1. Exempt Income and Non- assessable non- exempt income
Chapter 3
Exempt Income and Non- assessable non- exempt income
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Exempt Income
Exempt income is not included in assessable income.
Accordingly, all expenses associated with deriving exempt income are not deductions.
However, exempt income is taken into account when calculating the tax losses of earlier income years that can be deducted (refer to Chapter 13: Tax Losses).
Also, some types of exempt income are taken into account when calculating Adjusted Taxable Income (ATI) of the dependents of a taxpayer (see Chapter 12: Tax Offsets).
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Exempt Income
Definition of exempt income
An amount of ordinary or statutory income is exempt if it is made exempt by a provision of the ITAA.
Categories of exemption:
Exempt entities
i.e. Organisations, funds and persons specifically exempted.
Income specifically exempted
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4. Exempt Entities
A variety of organisations and funds are exempted from income tax on all of their income. Examples are:
Religious, scientific, charitable and public educational institutions
Trade unions and employer associations
Local government and public authorities
Non-profit cultural, sporting clubs and societies
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Exempt Entities
To be exempt from tax, an organisation must satisfy specific conditions which generally require the fund or organisation to:
have a physical presence in Australia.
incur its expenditure principally in Australia.
pursue its objectives in Australia.
These are collectively known as the “in Australia” requirement.
Every fund or organisation claiming an exemption must make written application to the Commissioner justifying its claim.
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6. Non-resident Exemptions
Some Australian earnings by non-residents are specifically exempted.
Examples:
Income of conference delegates attending conferences in Australia as representatives of educational, scientific or religious societies or associations.
Diplomatic representatives and consular staff of a foreign government.
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Exempt Amounts
Division 51 lists a variety of income receipts which are specifically exempt.
Examples include:
Pay and allowances of part-time Defence Force reserves.
Rent Relief Scheme payments.
Maintenance payments.
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Military Exemptions
Pay and allowances derived by Defence Force members serving overseas during a period of operation service in a defined operational area.
e.g. Iraq, Afghanistan
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Exempt Pensions
Examples of exempt social security payments are:
Family Tax Benefit
Maternity Payment
Disability Support pension
Disaster Relief Payment
Veterans’ Affairs disability pension and allowances
Carer Allowance
Note, however, that most social security payments are assessable.
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Exempt Foreign Income
Approved Overseas Projects
Income is exempt where an Australian resident taxpayer works continuously for 91 days or more on an approved overseas project.
Examples include:
A project for the development of natural resources.
A project for the supply of agricultural services carried out on behalf of the government or government authority.
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Exempt Foreign Income
Foreign Employment
Income is exempt where an Australian resident taxpayer is employed for at least 91 continuous days as:
An aid or charitable worker employed by a recognised non-government organisation.
A government aid worker.
A specified government employee.
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12. Exempt Overseas Employment Income and Australian Tax Payable
Exempt foreign income is used to determine tax payable on income that is assessable.
The ATO uses exempt income in the calculation of tax payable to ensure that taxpayers with exempt foreign earnings under the overseas employment and approved projects provisions are levied a similar rate of tax on their assessable income as taxpayers earning the same overall income from assessable sources.
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13. Illustration: Exempt Overseas Income and Calculation of Tax Payable
Rafael, a single resident taxpayer aged 25, completed six months of employment in Egypt on an approved overseas aid project. He derived gross wages of AUD$25,000 from which AUD$4,000 of Egyptian tax was withheld.
Rafael also derived a gross salary of $24,000 from his regular employment in Australia. PAYG tax of $3,000 was withheld.
Required:
For the year ended 30 June 2015, calculate the following:
Rafael’s taxable income.
Rafael’s net tax payable or refundable.
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Solution: $
Gross Wages – Egyptian employment (exempt) Nil
Gross Salary – Australian employment 24,000
TAXABLE INCOME 24,000
Taxable Income 24,000
Add: Exempt Foreign Employment Income 25,000
NOTIONAL GROSS TAXABLE INCOME 49,000
Tax on Notional Gross Taxable Income ($49,000) 7,472.00
3, % x (49,000 - $37,000)
Medicare Levy on Notional Gross Taxable Income
2% x 49,000
NOTIONAL GROSS TAX 8,452.00
Tax on Taxable Income ($24,000) 4,139.76
(Notional gross tax/Notional gross taxable income x Other taxable income)
8,207/49,000 x 24,000
Less low income tax offset
PAYG tax withheld 3, ,445.00
TAX REFUNDABLE
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15. Non-assessable Non-exempt Income (NANE)
NANE is ordinary or statutory income which is neither assessable or exempt. It is treated as if it were not income at all.
Examples include:
Fringe Benefits
GST payable on taxable supplies
Payments by taxed superannuation funds to members aged 60+
Some types of NANE affect a taxpayer’s liability for the Medicare Levy Surcharge.
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