500 in rental property expenses including depreciation, and $800 in income protection premiums, $16,500 in total. Taxable income works out to $107,600 minus $16,500, or $91,100, landing in the 30% marginal bracket. Run your own numbers with our Salary & Take-Home Pay Calculator.

Taxable income vs gross income vs adjusted taxable income

Gross income is everything you earn before deductions or tax, taxable income is what's left after allowable deductions. There's also adjusted taxable income (ATI), a different, broader measure Services Australia uses for means-tested payments like the Family Tax Benefit, it adds back things like reportable fringe benefits and net investment losses on top of your taxable income. Don't assume the figure on your tax return is the same one used for every government test, it usually isn't.

Why the number matters

Taxable income determines your marginal tax bracket, the tax-free threshold sits at $18,200, and above that you move through progressively higher brackets. It also determines whether you get the Low Income Tax Offset, worth up to $700 and phasing out between roughly $37,500 and $66,667 of taxable income. It's the base the 2% Medicare levy is calculated on, and it feeds into whether the Medicare Levy Surcharge applies if you don't hold private hospital cover. Beyond tax, it can affect Centrelink payments, the private health insurance rebate, and eligibility for the super co-contribution.

Common misconceptions

"My tax bracket is my rate on all my income." No, only the slice of income that actually falls within that bracket is taxed at that rate, everything below it is taxed at the lower rates first. "Super contributions don't affect my tax return." They can, salary sacrifice specifically reduces your taxable income. "The full profit from a sale is taxable." Not if you held the asset over 12 months, the 50% CGT discount halves the taxable portion. "The tax-free threshold means I don't need to lodge a return." Not necessarily, you may still need to lodge if tax was withheld from your pay or you have other assessable income during the year.