The taxable income formula
Two inputs, one output. Add up everything you have to declare, take off everything you are entitled to claim, and the number left is your taxable income. The ATO states it as a single line: assessable income minus allowable deductions equals taxable income.
Take a wage earner with $71,000 of assessable income for 2026-27, being $69,000 of salary and wages plus $2,000 of bank interest, who claims the new $1,000 standard deduction for work-related expenses and nothing else.
Working out taxable income (2026-27)
Without the deduction the same person would be taxed on the full $71,000 and would pay $13,240. The $1,000 deduction is therefore worth $320 of tax, not $1,000. That gap is the single most misunderstood thing about the formula, and the next table makes it explicit.
Hold the assessable income still at $71,000 and move only the deductions. Every row below is computed by the same engine the calculators on this site run on.
| Deductions | Taxable income | Total tax | Tax saved |
|---|---|---|---|
| $0 | $71,000 | $13,240 | $0 |
| $500 | $70,500 | $13,080 | $160 |
| $1,000 | $70,000 | $12,920 | $320 |
| $2,000 | $69,000 | $12,600 | $640 |
| $5,000 | $66,000 | $11,630 | $1,610 |
Read the last column against the first. A deduction returns your marginal rate, so at this income each dollar claimed is worth about 32 cents. The same $1,000 deduction is worth $220 to someone on $40,000, $335 to someone on $55,000 and $390 to someone on $140,000. The two lower figures beat their bracket rate because the low income tax offset phases back in as taxable income falls, stacking another 5 cents or 1.5 cents in the dollar on top depending on the band.
The bottom two rows carry a second-order effect worth knowing about. A big enough deduction can move taxable income under a threshold that runs off it. In this example $2,000 of deductions takes taxable income to $69,000, below the $69,528 study loan repayment threshold for 2026-27. Someone with a study loan and no deductions would owe a compulsory repayment of $220.80 on this income. Claiming the $2,000 takes the repayment to nil on top of the $640 of tax it already saves.
What is taxable income?
Taxable income is the amount you actually pay tax on. It is not your salary, it is not the money that reaches your bank account, and it is not what your payslip calls gross pay. It is a constructed figure: all of your assessable income for the income year, less all of your allowable deductions for that year.
The construction is why two people on identical salaries can face different tax bills. One has interest and rent on top, the other does not. One claims work-related expenses and a donation, the other claims nothing. Same salary, different assessable income, different deductions, different taxable income, different tax.
Taxable income is also a single-year figure. It runs from 1 July to 30 June, and it is settled when your return is assessed rather than when you are paid. What comes out of each pay is your employer's estimate of the eventual bill under the PAYG withholding system, which is why a refund or a bill turns up at the end of the year. The tax refund calculator runs that reconciliation.
What counts as assessable income
Assessable income is everything the ATO taxes you on if you earn enough to pass the tax-free threshold. Its own list is:
- salary and wages
- tips, gratuities and other payments for your services
- some allowances, such as for clothing and laundry
- interest from bank accounts
- dividends and other income from investments
- bonuses and overtime an employee receives
- commission a salesperson receives
- pensions
- rent
Two ATO points that catch people out. Income paid in goods or services rather than money is assessable at market value, and the ATO names clothing, makeup, tools and accessories received from subscribers or businesses through an online platform as the everyday case. And cash, including cash cheques, has to be declared like anything else.
What is not assessable income
The ATO splits everything you leave out into three named categories, and the difference between the first two matters more than the labels suggest.
Exempt income is tax free but still reported, because the ATO uses some exempt amounts to work out tax losses from earlier years and a dependant's adjusted taxable income. It covers the disability support pension paid to someone under age-pension age, the invalidity service pension under the Veterans' Entitlements Act 1986 on the same age test, the carer allowance and child care subsidy, certain overseas pay for Defence Force and Federal Police personnel, some government education payments, some scholarships and grants, and a lump sum on the surrender of an insurance policy you originally owned.
Non-assessable, non-exempt income is not assessed at all and does not affect tax losses. The main items are the tax-free component of an employment termination payment, genuine redundancy and early retirement scheme payments shown as Lump sum D on your income statement, super co-contributions, and certain disaster payments and grants. You cannot claim a deduction against any of it. The redundancy tax calculator works through the Lump sum D treatment.
Other non-taxable amounts is the residual category: gifts on special occasions, cash birthday presents and gifts from relatives given out of love, prizes from ordinary lotteries and raffles, game show winnings where you are not paid regular appearance fees, and child support and spouse maintenance you receive.
Allowable deductions, and the new $1,000 standard deduction
A deduction has to earn its place. For a work-related expense the ATO applies three tests: you spent the money yourself and were not reimbursed, the expense directly relates to earning your income, and you have a record to prove it. The expense also cannot be private, domestic or capital in nature, which is why the drive to work and the sandwich at lunch are not deductible. Where an expense is part work and part private, you apportion it and claim only the work share.
A handful of deductions are not tied to earning employment income at all: gifts and donations, expenses incurred earning investment income, personal super contributions, income protection insurance, and the cost of managing your tax affairs.
2026-27 brings a change worth knowing about. From the 2026-27 income year the ATO applies a standard deduction of up to $1,000 for work-related expenses, without you having spent the money or kept records. It does not apply to the 2025-26 return. It is applied automatically if you are eligible, it is a deduction rather than an offset or a rebate, and it is reduced by any work-related expenses you do claim. Union fees and memberships of a trade, business or professional association are the two exceptions that do not reduce it.
Eligibility runs on assessable labour income: salary and wages, director fees and office holder payments, payments to religious practitioners, return-to-work payments, termination and retirement payments, and parental leave pay. Dividend income and business income do not qualify. If your assessable labour income is under $1,000, your maximum standard deduction is that lower amount. And if you claim more than $1,000 of work-related expenses you have to keep records for all of them, not just the part above $1,000. Everything else, donations and rental and personal super contributions included, is claimed as normal on top.
What your taxable income then decides
One number, four jobs. It is worth seeing them together, because people often assume a deduction moves all four and it does not.
- Income tax. The resident rate scale is applied to taxable income. The full 2026-27 scale, and the non-resident and working holiday maker scales, are on the 2026-27 tax brackets page.
- Medicare levy. Two per cent of taxable income, worked out separately from income tax and added on top. Reductions and exemptions are covered in the Medicare levy guide.
- The low income tax offset. The entitlement is set by taxable income, tapering from $700 to nil between $37,500 and $66,667.
- Study loan repayments. Repayment income starts at taxable income, then adds reportable fringe benefits, total net investment loss, reportable super contributions and exempt foreign employment income. That add-back list is why salary packaging can cut your tax and leave your HECS repayment untouched.
The fourth item is the one that trips people up, and it is a different income concept sitting on top of the same base. The adjusted taxable income entry sets out the add-backs in full. For the tax itself, run a figure through the PAYG calculator or browse the rest of the glossary.
Frequently asked questions
What is the formula for taxable income?
Is taxable income the same as gross income?
Is taxable income worked out before or after tax?
What is the difference between exempt income and non-assessable non-exempt income?
Is salary-sacrificed super part of my taxable income?
Do I need to claim the $1,000 standard deduction?
Sources
- ATO: Taxable, assessable and exempt income (the formula itself, the assessable income list, and the exempt and non-assessable non-exempt definitions)
- ATO: Amounts you do not include as income (the three categories, and the examples in each)
- ATO: Claiming deductions (the three tests for a work-related expense, and the non-work deductions list)
- ATO: Standard deduction for work-related expenses (the $1,000 standard deduction applying from the 2026-27 income year, its eligibility test and its exceptions)
- ATO: What is the Medicare levy? (2% of taxable income, and the ATO's own worked example of the formula)
- ATO: Personal income tax, new tax cuts for every Australian taxpayer (the 16% rate cut to 15% from 1 July 2026, now law, used in every 2026-27 figure above)
- ATO: Study and training loan repayment thresholds and rates (the 2026-27 nil band to $69,528, and the repayment income add-backs)
Narelle Hartigan is a CPA-qualified tax accountant with over a decade of experience in Australian personal taxation and payroll. She founded PAYG Calculator Australia to make tax withholding easy for every Australian worker to understand.