Glossary of Common Tax Terms

We understand some (most) tax and accounting terms can be very confusing. So we picked the few common terms and explained a little bit on what each meant.

Please refer to this page as a guide and always talk to your tax professional regarding any tax related questions.

A

Acquisition

A purchase or acquisition includes the acquisition of goods or services such as trading stock, a lease and consumables.

Activity statement

Used to report your business tax entitlements and obligations for a reporting period, including GST, pay as you go (PAYG) instalments, PAYG withholding and fringe benefits tax instalments.

Adjusted taxable income (ATI)

Adjusted taxable income may include different types of income:

• taxable income
• foreign income
• tax-exempt foreign income
• total net investment losses
• reportable fringe benefits
• reportable superannuation contributions
• certain tax free pensions or benefits.

It may also include a deemed amount from account based income streams.
If you have a partner, their income can also affect your adjusted taxable income.

Alienation of income

The alienation of income is merely the process whereby a person:

• assigns the right to certain future income to another person.
• assigns property, including the attaching right to its income, to another person.
• interposes an entity between themselves (as the provider of services) and the person paying for those services so that the payment is received by the interposed entity.

Allowances

Any monetary benefit offered by the employer to its employees for meeting expenditures, over and above the basic salary are known as Salary Allowances.

Annual turnover

The total ordinary income that you derive in the income year in the course of running your business.

Annuities

An annuity is an investment that pays a series of regular guaranteed income payments for either a fixed period of time or for life.

Assessable income

Assessable income is income that can be taxed, provided you earn enough to exceed your tax-free threshold.

Assessment notice

The notice of assessment ATO send you is an itemised account of the amount of tax you owe on your taxable income.

Australian Business Number (ABN)

Your identifier for dealings with ATO and other Australian government departments and agencies.

Australian resident for tax purposes

If you reside in Australia, you are considered an Australian resident for tax purposes and you don’t need to apply any of the other residency tests.

B

Body Corporate

A body corporate is a legal entity created when land is subdivided to create common property and lots, and is registered to establish a community titles scheme. Every owner of a lot in a community titles scheme is automatically a member of the body corporate.

Business Activity Statement (BAS)

Refer to Activity statement

Business deductions

Things you can claim for tax purposes.

C

Capital acquisitions

The means by which you acquire new assets for your business. You use your capital to purchase assets like equipment, inventory, software, or even a business.

Capital allowance

It is a tax deduction claimable for the decline in value (depreciation) of capital assets, such as your investment property and work vehicle.

Capital asset

It is an asset with a useful life longer than a year that is not intended for sale in the regular course of the business’s operation.

Capital expenditure

It is money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

Capital Gains

It is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold.

Capital Gains Tax

The tax you pay on a capital gain

Capital Improvement

The addition of a permanent structural change or the restoration of some aspect of a property that will either enhance the property’s overall value, prolongs its useful life, or adapt it to new uses.

Capital items

Tangible assets that one business produces that is in turn used by a second business to produce consumer goods or services. Capital goods include tangible assets, such as buildings, machinery, equipment, vehicles, and tools that an organization uses to produce goods or services.

Capital loss

The loss incurred when a capital asset, such as an investment or real estate, decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.

Cash economy

An economic system in which financial transactions are carried out in cash rather than via direct debit, standing order, bank transfer, or credit card.

Co-contribution

If you are a low or middle-income earner and make personal (after-tax) super contributions to your super fund, the government will also makes a contribution up to a maximum amount of $500.

Contract workers

An individual retained by a company for a predetermined time, for a predetermined price. A company is not responsible for providing a variety of traditional employer benefits.

Contractor

Contractors run their own business and sell their services to others, unlike employees who work in someone else’s business.

Contribution tax

More information on this page.

Creditor

An individual or company to whom money is owing.

D

Debtors

An individual, or organization that owes money.

Deductions

Also known as tax deductions.

De-facto relationship

A relationship between two people (who are not legally married or related by family) who, having regard to all of the circumstances of their relationship, lived together on a genuine domestic basis.

Dependant

A dependent child is someone:

• under 21 years old
• between 21 to 24 years old and a full-time student at a school, college or university

E

End of financial year

The financial year is a time period of 12 months used for tax purposes. The Australian financial year starts on 1 July and ends the next year on 30 June.

Exempt income

Any income that isn’t subject to federal tax.

F

Family partnership

More information on this page.

Family Tax Benefit

More information on this page.

Family Trust

A discretionary trust set up to hold a family’s assets or to conduct a family business. They are established for asset protection or tax purposes.

Fixed trust

A trust in which persons have fixed entitlements to all of the income and capital of the trust at all times during the income year.

Foreign investment

The investment in domestic companies and assets of another country by a foreign investor.

G

Goodwill

An intangible asset when one company acquires another. It includes reputation, brand, intellectual property.

Gross Income

Also known as gross pay, it is the individual’s total pay from his or her employer before taxes or other deductions.

GST credits

You can claim a credit for the GST included in the price of goods or services (the inputs) you buy for use in your business, unless you use the purchase to make input-taxed sales.

I

Income Tax

Tax in your income such as salary, investment, rental, etc.

Investment income

Income that comes from interest payments, dividends, capital gains collected upon the sale of a security or other assets.

L

Limited partnership

A limited partnership is one where the liability of one or more partners for the debts and obligations of the business is limited.

Luxury Car Tax (LCT)

A tax on cars with a GST-inclusive value above the LCT threshold.

M

Managed Fund

An investment where your money is pooled together with other people’s money and is invested in a common investment goal by the fund manager.

Margin Scheme

A way of working out the GST you must pay when you sell property as part of your business.

Marginal tax rate

The highest rate of tax a taxpayer will pay on their income.

Medicare levy

Used to fund Australia’s public health system known as Medicare. Most Australian residents pay 2% of their taxable income.

Medicare levy surcharge

The surcharge is for Australians who earn above a certain income but don’t have an appropriate level of private patient hospital cover.

N

Negative Gearing

A form of financial leverage whereby an investor borrows money to acquire an income-producing investment.

Net amount

The amount remaining after taxes, deductions and expenses.

Net Income

Income remaining after taxes, deductions and expenses.

Non cash accounting method

More information on this page.

Non Profit Organisation

An organisation that is operating for its purpose and not for the profit or gain (either direct or indirect) of its individual members.

Non-capital acquisitions

Items you purchase like trading stock, the normal running expenses of a business, such as stationery and repairs, equipment rentals and/or leases.

Non-Commercial Loss

Any losses you incur as a sole trader or partnership in business are called “Non-commercial Losses”.

O

Outgoings

Expenses related to a rented shop that the tenant has agreed to pay in addition to the rent.

P

Pay As You Go (PAYG)

Pay As You Go (PAYG) instalments is a system for making regular payments towards your expected annual income tax liability. It only applies to you if you earn business and/or investment income over a certain amount.

Payee

A payee is a person (or organization) that receives a payment.

Payer

A person or an organization that pays or has to pay something

PAYG withholding

A tax on employees’ income that employers help the Australian Taxation Office (ATO) to collect.

Pensioner

A person who collects a pension, most commonly because of retirement from the workforce.

Primary production

You are a primary producer if you run a business of plant or animal cultivation, fishing or pearling, or tree farming or felling.

Principal residence

The primary location that a person inhabits, also referred to as primary residence or main residence.

R

Reconciliation

An accounting process that compares two sets of records to check that figures are correct and in agreement.

Reimbursements

Payments made to a worker for actual expenses already incurred, and the employer may be subject to fringe benefits tax (FBT).

Royalty

A legally-binding payment made to an individual, for the ongoing use of his or her originally-created assets, including copyrighted works, franchises, and natural resources.

S

Salary

A form of payment from an employer to an employee, which may be specified in an employment contract.

Salary Sacrifice

Also referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages. In return, the employer providing them with benefits of a similar value.

Self Managed Super Fund

A superannuation trust structure that provides benefits to its members upon retirement.

Self-employed

An individual does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals, or independent contractors, earn income by contracting with a trade or business directly.

Self-funded retiree

A person who supports their own retirement without the assistance of the government pension.

Sole trader

As a sole trader you are legally responsible for all aspects of your business including any debts and losses and day-to-day business decisions.

State taxes

A direct tax levied by a state on your income.

Subcontractor

A company or person whom a general contractor hires to perform a specific task as part of an overall project and normally pays for services provided to the project.

Superannuation

Money set aside during your working life for when you retire. For Australia only.

T

Tax Agent

A qualified professional who can help you prepare and lodge your tax return.

Tax Evasion

An illegal activity in which a person or entity deliberately avoids paying a true tax liability.

Tax File Number (TFN)

A unique identifier issued by the Australian Taxation Office (ATO) to each taxpaying entity — an individual, company, superannuation fund, partnership, or trust.

Tax Offset

Not to be confused with are tax deductions. Tax offsets directly reduce the amount of tax you must pay. Each dollar of tax offset reduces your tax payable by each dollar, regardless of your taxable income.

Taxable income

The income you have to pay tax on.

Tax-free threshold

An amount of money that the Government have declared to be tax free.

Travel expenses

Includes the cost of driving your car, flying, catching a train, taxi or bus.

Turnover

The amount of money taken by a business in a particular period.

U

Unit Trust

An unincorporated mutual fund structure that allows funds to hold assets and provide profits that go straight to individual unit owners instead of reinvesting them back into the fund.

Untaxed element

Includes amounts where a fund has not paid any tax on the contributions or earnings

W

Withholding Tax

A set amount of money out of an employee’s paycheck and pays it to the government. The money taken is a credit against the employee’s annual income tax.