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.
Practise this lesson
Three printable worksheets that build from foundations to mastery — or build your own from any module’s questions.
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?
The core formula for this lesson is simple — the skill is in deciding what goes in.
$$\text{Taxable income} = \text{Gross income} - \text{Total allowable deductions}$$
$$\text{Gross income} = \text{Salary} + \text{Interest} + \text{Rental income} + \ldots$$
$$\text{Allowable deductions} = \text{Sum of all eligible work-related and approved expenses}$$
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
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
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
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.
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
What to write in your book
- Taxable income = Gross income − Allowable deductions. Write this formula at the start of every question.
- Gross income includes ALL assessable income: salary, interest, rental income, etc.
- Put a tick or cross beside each expense before totalling — prevents accidentally including non-deductible items.
- PAYG tax withheld is NOT an allowable deduction when calculating taxable income.
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
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.
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.
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?
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.
What to write in your book
- Put a tick or cross beside each expense before totalling.
- Write "Taxable income = $X − $Y = $Z" as a standalone labelled line.
- When working backwards: Deductions = Gross income − 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.
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?
Top 3 list: Name THREE types of expenses that are NOT allowable deductions when calculating taxable income.
Pick your answer, then rate your confidence — that tells the system what to drill next.
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)
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)
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)
📖 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].
Five timed questions on taxable income and allowable deductions. Beat the boss to bank a tier.
⚔ Enter the arenaClimb platforms by answering questions on taxable income. Pool: lessons 1–7.
Mark lesson as complete
Tick when you've finished the practice and review.