The Tax Act deals with a broad category of exempt income on which income tax is not payable.
However, such exemptions still should be declared in income tax returns. Although income tax is not payable on exempt income itself, its inclusion in tax returns alters the tax payable rate on other income.
Note that any tax losses carried forward are first applied against exempt income.
ITEMS OF EXEMPT INCOME
Exempt income includes:
- Bonafide redundancy payments (subject to limits)
- Certain pensions and allowances
- Childcare payments
- Commonwealth education payments to assist in the cost of rent, commencing employment, travelling, special equipment etc.
- Demerger dividends
- Employment security scheme payments
- Exceptional circumstances relief payments
- Foreign dividends received by an Australian company (where > 10% ownership)
- Foreign earnings of companies operating active businesses through branches
- Frequent Flyer benefits for employees
- Fringe benefits
- International scholarships
- Mutual income
- Open employment incentive bonus
- Pay and allowances for part-time members of the Defence Force Reserves
- Pay and allowances to ADF personnel whilst on operational service
- Periodic maintenance payments received by a spouse, former spouse, or child
- Private health insurance payments
- Rent subsidy payments
- Scholarships, bursaries etc., derived by a student receiving full-time education at the school, college, or university
- Secondary education and isolated children’s education assistance
- Some allowances paid and the value of rations and quarters for members of the Defence Force
- Some Veteran’s entitlement pensions and similar benefits
- Wartime persecution pensions
- Income support bonus payments
- Interest paid by the Commonwealth on unclaimed sums of money and property from 1 July 2013 is exempt
- Payments made under the Defence Abuse Reparation Payment Scheme are exempt from 1 July 2013
- Payments under the National Disability Insurance Scheme are exempt with effect from 1 July 2013
EXEMPT VETERANS’ ENTITLEMENTS
Exempt payments made under the Veterans’ Entitlements Act include:
- Attendant allowances
- Bereavement payments
- Carer service pensions in certain circumstances
- Clothing allowances
- Decoration allowances
- Funeral benefits
- Income support supplements in certain circumstances
- Invalidity service pension where under pension age
- Loss of earnings allowance
- Partner service pension when under pension age
- Pension bonus
- Pension for defence or war-caused death or incapacity
- Pharmaceutical allowance
- Recreation transport allowance
- Rental assistance etc.: paid with Aged Service Pension
- Special assistance
- Telephone allowance
- Temporary incapacity allowance
- Travelling expenses for health treatment
- Vehicle assistance scheme payments
- Victoria Cross allowance
EXEMPT CENTRELINK PAYMENTS
Exempt payments under Social Security legislation include:
- Advance pharmaceutical supplements
- Carer allowances: carer payments in certain circumstances
- Disability wage supplements when under pension age
- Disaster relief payments
- Double orphan pension
- Employment entry payment
- Family assistance
- Fares allowance
- Maternity payment
- Mobility allowance
- Parenting payments (under certain circumstances)
- Pensioner bonus
- Pensioner education supplements
- Remote area allowance etc.: paid with AUSTUDY
- Rental assistance and allowances paid with aged pensions
- Rental assistance etc.: paid with bereavement allowances
- Rental assistance etc.: paid with mature age allowances and mature age partner allowances
- Rental assistance etc.: paid with Newstart allowances
- Rental assistance etc.: paid with special needs
- Rental assistance etc.: paid with partner allowances
- Rental assistance etc.: paid with sickness allowances and special benefits
- Rental assistance etc.: paid with widow allowance and widow B pension
- Rental assistance etc.: paid with youth allowances
- Senior’s concession allowance
- Senior’s utilities allowance
- Telephone allowance
- Wife pension when under pension age
Occasional receipts that involve nothing more than the vigorous pursuit of a hobby should not be assessable.
It can be a fine line, and if you are consistently making profits, the ATO will view that you are conducting a business.
Other factors the ATO will consider include:
- size and scale of operations
- activity levels
- details of business records kept
Gambling, betting, or lottery wins are considered windfall gains and are not assessable unless it is considered that you are in the business of gambling.
Examples of professional gamblers include bookmakers, casino proprietors and professional punters.
A professional punter gambling systematically and making profits may be considered to be operating a business and hence, would be assessable on such income. Sadly, such people may consistently make losses, and professional punters who have tried to offset gambling losses against other income have had little success in the courts!
Conversely, those who only occasionally gamble must keep adequate records of any significant win to prove that the payout is from a gambling source and not from other undeclared income.
In the event of an audit, the onus of proof is on the taxpayer, and the ATO will deem unexplained increases in cash or assets to be assessable income unless you can prove otherwise.
AUSTRALIANS WORKING OVERSEAS
Up to 30 June 2009, given the global nature of the labour market, many Australians were aware that overseas employment income could be exempt from tax if certain conditions regarding “continuous employment” were met.
Here we are dealing with a situation where the taxpayer is still a resident of Australia. However, this overseas income still had to be disclosed in the tax return, possibly resulting in Australian sourced salary and investment income being placed in higher marginal tax brackets.
Since 1 July 2009, this exemption has only been available to income earned from:
- As an aid or charitable worker employed by a recognised non-government organisation; or
- As a government aid worker; or
- As a specified government employee (for example, defence and police force personnel deployed overseas).
- Note, under Taxation Determination TD2013/18, for foreign employment income exemption purposes. A defence force member is deployed if directed to perform duties overseas by the Commonwealth, a State or a Territory or authority thereof.
Further, income earned by an individual employed on an overseas project approved by the Minister for Trade as being in the national interest will remain exempt, as provided for by existing rules.
To avoid Australians paying double-taxation, a tax offset will be available for any foreign tax paid on their foreign employment income.
The principle of mutuality means that a taxpayer’s income can only consist of amounts derived from outside the individual or entity. This means that membership subscriptions and profits on sales to club members are not income.
Apportionment rules apply for clubs that both members and non-members use, and appropriate records must be kept.
A High Court decision demolished this long-held principle by holding the mutuality principle did not apply where the members were prevented from obtaining the value of the net assets when the organisation was wound up.
Legislation has now been passed to restore the principle of mutuality to non-profit organisations.
Genuine gifts are not considered income.
This most commonly occurs between family members. Note that if there is a link between the recipient’s work-related activities and the gifts received, this will not be the case.
Tips received by waiters, for example, are assessable because they directly relate to the work they are doing.
Gifts made by an employer to an employee are exempt to the employee but may be subject to FBT.
NON-ASSESSABLE, NON-EXEMPT INCOME
Non-assessable, non-exempt income is income you do not need to pay tax on. It does not affect your tax losses but may be taken into account when calculating your liability for the Medicare levy surcharge and the adjustable taxable income of your dependants.
Non-assessable, non-exempt income includes:
- The tax-free component of an employment termination payment (ETP).
- Genuine redundancy payments and early retirement scheme payments shown as ‘Lump sum D’ amounts on your payment summary.
- Super co-contributions.
- GST payable on a taxable supply.
Other amounts that are NOT taxable
Generally, you DO NOT have to declare:
- Rewards or small gifts such as cash birthday presents. However, gifts may be taxable if they are large amounts, or you receive them as part of a business-like activity or in relation to your income-earning activities as an employee or contractor).
- Prizes you won in ordinary lotteries, such as lotto draws and raffles.
- Prizes you won in game shows unless you regularly receive appearance fees or game-show winnings.
- Child support and spouse maintenance payments you receive. However, such payments may impact welfare entitlements.