Exempt income and excluded income
Section BD 1 of ITA 2007 classifies income as income, exempt income, excluded income, non-residents’ foreign-sourced income and assessable income
Exempt income is defined in section BD1(2) as an amount of income of a person is exempt income if it falls under subpart CW (exempt income) or CZ (Terminating provisions)
Excluded income is defined in section BD1(3) as an amount of income of a person is excluded income if it falls under subpart CX (excluded income) or CZ and it is not their non-residents’ foreign-sourced income.
For a transaction to be exempt or excluded income, it first must be income. Exempt income and excluded income are not included in the calculation of assessable income. This means that you do not have to pay tax on exempt and excluded income.
However, section DA 2(3) introduces exempt income limitation, which means that taxpayer is not able to deduct any expenses incurred when deriving exempt income.
On the other hand, any expenses incurred in deriving excluded income can be deducted under section DA 1 providing it is not disallowed by any limitations under DA 2.
Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert.
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