How tax deductions work.
Tax can feel complicated, but the maths behind a deduction is simple. This page explains, in plain English, how deductions actually reduce the tax you pay in Australia — and why claiming everything you're entitled to matters.
The simple formula
Australian income tax is calculated on your taxable income, not on everything you earn. The formula is: assessable income minus allowable deductions equals taxable income. Your tax is then worked out on that taxable income figure, not your gross earnings.
Assessable income − allowable deductions = taxable income (the number the ATO uses to calculate your tax).
Assessable income
Assessable income is the money you have to declare. For most Australians it includes salary and wages, bonuses, tips, ABN or sole trader income, rental income, interest, dividends, capital gains, and certain government payments.
- Wages and salary from your employer
- Business income from your ABN or company
- Rent from investment properties
- Interest, dividends and distributions
- Capital gains from selling assets
Allowable deductions
Allowable deductions are the costs the ATO lets you subtract from your assessable income. Most are expenses you incurred to earn that income — but some are permitted extras like donations to registered charities, personal super contributions and the cost of managing your tax affairs.
A worked example
Sarah earns $85,000 in salary. Over the year she spent $600 on a laptop bag and stationery used for work, $220 on a professional membership, and donated $300 to a registered charity. Her allowable deductions total $1,120, so her taxable income drops to $83,880. Tax is calculated on $83,880 — not $85,000.
Ben has $72,000 in salary plus $9,000 in rideshare income. His car running costs, phone use and platform fees add up to $3,800 of deductions relating to the rideshare work. Those deductions reduce the tax he pays on the extra earnings.
Why this matters
Every dollar of legitimate deduction reduces your taxable income. Depending on your marginal tax rate, that can be worth roughly 19c, 30c, 37c or 45c back in your pocket for each dollar claimed. Missing deductions is the single most common reason Australians pay more tax than they need to.
How Night Tax helps
Night Tax AI asks smart, targeted questions based on your occupation, income sources and life circumstances — then prompts you for the deductions people in your situation commonly forget. Every suggested claim is checked by a registered tax agent before lodgement.
Let AI find deductions you didn't even know existed
Start your Night Tax return tonight — quick, accurate and reviewed by a registered tax agent before lodgement.
Night Tax always applies ATO rules on substantiation and compliance. AI suggestions are reviewed by a registered tax agent before lodgement.