Division - 4 of Australian taxation Act outlines the steps to determine how much income tax an entity must pay based on its taxable income.
4-1 Who must pay income tax
- Income tax is payable by individuals, companies, and certain other entities (though the amount may be nil).
(Refer to Division 9 for a list of taxable entities.)
4-5 Meaning of "you"
- The term "you" applies broadly to all entities unless specified otherwise.
4-10 How to calculate income tax payable
- Income tax is calculated annually based on the taxable income for the income year
Usually, the income year is same as the financial year, except
-
- For companies: - Income Year is Previous Financial Year
- If you have an accounting period that is not the same as the financial year (Commissioner allow to adopt other than 30 June)
- Income Tax payable: - (Taxable Income * Rate) – Tax offsets.
4- 15 How to calculate taxable income
Taxable income = Assessable income – Deductions
Special rules apply for companies, consolidated groups, insurers, and other cases.
4-25 Special provisions for basic income tax liability
Subsection 392-35(3) may increase your basic income tax liability beyond the liability worked out simply by applying the income tax rates to your taxable income.
Taxable Income Method Statement for Calculation of Taxable Income & Tax Liability
Taxable Income
| Steps | Action |
|---|---|
| Step 1 | Sum all assessable income (salaries, business income, dividends, etc.). |
| Step 2 | Sum all allowable deductions (work expenses, rental costs, etc.). |
| Step 3 | Subtract deductions from assessable income → Taxable Income = Assessable Income − Deductions (if ≤$0, may be a tax loss). |
Tax Liability
| Steps | Action |
|---|---|
| Step 1 | Calculate taxable income (assessable income minus deductions). |
| Step 2 | Determine basic income tax liability using applicable tax rates (refer to Income Tax Rates Act 1986 and special provisions). |
| Step 3 | Subtract any tax offsets (listed in section 13-1) from the basic liability. |
| Step 4 | The result is the income tax owed for the financial year. |
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