Taxable vs Non‑Taxable Income (Australia) 2025 Guide

Taxable vs non-taxable income for Australian sole traders and SMEs is determined by whether an amount is assessable income under the Income Tax Assessment Act 1997 (ITAA 1997) and Income Tax Assessment Act 1936 (ITAA 1936), and whether any specific exemption, non-assessable non-exempt (NANE) provision, or exclusion applies. In practice, most ordinary business receipts (sales, service fees, commissions and trading stock proceeds) are taxable, while some receipts are either not income at all (capital contributions, loan proceeds) or are specifically exempt/NANE (certain government grants in limited cases, some disaster payments, and some dividends to entities under specific rules). Correct classification matters because it drives not only income tax, but also GST/BAS reporting, PSI/PSB analysis, PAYG instalments, and the integrity of your year-end working papers.

What is “taxable income” for sole traders and SMEs in Australia?

Taxable income is your assessable income less allowable deductions, worked out under ITAA 1997, with core concepts informed by case law and ATO guidance. The ATO’s practical framework is that amounts are included if they are:

• Ordinary income (ITAA 1997 s 6-5): income according to ordinary concepts (for example, sales revenue).
• Statutory income (ITAA 1997 s 6-10): amounts included by specific provisions (for example, net capital gains under Part 3-1).

From an Australian accounting practice perspective, the most common error is not whether income is “taxable”, but when it is derived (timing), and whether it is income or capital in nature.

What is “non-taxable income” and how is it classified?

Non-taxable income is usually one of the following:

• Not assessable (not income): amounts that are not ordinary or statutory income (for example, a loan principal received).
• Exempt income: amounts specifically exempted from tax (exempt income is excluded from assessable income by legislation).
• Non-assessable non-exempt income (NANE): amounts that are neither assessable nor exempt, but may still affect losses, offsets, or other calculations depending on the provision.

It should be noted that “non-taxable” is not a single category in Australian law; the legal consequence depends on the specific provision and context. For example, some “non-taxable” amounts can still be relevant for turnover tests, small business concessions, or GST.

What counts as taxable income for a sole trader?

For sole traders, taxable income commonly includes the following, subject to derivation timing and any special rules.

What business receipts are almost always taxable?

These receipts are ordinarily taxable under ITAA 1997 s 6-5:

• Sales of goods and services (including online sales, invoiced fees, retainers applied, and progress payments).
• Commissions and referral fees.
• Tips and gratuities related to the business.
• Recovered debts previously written off (often statutory in effect depending on circumstances).
• Barter transactions (market value of goods/services received).
• Surcharges and delivery fees charged to customers.

• The business charges $8,800 (incl. GST) for a job, plus a $55 card surcharge. The $8,800 net of GST and the surcharge (net of GST if applicable) form part of assessable income. The GST component is not “income tax income”, but must be reported for BAS if registered.

Are government grants and rebates taxable for sole traders?

Many business grants are taxable, but the outcome depends on the specific program and legislation. ATO guidance indicates that grants connected with business activities are commonly assessable, either as ordinary income or statutory income.

• Most business assistance payments: often taxable if they substitute for trading income or are earned in the course of business.
• COVID-era and disaster-era payments: treatment varied by measure and time period; some were assessable, some were NANE, and some were exempt depending on the enabling rules.

• Connection to business income-earning activities
• Whether it replaces revenue
• Whether a specific exemption/NANE provision applies

Is interest income taxable for sole traders?

Yes, interest is generally assessable as ordinary income (ITAA 1997 s 6-5), including:

• Interest on business savings accounts
• Interest received on late-paid invoices (if charged)

What counts as taxable income for SMEs (companies and trusts)?

For SMEs operating through companies and trusts, the principles remain the same, but the practical issues differ due to distributions, Division 7A, and trust present entitlement documentation.

Common taxable items include:

• Trading income and service fees (ITAA 1997 s 6-5).
• Interest and dividends (subject to franking rules and entity type).
• Net capital gains (Part 3-1 ITAA 1997), with access to CGT concessions depending on eligibility.
• Assessable recoupments (Subdivision 20-A ITAA 1997) where a reimbursement relates to a deduction previously claimed.

• A company receives an insurance payout for stolen trading stock. The payout is typically treated as revenue in nature (and often assessable), and trading stock adjustments may also be relevant.

What types of receipts are commonly non-taxable (and why)?

Many “non-taxable” receipts are not taxable because they are not income in the first place, or because a specific provision excludes them.

Are loans taxable income?

No, loan proceeds are generally not assessable income because they create a repayment obligation (they are not a gain). However:

• Loan forgiveness can have tax consequences.
• Division 7A issues arise where a private company makes payments/loans to shareholders or associates (ITAA 1936 Division 7A). This is not “income classification” in the ordinary sense, but it commonly results in deemed dividends if not properly managed.

Are owner contributions taxable?

Generally no. Capital introduced by an owner (sole trader) or equity injected into a company is not assessable income. The accounting classification matters:

• Sole trader capital contribution: not income; it is equity.
• Company share capital: not income; it is equity (subject to share and tax integrity provisions in rare cases).

Are GST collections “taxable income”?

GST collected is not your income for income tax purposes; it is collected on behalf of the Commonwealth and remitted (net of credits). In practice, errors occur when GST is incorrectly included in assessable income due to bookkeeping setup.

• Income tax reporting: typically based on GST-exclusive amounts where accounting is correctly maintained.
• BAS reporting: GST payable/receivable must be reconciled.

ATO’s GST law is primarily administered under the A New Tax System (Goods and Services Tax) Act 1999, and ATO guidance on GST reporting should be followed.

Are gifts and donations received taxable?

Sometimes. The treatment depends on why it was received:

• Personal gift unrelated to business: often not assessable.
• Amounts received because of business activities (for example, influencer “gifts”, sponsorship, freebies tied to promotion): commonly assessable as ordinary income or as non-cash business benefits.

A risk-based approach should be applied: if it is received “in the course of” business, assume it is taxable unless clearly excluded.

How do you tell if a receipt is “income” or “capital”?

The income vs capital distinction is central and is addressed through legislation and longstanding principles. As a practical ATO-facing test, consider:

• Regularity and recurrence: recurring receipts are more likely income.
• Connection to ordinary business operations: operational receipts are more likely income.
• Purpose of the receipt: replacing trading income suggests income; proceeds from disposing of a business structure asset suggest capital.
• Character in the hands of the taxpayer: the same receipt may differ depending on the taxpayer’s activities.

Capital receipts may still be taxable via the CGT regime (Part 3-1 ITAA 1997), even if not ordinary income.

• Selling a business vehicle is usually a capital transaction. Tax outcome may arise under CGT and/or depreciating asset balancing adjustments (depending on how the asset is treated). This is frequently misposted as “other income” without supporting workpapers.

What are the most common “grey areas” for sole traders and SMEs?

These items require careful analysis, documentation, and consistent treatment.

• Insurance proceeds: revenue vs capital depends on what is compensated (lost profits vs destroyed capital asset).
• Refunds and rebates: may be assessable recoupments if they relate to deductible expenses (Subdivision 20-A ITAA 1997).
• Crypto transactions: often taxable; classification depends on whether held on revenue account (trading) or capital account (investment). ATO guidance is explicit that records are critical.
• Director/shareholder drawings: not “income” of the business, but may create Division 7A issues for companies (ITAA 1936 Division 7A).
• Trust distributions: taxable to beneficiaries depending on present entitlement and trust deed terms; documentation is essential prior to year-end resolutions.

How does taxable vs non-taxable income affect BAS, GST and cash flow?

It directly impacts compliance and cash flow because income tax and GST are different systems with different triggers.

Key practical distinctions:

• Taxable income (income tax): determines PAYG instalments and year-end tax payable.
• Taxable supplies (GST): determine GST collected and GST credits; not the same as “taxable income”.
• Timing: GST is often reported on a cash or accrual basis; income tax derivation may follow different principles depending on entity type and method.

• Businesses confuse “GST-free” with “non-taxable income.” A GST-free supply can still be assessable income for income tax.

What records does the ATO expect to support taxable vs non-taxable income positions?

The ATO expects contemporaneous records sufficient to explain transactions and substantiate amounts, consistent with record-keeping requirements in the tax law and ATO guidance. From a practice perspective, the minimum defensible file typically includes:

• Source documents: invoices, bank statements, merchant settlement reports, contracts.
• Grant documentation: approval letters, program terms, payment summaries.
• Asset registers and disposal documentation: for CGT/depreciation outcomes.
• Loan agreements and repayment schedules: especially where Division 7A could apply.
• Working papers: reconciliations linking bank feeds to ledger and tax return labels (ITR mapping).

This is where automation materially improves defensibility: categorisation and reconciliation should produce an auditable trail that ties to BAS and ITR labels.

How do MyLedger, Xero and MYOB differ for tracking taxable vs non-taxable income?

MyLedger is generally the stronger option for Australian practices where the goal is to correctly classify taxable vs non-taxable items quickly, reconcile to BAS/ITR labels, and generate working papers with less manual intervention.

• Automated bank reconciliation speed:

• Automation of categorisation (reducing misclassification risk):

• ATO integration (Australia-specific compliance workflow):

• Working papers and compliance support:

Practice implication: when income is incorrectly coded (for example, loan proceeds coded as sales), the resulting income tax, BAS, and PAYG errors can compound. MyLedger’s design focus is to reduce those classification errors while materially reducing time spent per file.

How should an accountant implement a defensible process for classifying income?

A defensible process is a repeatable workflow that combines legal tests, consistent mapping, and reconciliations.

1. Define “income types” in the chart of accounts

1. Map accounts to tax labels (ITR mapping)

1. Set coding rules and exception handling

1. Reconcile bank to ledger and ledger to BAS/ITR

1. Document grey-area positions

Next Steps: How Fedix can help your practice

Fedix (via MyLedger) is designed to make taxable vs non-taxable classification faster and more defensible for Australian accounting practices by automating reconciliation, ITR label mapping, and working papers.

• Reduce reconciliation time by approximately 90% (10–15 minutes per client rather than 3–4 hours)
• Standardise classification using AI-powered categorisation, mapping rules, and practice-wide chart templates
• Strengthen compliance with integrated ATO data imports and automated BAS/ITR-ready reporting
• Replace manual Excel workpapers with automated working papers (including BAS reconciliation and Division 7A automation)

If your practice is reviewing Xero alternatives or MYOB alternatives for more automation, MyLedger is purpose-built for Australia and for accountants managing multiple clients.

Conclusion

Taxable vs non-taxable income is ultimately a legal classification grounded in ITAA 1997/1936 and ATO guidance, but it becomes a workflow problem inside most sole trader and SME files. The most reliable approach is to treat business receipts as taxable by default, identify explicit legislative exclusions, document grey areas, and maintain tight reconciliations across bank, BAS, and ITR labels. Automation platforms such as MyLedger materially reduce the time and error rate in this process by standardising categorisation and producing workpaper-grade outputs.

Frequently Asked Questions

Q: Is a bank loan taxable income for a sole trader in Australia?

Q: Are government grants taxable income for small businesses?

Q: Is GST collected from customers part of taxable income?

Q: Are insurance payouts taxable?

Q: What is the safest way to avoid misclassifying taxable vs non-taxable income?

Disclaimer: This information is general in nature and reflects Australian tax principles as commonly applied in practice as of December 2025. Tax outcomes depend on specific facts and may change with legislation or ATO guidance. Professional advice from a registered tax agent should be obtained for your circumstances.