Chapter 3 Exempt Income and Non assessable non

Chapter 3 Exempt Income and Non- assessable non- exempt income © National Core Accounting Publications 1

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). © National Core Accounting Publications 2

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: 1. Exempt entities i. e. Organisations, funds and persons specifically exempted. 2. Income specifically exempted © National Core Accounting Publications 3

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 © National Core Accounting Publications 4

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. © National Core Accounting Publications 5

Non-resident Exemptions Some Australian earnings specifically exempted. by non-residents are 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. © National Core Accounting Publications 6

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. © National Core Accounting Publications 7

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 © National Core Accounting Publications 8

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. © National Core Accounting Publications 9

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. © National Core Accounting Publications 10

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 nongovernment organisation. • A government aid worker. • A specified government employee. © National Core Accounting Publications 11 11

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. © National Core Accounting Publications 12

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 2014, calculate the following: • Rafael’s taxable income. • Rafael’s net tax payable or refundable. © National Core Accounting Publications 13

Solution: $ Gross Wages – Egyptian employment (exempt) Gross Salary – Australian employment TAXABLE INCOME Nil 24, 000 Taxable Income Add: Exempt Foreign Employment Income NOTIONAL GROSS TAXABLE INCOME 24, 000 25, 000 49, 000 Tax on Notional Gross Taxable Income ($49, 000) 3, 572 + 32. 5% x (49, 000 - $37, 000) Medicare Levy on Notional Gross Taxable Income 1. 5% x 49, 000 NOTIONAL GROSS TAX Tax on Taxable Income ($24, 000) (Notional gross tax/Notional gross taxable income x Other taxable income) 8, 207/49, 000 x 24, 000 Less low income tax offset 445. 00 PAYG tax withheld 3, 000. 00 TAX REFUNDABLE © National Core Accounting Publications 7, 472. 00 735. 00 8, 207. 00 4, 019. 76 3, 445. 00 574. 76 14

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. © National Core Accounting Publications 15