ato logo
Search Suggestion:

Work out your business's taxable income

Calculate your business's taxable income using a calculation of business profit or loss and applying adjustments.

Last updated 18 June 2019

The formula to work out your taxable income is:

  • Taxable income equals assessable income minus deductions.

If you are carrying on a business, to work out your taxable income use your business operating profit or loss as a starting point. You then make income reconciliation adjustments or expense reconciliation adjustments to reconcile your business operating profit or loss with your business taxable income.

After you have worked out your taxable income (taking into account income and deductions from business and non-business), we work out your tax liability. We then apply your concessions, rebates and offsets.

If you only have income and deductions for your business, it is a good idea to reconcile your taxable business income at the end of each financial year with the income you have submitted in your activity statements for that year.

Some common examples include CGT, prepaid expenses and different rates of depreciation for tax purposes (rather than accounting rules).

Start of example


Sharma has a small physiotherapy business, which she has been running for many years and she has a regular client base.

In May 2019, she negotiated a discount on an 18 month insurance policy, covering the period from June 2019 to November 2020, and paid for it up front. She uses a cash accounting system for her record keeping so she included the total insurance policy expense of $3,600 as an accounting expense in May 2019. Her accounting profit for running her business for 2018–19 was $60,000, which included the entire insurance policy expense.

However, for tax purposes, the insurance policy expense can't be deducted in total in the one year. It must be apportioned over the life of the policy. Sharma must reconcile her accounting profit with the tax law and add back the portion of the expense that she didn't use in the 2018–19 year. She does this by adding back $3,400 to her accounting profit. So, for tax purposes, her business taxable income is $63,400.

In 2019–20, she subtracts $2,400 from her accounting profit to take into account, for tax purposes, the pre-paid insurance policy expense. In 2020–21, she reconciles the balance of $1,000.

End of example

See also: