Concept of income

What is income?

Income is the acquisition of money via a regular source, including money that you earn through work, or any allowance that you might receive on a regular basis. For the purposes of taxation, the Australian Tax Office (ATO) makes a distinction between assessable income, which is subject to tax, and exempt income, which cannot be taxed. Your taxable income is the amount left over after you make all allowable deductions from your assessable income and what the ATO recognises as the amount on which you must pay tax.

Types of assessable income

The most common form of income is the salary or wage that you earn when you work. A salary is a form of payment made by an employer based on an employment contract. An employment contract will define the employee's expected working hours, conditions and pay package, with the employee receiving regular payment for regular work. The pay package covers what you could expect to receive in a period of time, usually a year. You would generally receive a salary for full-time work that has set hours or set objectives.

A wage is a form of payment made by an employer based on the hours of work completed, usually involving an hourly rate. You would generally receive a wage for work that has a variable number of hours.   See image 2

Not everyone derives income from a salary or wage; some occupations will charge a fee for services, for example, a gardener might come once a month and charge you a $100 fee per visit. You would work on a fee basis if you did not have a contract for regular employment. See image 3

Creative occupations derive income from royalties, which are payments made from the sale or use of their work. Every time a radio station plays a song, whoever owns the rights to the song (usually a musician or songwriter) receives royalties. Similarly, a book author would receive a royalty for sales of his or her book. Australian authors also receive royalties every time someone borrows their book from the library.

The ATO also defines income from enterprise, such as money earnt via a business, as assessable income. This generally refers to profits, money earnt after payment of business expenses.

You may also acquire income via investments such as interest that the bank pays you for keeping money in your account, rent received from leasing a property that you own or dividends paid by a company when you invest in shares of that company.

Types of exempt income

There are other types of income which are exempt from tax, including a number of government payments such as some pensions, educational allowances and the wages of defence force reserve personnel. The ATO website (www.ato.gov.au) has a full list of income sources that are exempt from tax.

Some payments are not really a form of income in that the payment does not come from a regular source. This includes income derived from a hobby such as casual winnings from gambling (where gambling is not the main source of income), pocket money and one-off payments such as a monetary gift or an inheritance. If you invested the gift or inheritance and received payment from the investment, then you would need to declare the payment derived from the investment as part of your income.