Computing Taxable Income

1. Tax Payable
You will find this rule in …|
Tax is payable on a person’s taxable income|Australia’s Tax Law decrees that every year ending 30 June, most people in Australia (and this includes companies) have to pay tax on an amount which the Tax Law calls the person’s “taxable income.” This amount – the person’s “taxable income” for that year – is the end result of a much longer series of steps which the Tax Law prescribes in detail.|s. 4-1|
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Tax payable = taxable income x. tax rate|Once the amount of taxable income has been calculated, the Tax Law then applies a scale of Tax Rates to this amount in order to work out exactly how much tax the person has to pay for this year.|s. 4-10(3)|
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Taxable income is assessable income minus allowable deductions|Our concern is not with the tax rates nor the amount of tax payable, but rather with the steps that lead up to finding the amount of taxable income earned during the year.Taxable income is defined in the Tax Law to be the difference between a person’s assessable income and deductions (reduced by losses made in prior years). So it is a two-step process – looking first at what amounts fall into assessable income, and then looking at what amounts are deductions.These are the two critical concepts that we want to examine:1. Which receipts and other amounts form part of a person’s assessable income?2. Which payments and other amounts are allowed as deductions?If we know the answers to these questions, we then know how much is the person’s taxable income.|s. 4-15|

2. The first part of taxable income: assessable income
You will find this rule in …|
Assessable income is ordinary income|Section 6-5 of the Tax Law says that a person’s assessable income includes all their “ordinary income” derived during the year. |s. 6-5|
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Plus statutory income|Section 6-10 then says that a