Income tax
Exempt income
Exempt income is income that is specifically declared exempt from income tax by law, so it is not taxed, although it may still affect some calculations such as tax losses.
Exempt income is income that the legislation specifically states is free from income tax. Unlike ordinary assessable income, you do not pay tax on it. It is closely related to non-assessable non-exempt income, and in day to day terms both mean the money is untaxed, but legally the two categories are treated differently in a few situations.
Examples of exempt income include the income of certain registered charities and some other organisations that meet the requirements set by the law, certain pensions and allowances paid to particular groups, and some foreign employment income under specific conditions. Whether a payment is exempt depends on the law and the facts, so it is not safe to assume.
The key practical difference between exempt income and non-assessable non-exempt income appears when working out a tax loss. Exempt income is taken into account in that calculation, which means it can reduce the amount of tax loss that is carried forward. Entities with a mix of exempt and taxable income should be aware of this when preparing their returns.
Exempt income has an impact on other tests too. Some income-tested items count exempt income, and the ATO may require it to be shown in your return even though it is not taxed. Also, if you earn exempt income, the expenses of earning it are generally not deductible, in the same way as for other untaxed amounts.
Charities and not-for-profit organisations are common recipients of exempt income. Endorsement by the ATO as an income tax exempt charity allows the organisation to be exempt from income tax. These organisations may still have GST obligations, including registration at a $150,000 turnover threshold for non-profits, so income tax status and GST status must be dealt with separately.
The exempt status of an amount is a legal conclusion, so do not rely on informal advice. Keep documentation that supports your treatment, such as endorsement letters or the legislative basis for the exemption. This is general information only, so confirm what counts as exempt for you with the ATO or a registered tax professional.
Worked example
A registered charity that is endorsed as income tax exempt receives $200,000 of donations and fundraising income. That income is exempt from income tax. The charity cannot deduct expenses related to earning that exempt income in a way that creates a tax loss, and its GST position, such as whether it must register once GST turnover reaches $150,000, is a separate matter.
Practical tips
- Do not assume a payment is exempt without checking the law or ATO guidance.
- Keep documents such as endorsement letters that support exempt status.
- Remember exempt income can reduce a tax loss, so it matters if you also have taxable activities.