Adjusted Taxable Income & Income Tests

Taxable Income vs Adjusted Taxable Income

It’s important to understand the difference between your taxable income (TI) and adjusted taxable income (ATI) as most income tests rely on your ATI.

As such, it’s not always as simple as looking at your taxable income reported in your income tax return. There are other benefits you receive that are not taxable which must be included in the calculation of your ATI.

ATI includes:

• Your taxable income
• Reportable fringe benefits
• Net investment losses (financial and rental property)
• Reportable employer superannuation contributions
• Deductible personal superannuation contributions
• Certain tax-free government pensions or benefits
• If you have a spouse, their share of the net income of a trust on which the trustee must pay tax

Less:

• Any child support payments you paid

Once your ATI is determined, that will be your income level used when calculating certain entitlements and obligations.

Where does your ATI come into play?

Division 293 Tax

If your ATI is over $250,000 then you will be liable to pay an additional tax known as division 293 tax. This is calculated based on your ATI and your super contributions made during the year, and has the effect of increasing your super contributions tax from 15% to 30%.

The ATO send division 293 tax assessments separately to your normal notice of assessment, sometimes months after lodging your tax return, so this can be an unexpected bill. It is important to understand your ATI so that you can budget for this additional tax payment.

Find out more about Division 293 tax here.

Medicare Levy Surcharge

Most taxpayers will be required to pay the base Medicare Levy, which is 2% of your taxable income. Generally, your employer will be withholding enough from your wage to cover this.

However if your income is over the relevant threshold and you do not have sufficient private health insurance, you may get caught out by an additional charge – the Medicare Levy Surcharge (MLS). This is an extra tax of between 1% and 1.5% of your ATI.

The income threshold starts at $93,000 for singles and $186,000 for families. If you are earning more than this as your adjusted taxable income (ATI), you may want to consider private health insurance (PHI), as you may be better off taking out a PHI policy, rather than paying the surcharge.

Private Health Insurance Rebate

If you do have the appropriate level of private patient hospital cover, you will be safe from MLS. However you may find that you are having to pay back some of your insurance rebate when you lodge your tax return.

Depending on your ATI, you are entitled to a certain percentage discount on your PHI premiums (often referred to as a PHI rebate). Generally you need to advise your insurer of your expected taxable income when taking out a PHI policy. If your actual ATI is higher than what you’ve advised, you may have to repay some of the discounts received. If your ATI is lower, you may be entitled to a tax offset due to paying too much in premiums during the year.

You can refer to the income tier’s here.

Centrelink Payments

As a disclosure, we are no experts when it comes to payments Centrelink offers, however common concerns are if families will be entitled to the Child Care Subsidy or Family Tax Benefits.

Usually Centrelink will require an income estimate at the beginning of the year, and they make regular payments to you or your childcare provider based on this income estimate. Similarly to the PHI rebate, if your ATI ends up being higher than what you’ve advised, you may have to repay some of the benefits that you have received during the year. If your ATI is lower, you may be entitled to an additional payment due to under-claiming your entitlements during the year.

The ATO will share information from your tax return with Centrelink, which allows Centrelink to reconcile your income estimate to your ATI. Once they’ve completed their reconciliation, they will send you an assessment or a refund.

Conclusion

To avoid unexpected bills, it is important for your estimated ATI to be as accurate as possible, and if assistance is needed then engaging with a trusted accountant or business adviser can save you a lot of time - and money!

To determine whether this applies to you or to gain a better understanding of your own adjusted taxable income and income tests, please don't hesitate to have a talk with us at BLG Business Advisers. Our team are here to help you.

We wish you and your business every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is relevant at the time of publishing and is subject to change*