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Module 3 · L7 of 14 ~50 min MS-F1 ⚡ +90 XP available

Taxable Income and Allowable Deductions

The ATO taxes what you earn, but not all of it. Knowing what qualifies as an allowable deduction is worth real money. Work boots, a professional development course, a union fee: some of these reduce your taxable income; others don't. This lesson explains the difference.

Today's hook, You spent $\$800$ on work boots, $\$1,200$ on a professional development course, and donated $\$500$ to a registered charity. Which of these reduces your tax bill, and why?

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Three printable worksheets that build from foundations to mastery, or build your own from any module’s questions.

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Most people assume that the ATO taxes everything you earn. But what if you spent $\$800$ on work boots, $\$1,200$ on a professional development course, and donated $\$500$ to a registered charity?

Before we do the maths what kinds of expenses do you think should count as tax deductions, and why?

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The core formula for this lesson is simple, the skill is in deciding what goes in.

$$\text{Taxable income} = \text{Gross income} - \text{Total allowable deductions}$$

$$\text{Gross income} = \text{Salary} + \text{Interest} + \text{Rental income} + \ldots$$

$$\text{Allowable deductions} = \text{Sum of all eligible work-related and approved expenses}$$

Deductions are subtracted from gross income to give taxable income, on which tax is calculated.

Reverse formula: Allowable deductions = Gross income − Taxable income (use when taxable income is given)

Allowable deductions ✓

Work tools and equipment, uniforms/protective clothing, professional development, work-related textbooks, union fees, donations to registered DGRs ($\$2$+), home office expenses.

NOT allowable ✗

Travel from home to regular workplace, conventional clothing worn at work, personal grooming, gym memberships, private/domestic expenses, meals (unless travelling overnight for work).

Filter test

Ask: Was the expense incurred in earning assessable income? Was it private or domestic? Was the worker reimbursed? Yes/No/No = usually deductible.

What you'll master

Know

Key facts

The formula: taxable income = gross income − allowable deductions
That gross income includes all assessable income (salary, interest, rental income)
Examples of allowable and non-allowable deductions

Understand

Concepts

Why tax is applied to taxable income, not gross income
Why not all expenses qualify as deductions (personal vs income-earning)
Why PAYG tax withheld is not an allowable deduction

Can do

Skills

Identify which items in a list are allowable deductions
Calculate gross income from multiple sources
Calculate taxable income and work backwards from taxable income to find deductions

Key terms

Taxable IncomeGross income minus allowable deductions, the amount on which tax is calculated.

Gross IncomeTotal income from all sources before any deductions.

Allowable DeductionWork-related expenses that can be subtracted from gross income to reduce taxable income.

Tax OffsetA reduction in the amount of tax payable, also called a tax rebate.

Medicare LevyA 2% levy on taxable income to fund the public health system.

DGRDeductible Gift Recipient, a registered charity to which donations of $\$2$ or more are tax-deductible.

Gross income vs taxable income, and the full process

Gross income is everything you earn: salary, wages, interest earned on bank accounts, rental income from investment...

Gross income vs taxable income, and the full process

core concept

Gross income is everything you earn: salary, wages, interest earned on bank accounts, rental income from investment properties, and certain government payments. It is the total of all assessable income before any deductions.

Taxable income is gross income minus allowable deductions. The distinction matters because income tax is calculated on taxable income, not gross income. Reducing your taxable income, legally, through legitimate deductions, reduces the tax you owe.

Deduct allowable expenses from gross income to get taxable income, then the tax bill.

Tax is calculated on taxable income, not gross income: Always complete the taxable income calculation before attempting any tax calculation. Applying tax brackets to gross income is a guaranteed error.

PAYG tax withheld is NOT an allowable deduction: PAYG tax is not an allowable deduction from income. It is a prepayment of tax, it reduces your tax bill at the end of the year, but it is not subtracted when calculating taxable income.

The 5-step process:

List all income sources and sum to get gross income
Go through each listed expense and determine if it is allowable
Sum only the allowable deductions
Taxable income = Gross income − Total allowable deductions
Label taxable income clearly before moving to any tax calculation

Taxable income = gross income − tax deductions (e.g. work expenses). Gross income includes salary, bank interest, rental income. Tax is calculated on taxable income, not gross income. Always subtract allowable deductions before applying tax brackets.

Pause, copy the taxable income formula (taxable income = gross income − allowable deductions), the gross income components (salary/wages + bank interest + rental income + other assessable income), and the calculation sequence (gross → subtract deductions → taxable income → apply tax brackets) into your book.

Quick check: A worker's salary is $\$64,500$. They also earned $\$700$ in bank interest. Their allowable deductions total $\$2{,}850$. What is their taxable income?

Worked examples · 4 in a row, reveal as you go

PROBLEM 1 · IDENTIFYING DEDUCTIONS

Sophie is a secondary school teacher. Her annual salary is $\$89,400$. She also earned $\$640$ interest. She spent: $\$480$ on textbooks and classroom resources, $\$320$ on a professional development course, $\$180$ on a conventional work wardrobe, $\$250$ donation to a registered charity, $\$860$ on daily train travel to school. Calculate her taxable income.

$\text{Gross income} = \$89{,}400 + \$640 = \$90{,}040$

Salary plus bank interest, both are assessable income.

PROBLEM 2 · MULTIPLE INCOME SOURCES

David earns a salary of $\$74,200$, receives $\$1,850$ in rental income, and earned $\$420$ in bank interest. His allowable deductions total $\$3,640$. Calculate his taxable income.

$\text{Gross income} = \$74{,}200 + \$1{,}850 + \$420 = \$76{,}470$

Sum all three assessable income sources.

PROBLEM 3 · WORKING BACKWARDS

Anika's taxable income is $\$61,450$. Her gross salary is $\$64,800$ and she earned $\$380$ in interest. What were her total allowable deductions?

$\text{Gross income} = \$64{,}800 + \$380 = \$65{,}180$

Sum salary and interest.

PROBLEM 4 · MIXED DEDUCTION LIST

Olivia earned $\$72,400$ in salary and $\$560$ in bank interest. Her listed expenses are: $\$420$ union fees, $\$660$ professional registration, $\$240$ conventional business clothes, $\$1,150$ commuting costs, and a $\$300$ donation to a registered charity. Calculate her taxable income.

$\text{Gross income} = \$72{,}400 + \$560 = \$72{,}960$

Salary plus interest.

Step 4

True or false: PAYG tax withheld by an employer is an allowable deduction when calculating taxable income.

True or false: PAYG tax withheld by an employer is an allowable deduction when calculating taxable income.

Fill the gap: A worker's taxable income is $\$58,900$. Gross salary is $\$61,200$ and they earned $\$300$ in interest. Total allowable deductions = $\$$.

Match each expense to allowable or not allowable.

Union membership fees
Daily commute to office
Work-related textbooks
Conventional office clothes

Allowable
Not allowable
Allowable
Not allowable

Revisit your thinking

Look back at what you wrote in the Think First section.

Revisit your thinking

Look back at what you wrote in the Think First section. Work boots = allowable (protective equipment for earning income). Professional development = allowable (directly incurred in earning income). Registered charity donation = allowable (DGR donation of $\$2$+). Did you get them right?

What has changed? What did you get right? What surprised you?

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Top 3 list: Name THREE types of expenses that are NOT allowable deductions when calculating taxable income.

Show what you have learned

Multiple choice, then short answer under exam conditions.

Multiple choice

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Short answer

ApplyBand 32 marks

SA 1. A worker earns $\$64,500$ in salary and $\$700$ in bank interest. Their allowable deductions total $\$2{,}850$. Calculate their taxable income. (2 marks)

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ApplyBand 32 marks

SA 2. A worker's taxable income is $\$58,900$. Their salary is $\$61,200$ and they earned $\$300$ in interest. Calculate their total allowable deductions. (2 marks)

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ApplyBand 43 marks

SA 3. A worker earns $\$78,000$ salary. Their listed expenses are $\$520$ union fees, $\$860$ commuting costs, $\$290$ donation to a registered charity, and $\$430$ work-related textbooks. Calculate their taxable income. (3 marks)

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📖 Answers (click to reveal)

SA 1 (2 marks): Gross income = $\$64{,}500$ + $\$700$ = $\$65,200$ [1]. Taxable income = $\$65,200$ − $\$2{,}850$ = $\$62{,}350$ [1].

SA 2 (2 marks): Gross income = $\$61{,}200$ + $\$300$ = $\$61,500$ [1]. Allowable deductions = $\$61,500$ − $\$58{,}900$ = $\$2{,}600$ [1].

SA 3 (3 marks): Allowable: union fees $\$520$ + registered charity $\$290$ + textbooks $\$430$ = $\$1{,}240$ [1]. Commuting costs ($\$860$) not allowable [1]. Taxable income = $\$78,000$ − $\$1{,}240$ = $\$76{,}760$ [1].

Consolidate and move on

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quiz

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Science Jump · platform challenge

Climb platforms by answering questions on taxable income. Pool: lessons 1–7.

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← Lesson 6 · Deductions & Net Pay Lesson 8 · Income Tax →

Module overview · Maths Standard