Income tax
Non-assessable income
Non-assessable income, more fully non-assessable non-exempt income, is income that the law says is not taxed and is not counted in assessable income.
Some amounts you receive are specifically excluded from income tax by law. When the legislation says the amount is not assessable and is not exempt, it is called non-assessable non-exempt income, often shortened to non-assessable income. You do not pay tax on it, and you do not include it as assessable income in your tax return, although you may need to disclose it in some cases.
Examples include certain government payments and reimbursements, some amounts from the Commonwealth designed to be tax free, and certain dividends or distributions, such as some franked distributions to foreign residents on which withholding tax is final. Other items such as certain payments under specific legislation or some foreign income covered by tax treaties may also fall in this category.
Because the amount is not assessable, expenses incurred in earning it are generally not deductible. This is an important rule, since a deduction is available only for costs of earning assessable income. If you pay costs to earn non-assessable income, you will usually not be able to claim them.
Non-assessable income should be separated from exempt income, even though both are untaxed. The difference arises in the calculation of tax losses. Exempt income is taken into account when working out a tax loss, in that it can reduce the loss available to carry forward, while non-assessable non-exempt income is not. For most individuals the difference has no practical effect.
Do not assume that a payment is untaxed simply because it was not paid as wages. Many payments to business owners, including grants, are assessable. The tax treatment of the payment depends on the law that applies to it and the circumstances, so check before leaving it out of your return. The ATO guidance often says clearly whether a specific payment is assessable.
Non-assessable income can also be outside the GST system or inside it, depending on what the payment is for. A government grant that is non-assessable for income tax might still involve GST considerations if it is consideration for a supply. The two tax systems are separate, so analyse each. This is general information only, so confirm the treatment of any payment with the ATO or a registered tax professional.
Worked example
Ian receives a one-off payment under a government program which the law specifically says is non-assessable non-exempt income. He receives $3,000 and does not include it in his assessable income. If he paid $400 in costs directly to obtain that payment, he generally cannot claim a deduction for the $400, since the costs relate to income that is not assessable.
Practical tips
- Check the ATO guidance before leaving a payment out of your return, since many payments that look tax free are assessable.
- Remember costs of earning non-assessable income are generally not deductible.
- Keep records showing why you treated a receipt as non-assessable in case of review.