What Is Assessable Profit?
Assessable profit is a calculation used in tax law to determine an individual's taxable income based upon gains or losses on funds held in taxable investment accounts. The term "assessable" references profits that are capable of being assessed for taxation purposes.
It is taken net of items such as investment account expenses, depreciation, and charitable donations. Essentially, it is taxable income after accounting for allowable deductions. For an individual, assessable profit is usually considered the income that is derived from passive means, rather than income that is derived from a salary, wages, or tips. Passive income is income that is received but that requires little effort on the part of the recipient to maintain it.
In many jurisdictions, assessable profit is also calculated to determine which portion of a company’s net profit is taxable in that jurisdiction. When applied to corporate profits in this manner, assessable profit is calculated by deducting any tax adjustments from the net profit.
Understanding Assessable Profit
Assessable profits are an important tax measure in constituencies where taxpayers may see large portions of taxable income come from investments held in taxable investment accounts. Taxable investment accounts are often referred to as brokerage accounts in the U.S. They are investment accounts that are funded with money upon which taxes have already been paid and any growth on the initial investment is also taxable. This can be contrasted with non-taxable or tax-deferred investment accounts, which are funded with pre-tax dollars (or after-tax dollars in the case of a Roth IRA) and the money in the account is able to grow free from taxability.
Income from investment accounts is considered passive income because it generates income for the investor without them having to do anything to earn it. This income, combined with income earned from tips, wages, and salaries, represents the individual’s assessable income, or the total of income made from working a job, selling investments or collecting returns on investments, selling property, collecting rent on rental properties, and any other sources of income for an individual during a tax period. Taxable income is the portion of that income that can be used to calculate the individual’s tax burden and is usually determined by deducting certain allowable expenses from the assessable income.
For calculating corporate profits, companies deduct any tax adjustments from the net profit to determine assessable profit.
Example of Assessable Profits
In Hong Kong, for instance, assessable profits are used to determine an individual's Hong Kong taxes payable. Profits from investment accounts less account expenses are used when computing income tax. Such tax income is important for jurisdictions that rely on taxation for a bulk of their budgetary capital.
Nigeria is one of the jurisdictions in which assessable profit is used to determine a corporate income tax. In Nigeria, corporate income taxes are determined by calculating assessable profit as net profit, or the total profit the company made during the basis period, plus disallowable expenses and taxable income not reported, less allowable expenses not reported and non-taxable income reported. Disallowable expenses in Nigeria include depreciation, penalties, and fines. Allowable expenses include expenses that are wholly, reasonably, exclusively, and necessarily (WREN) incurred in the generation of the company’s income during a given tax year or basis period.