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Assessable income

Contributed by AnnetteMorgan and current to 27 July 2018

Residents of Australia are assessed on their gross income from all sources. Non-residents are assessed on the gross income from Australian sources only. Your citizenship or nationality does not determine your tax residence. As a general rule of thumb, if you reside in Australia and do not maintain a permanent home elsewhere you will be a resident of Australia for tax purposes.

Income you derive from overseas (if you are an Australian resident) or your Australian-sourced income (if you are a non-resident) may also be subject to tax in another jurisdiction. Usually one of the jurisdictions will treat the income as exempt or allow a credit or deduction for taxes paid in the other jurisdiction.

Generally, Australian residents are subject to tax on income earned anywhere in the world, but a tax credit is available if tax is paid in the other country. A limited exemption from tax may be available if you are employed for more than 91 days in delivering foreign aid or are deployed overseas as a member of the defence or police forces. In other situations, a double tax treaty, which will prevent you from being taxed twice on the one amount of income, may exist between the two places of taxation. Australia has negotiated double tax treaties with many of its major trading partners (such as Japan, China, the United States and the United Kingdom) but not with those considered to be tax havens.

What is meant by income?

"Income" is not defined in the Acts. Over the years the courts have formulated certain principles to determine whether an amount is income or not. Under these principles, items will generally be regarded as income where they consist of:

* your personal earnings from the performance of services, for example, salary, wages, bonuses, etc;
* recurring payments you receive for the provision of services, or from investments or the exploitation of property or rights, for example, rent received; and
* your receipts which come from or are directly related to a profit-making enterprise or business in which you are involved, for example, sales revenue.

Under general principles, an amount that you receive will not be income unless it consists of money or is capable of being converted into money. However, there are special provisions in the 1936 Act that mean the value of certain non-cash benefits you receive will need to be included in your assessable income or will be subject to fringe benefits tax in the hands of your employer. In effect, you cannot avoid paying tax simply by converting an entitlement to income into the provision of a benefit in lieu of a receipt of money, or by directing that the amount be paid to some other person.

Receipts defined as income by the Acts

In addition to the principles established by the courts, the Acts lay down various situations in which amounts you receive will be regarded as part of your assessable income. In some situations, it is likely that these items would have been regarded as income under the courts' principles. However, for other items this may not be the case and hence the Acts deem them to be assessable income. Some of the more important of these items include:
  • capital gains you make from the disposal of a capital gains tax asset;
  • benefits you receive in relation to your employment which are not caught under the fringe benefits tax provisions;
  • certain discounts on share purchases you enjoy under employee share schemes;
  • profits from sale of property you acquired for the purpose of profit-making by sale and profits from carrying out profit-making schemes;
  • interest you receive;
  • dividends you receive as a shareholder (however, see "The imputation system" below);
  • most annual payments (annuities you receive for a fixed period or for life), for example, superannuation pensions and maintenance payments;
  • amounts withheld from your salary or wages for that are npt classified as fringe benefits, for example, medical or hospital fund contributions and superannuation deductions (however, for information on salary sacrifices for superannuation, see "Superannuation deductions", below);
  • a right you hold to receive a flow of income under the terms of a will as opposed to a specific gift or sum of money;
  • compensation you are paid periodically to replace wages or in a lump sum for past lost wages, as opposed to fixed awards or lump-sum damages for loss of future earning capacity;
  • holiday pay and long service leave payments (see "Unused leave payments", below);
  • periodic workers compensation payments;
  • tips received in the course of your employment; and
  • trust income, unless the beneficiary is an infant or under a legal disability, in which case the trustee is liable to tax.
Note: The above is not intended to be a complete list of all items that may be regarded as assessable income.

Personal services income

There is a special tax regime for including in your assessable income your personal services income (PSI) even if that PSI has been diverted to another entity (for example, a trust or company). PSI is generally the money you receive for your personal efforts or skills. You are also limited in what you can claim as deductions against your PSI.

The PSI regime does not apply to you if you are an employee. It will also not apply to income you receive from the conduct of a Personal Services Business (PSB). You will be conducting a PSB if:
  1. You pass the "results test". That is, if you earned at least 75 per cent of your PSI for producing a particular result for which you had to supply the necessary equipment and any defects in which you had to rectify; or
  2. You do not earn 80 per cent or more of your PSI from one source and at least one of the following applies to you:
    a) You earn PSI from two or more unrelated clients; or
    b) You employ entities (including people) in the course of your business; or
    c) You maintain and use business premises which are physically separate from the premises of the entities to which you provide services.
If you earn more than 80 percent of your PSI from one source and you do not pass the results test, you will need to obtain a determination from the ATO that you are running a PSB.

Further information on this is available from the ATO website or the Business Tax Enquiries infoline on 13 28 66.

Unused leave payments

If your employment is terminated, it is common for you to receive a lump sum payment for any annual leave or long service leave which you have accrued. The taxation treatment of such payments may be summarised as follows.

Unused annual leave

Changes were made to the law on 18 August 1993 so that, if your employment is terminated on or after that date, any unused leave you accrued before will have to be apportioned.

The maximum rate of tax you have to pay on amounts you receive for unused leave you accrued prior to 18 August 1993 will be 30 per cent plus the Medicare levy. For payments for unused leave you accrued on or after 18 August 1993, the amount will be added to your assessable income and taxed at the appropriate marginal rate.

However, if the termination of your employment is:
  • due to bona fide redundancy;
  • under an approved early retirement scheme; or
  • due to a disability, the amount you receive is taxed at the rate applicable to amounts accrued before 18 August 1993 (maximum 30 per cent plus Medicare levy).

Unused long service leave

  • Five per cent of the amount relating to long service leave which you accrued prior to 16 August 1978 is added to your assessable income and taxed at the appropriate marginal rate.
  • The amount relating to leave which you accrued between 16 August 1978 and 17 August 1993 is included in your assessable income and taxed at a maximum rate of 30 per cent, plus the Medicare levy.
  • The amount relating to leave you accrued on or after 18 August 1993 is included in your assessable income and taxed at the appropriate marginal rate, unless the receipt is for bona fide redundancy, invalidity, or under an approved early retirement scheme, in which case the amount will be taxed at a maximum rate of 30 per cent plus the Medicare levy.
(Note: Where you accrued such an amount before 16 August 1978, 5 per cent of the amount will be taxed at the appropriate marginal rate.)

Employment termination payments

This is a particularly complex area of taxation law that, together with superannuation, has been the subject of a continuous stream of amendments since 1983. In effect, their application will need to be considered on a case-by-case basis. The taxation laws provide special provisions for dealing with employment termination payments , which are primarily designed to lower your tax burden if you receive these payments. The following provides a very general outline of the key elements of this area.

An employment termination payment is a payment made in consequence of the termination of employment of a person. The payment may be made directly in relation to the taxpayer's employment (life benefit termination payment) or it may be made to a taxpayer in relation to the employment of another person following the death of that person (death benefit termination payment). The payment must be made within 12 months from the date of termination or employment or the taxpayer can apply for the Commissioner to exercise his discretion for a longer period of time. Payments cannot be rolled over to a superannuation fund.

Employment termination payments can include, amounts for unused rostered days off, amounts in lieu of notice or a gratuity or 'golden handshake'

There are some specific exclusions from the definition of an employment payment, they include, a payment for unused annual leave or unused long service leave and the tax-free part of a genuine redundancy payment

Taxation of life benefit termination payments

An employment termination payment is made up of 2 components, a tax-free component and a taxable component.

The tax-free component of a life benefit termination payment consists of:
a) The invalidity segment of the payment being the portion of the payment that compensates the taxpayer for termination of employment due to invalidity, and
b) The pre-July 1983 segment being the portion of the payment attributable to the taxpayer's service period before 1 July 1983.

The taxable component is the amount of the payment less the tax-free component.

The taxable component is included in the individual's assessable income with a tax offset available to cap the maximum tax rate applied to the payment. The age of the recipient together with an ETP cap and an annual whole-of-income cap will determine the applicable tax rate on the payment.

There is an ETP cap of $200,000 for 2017/18 which is indexed each year that is applicable to employment termination payments. If the total taxable component received by a taxpayer from the same termination, irrespective of whether the ETP is made in multiple payments in the tax year or over multiple tax years, does not exceed the cap, a tax offset is available to limit the tax payable. The available offset may be limited by the whole-of-income cap. The annual whole-of-income cap ensures that any ETP that takes the individual's total taxable income over $180,000 in the relevant tax year is subject to tax at the top marginal rate. The net effect of the offsets and caps mean that in any given year the ETP will be taxed concessionally (via an offset) up until the point the total taxable income reaches $180,000 and assuming the ETP cap has not been exceeded. The amount which takes the individual's total taxable income above $180,000 or is in excess of the ETP cap amount will be taxed at the top marginal rate. The ETP cap is reduced by any earlier payments received in that year, or in relation to the same termination, either in the same financial year or an earlier year. Therefore the maximum amount in respect of any one termination which can be concessionally taxed is the cap limit.

The following table shows the maximum rates of tax applicable on the two components of an ETP, according to the age of the taxpayer when the ETP was made. The taxable component of the ETP is still included for the calculation of the Medicare levy irrespective of whether an offset applies except in the instance where the maximum rate of tax applicable is 0%.

Employment termination payments

Component

Tax treatment

Tax-free component

Not assessable income and not exempt income

Taxable component

Preservation age and over 15% up to the applicable cap amount. Top marginal rate on amount above the applicable cap amount (45%)

Below preservation age 30% up to the applicable cap amount Top marginal rate on amount above the applicable cap amount (45%)

Concessional taxation treatment

The portion of an ETP made to you under an approved early retirement scheme or because you were made redundant is given concessional tax treatment. For 2017-18, such payments are exempt from tax on the first $10,155 you receive plus $5,078 per year of service you completed with the employer who makes the payment. These amounts are indexed annually. Any amount received in excess of the tax-free amount will be included in assessable income, but taxed at a maximum rate of 30%.

Superannuation benefits

Superannuation benefits are usually paid from superannuation funds, retirement savings accounts, approved deposit funds or superannuation annuities. A superannuation benefit can be paid either as a lump sum or as an income stream and includes both superannuation member benefits and superannuation death benefits.

Taxpayers have a choice in relation to how they access superannuation payouts. They can either take a lump sum payment or a pension, now referred to as an income stream. The tax treatment will differ accordingly.

Tax treatment in relation to superannuation lump sum payment

Before the tax treatment can be determined an understanding of the following should be gained:

1) Components of a superannuation lump sum payout

The rules which apply from 1 July 2007 are that superannuation payouts now comprise two components:
  • A tax-free component
  • A taxable component

Tax-free component

This is the part of the benefit that is tax-free and is not included in assessable income. It includes undeducted contributions and the pre-July 1983 component.

Taxable component

The taxable component is included in assessable income and may include two parts:

* A taxed element - Tax has already been paid on this element in the superannuation fund. It may or may not need to have additional tax paid on it when paid out. The taxed element is included in assessable income and may attract a tax offset.

* An untaxed element - No tax has been paid on this element in the superannuation fund. The untaxed element is included in assessable income.

2) Preservation age

The preservation age of the taxpayer is when the taxpayer can access the superannuation benefits. The amount of tax payable depends on whether or not the taxpayer is:
  • Over 60 years of age
  • Between preservation age and 60 years of age
  • Under preservation age
Use the following table to determine a taxpayer's preservation age.
Date of Birth Preservation Age
Before 1 July 1960 55
1 July 1960 to 30 June 1961 56
1 July 1961 to 30 June 1962 57
1 July 1962 to 30 June 1963 58
1 July 1963 to 30 June 1964 59
After 30 June 1964 60
The following table shows the maximum rates of tax applicable on superannuation member benefits depending on the type of payment, the tax status of the element in the fund and the age of taxpayer at the time the payment is made. The taxable component of the superannuation benefit is still included for the calculation of the Medicare levy irrespective of whether an offset applies except in the instance in which the maximum rate of tax applicable is 0%.

  Element taxed in fund Element taxed in fund Element in untaxed fund Element in untaxed fund
Age Superannuation lump sum Superannuation income stream Superannuation in lump sum Superannuaton income stream
60 and above 0% 0%

15% up to $1,445,000 per

super plan and top marginal tax rate

for amount above $1,445,000

Marginal tax rate and 10%

tax offset

Preservation age to age 59

0% up to $200,00

15% above $200,000

Marginal tax rate and 15%

tax offset

15% up to $200,000

30% up to $1,445,000 and

top margianl tax rate for amount

above $1,445,000

Marginal tax rate and no tax

offset

Below preservation age 20%

Marginal tax rate and no tax

offset

30% up to $1,445,000 and top

marginal tax rate for amount above

$1,445,000

Marginal tax rate and no tax

offset

Superannuation pensions or income streams

On termination of employment employees who were members of superannuation funds may choose to take a pension from that fund. A taxpayer who receives a pension paid from a superannuation fund instead of a lump sum on termination of employment is assessed as follows:
  • Superannuation income stream when payout consists of the tax-free component and the taxed element of the taxable component
  • Individual over 60 years of age
Both the tax-free component and the taxed element are treated as non-assessable and non-exempt income.
  • Individual between preservation age and 60 years of age
The tax-free component is treated as non-assessable and non-exempt income and the taxed element is taxed at marginal rates and a 15% tax offset available.
  • Individual below preservation age
The tax-free component is treated as non-assessable and non-exempt income and the taxed element is taxed at marginal rates but no tax offset is available.
  • Superannuation income stream when the payout consists of the untaxed element of the taxable component
  • Individual over 60 years of age
The untaxed element is assessable income subject to marginal tax rates, and a 10% tax offset is available.
  • Individual between preservation age and 60 years of age
The untaxed element is assessable income subject to marginal tax rates but no tax offset is available.
  • Individual below preservation age
The untaxed element is assessable income subject to marginal tax rates but no tax offset is available. This is the same tax treatment as above.

Amounts you receive from the government

Many payments are made by the Commonwealth government and it is not possible to deal with the taxation treatment of each and every one of those payments. Centrelink will advise whether your payments inlcude a component that is assessable. Some payments you receive from the Commonwealth will be fully assessable, other payments may be fully exempt from tax and others may be partially assessable and partially exempt. You should consult the tax guides for a comprehensive list. The following outlines the taxation treatment of some of the more common government pensions and allowances.

Assessable Receipts

Government payments that are assessable or partially assessable include the following:
  • age pension;
  • carer payment, except where both the handicapped person and taxpayer are under the pension age or the handicapped person is deceased and the taxpayer is under the pension age, in which case the payment is fully exempt;
  • Newstart allowance;
  • sickness allowance;
  • parenting payment (single);
  • wife pension, where the taxpayer or partner is over the pension age;
  • mature age allowance and mature age partner allowance; and
  • income support supplement.
Note: Some of the above items have special provisions which are relevant in determining assessability. For example, some of the pensions may also attract a supplementary amount which represents rent assistance or payments attributable to children. The supplementary amounts are exempt from tax.

Exempt Receipts

There are also pensions and allowances which do not attract taxation. These include the:
  • double orphan pension;
  • employment entry payment;
  • disability support pension and wage supplement (where taxpayer is under the pension age);
  • carer allowance;
  • family assistance allowances and benefits;
  • childcare benefit;
  • fares allowance;
  • mobility allowance;
  • telephone allowance;
  • rent subsidy to tenants under Commonwealth/state rent relief schemes;
  • disaster relief payments;
  • maternity allowance and maternity immunization allowance; and
  • certain supplementary payments on otherwise assessable pensions and benefits (for example, rental assistance on the age pension).

Veterans' Entitlements

If you are a war veteran, or the dependant of a war veteran, you may be entitled to certain pensions and allowances. Once again, some of these payments are exempt from taxation, some are assessable and some are partly assessable. Some of the assessable or partly assessable veterans' payments include the:
  • age service pension;
  • carer service pension, with some exceptions, for example, where the recipient and the veteran are under pension age and the veteran is receiving the invalidity service pension; and
  • invalidity service pension, where the recipient is over pension age.
Some veterans' payments which are exempt from taxation include:
  • certain supplementary allowances on otherwise assessable pensions and benefits (for example, rental assistance, remote area allowance and additional amounts for dependent children);
  • clothing, decoration, recreation, transport, temporary incapacity, telephone and attendant allowances;
  • invalidity service pension where the recipient is under the pension age;
  • loss of earnings allowance;
  • pharmaceutical allowances;
  • bereavement payments in respect of disabled veterans;
  • special assistance payment; and
  • vehicle assistance scheme payment.

Scholarship/educational allowances

Various schemes and allowances provide financial assistance if you are studying. Once again, the amounts may be assessable, partly assessable or not assessable, depending on the nature of the payment.

As a general policy, scholarships and bursaries (including those provided by the Commonwealth) which you receive are exempt from tax, providing you are studying full-time at an appropriate educational institution in Australia or overseas (for example, at a school or university). Your age is not relevant. The Acts also contain other express exemptions from income tax in certain specific situations. These include:
  • scholarships or similar allowances to foreign students and trainees who are in Australia solely for study or training;
  • grants from the Australian-American Educational Foundation (Fulbright Scholarships);
  • allowances for students under 16 years of age paid under the Assistance for Isolated Children Scheme or under the Veteran's Children Education Scheme; and
  • Childcare subsidy payable under Youth Allowance, ABSTUDY and Austudy.
However, there are several exceptions to the tax-free status of educational assistance. These include:
  • payments you received which bind you to work for a particular employer. However, it seems that where your fees are paid directly to an educational institution by the prospective employer, this will not constitute assessable income;
  • payments you receive from Youth Allowance, Austudy or ABSTUDY, except to the extent that they contain a component for a child or children dependent on you; and
  • payments you receive from a friendly society education fund as a student undertaking education at a school, college or university. However, a tax exemption does apply for the contributions paid to such funds before 29 April 1993 or paid after that date as a result of a legally binding obligation entered into before that date.

Exempt income and non-assessable, non-exempt income

As mentioned in previous sections, some items which would normally be regarded as income are exempt from income tax due to specific provisions of the Act. In addition, the following items are exempt:
  • periodic maintenance payments you receive as the spouse or ex spouse (including a de facto spouse), or child of the payer (including adopted, ex-nuptial or step-children);
  • lump sum damages (and interest accrued on the payment) or annuities you are awarded under certain structured settlements for loss of earning capacity as a result of a personal injury claim;
  • some workers' compensation payments you receive (such as for loss of a body part). This is not a settled area of law so that some amounts you receive will be assessable income (for example, periodic workers' compensation payments you receive as compensation for lost wages) while others may constitute a payment on the loss of a capital gains tax asset (for example, some lump sum workers' compensation payments for loss of earning capacity);
  • death benefits/life insurance you receive as a dependant of the deceased, other than income you receive in the form of a pension or annuity (which will be subject to differing tax treatment, depending on when the income became payable);
  • gifts not related either directly or indirectly to services you rendered;
  • gambling wins unless you are in the business of gambling;
  • hospital or medical fund reimbursements;
  • income tax refunds (however, interest on overpaid tax is assessable);
  • profit on the sale of capital assets if you acquired them or are deemed to have acquired them, on or before 19 September 1985, unless a profit-making enterprise was involved; and
Note: this list is not exhaustive. Note also that certain gifts and bequests, even if exempt income to the recipient, may make you as the giver liable to capital gains tax.

Recently, another sub-category of income has been introduced into the tax law known as "non-assessable, non-exempt" income. You will not be assessed on income that falls within this category. However, it will also not be taken into account in calculating a tax loss you have for a year (unlike exempt income, which is taken into account). Most types of non-assessable, nonexempt income relate to business income and are therefore beyond the scope of this chapter. One example of non-assessable, non-exempt income is a fringe benefit provided by your employer which is subject to fringe benefits tax.

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