Non-assessable non-exempt income

A number of provisions in the ITAA 1936 and the ITAA 1997 treat foreign income received by an Australian resident as either exempt or non-assessable and non-exempt.

Both exempt income and non-assessable non-exempt income are relieved from Australian tax. There are some differences, however, in the way exempt income and non-assessable non-exempt income are treated. These are outlined below.

Exempt income

This must be offset against losses.

Expenses relating to the earning of exempt income are not allowable deductions.

Non-assessable non-exempt income

There is no need to offset against losses.

Some expenses relating to the derivation of non-assessable non-exempt income are deductible.

Under section 23AH of the ITAA 1936, income earned from a permanent establishment in a foreign country by an Australian resident company may be treated as non-assessable non-exempt. This also includes capital gains and losses from capital gains tax events.

Dividends declared by a controlled foreign company to a resident taxpayer may be non-assessable non-exempt income under section 23AI of the ITAA 1936. This is only to the extent that the dividend is paid from profits which the taxpayer has previously paid tax on under the controlled foreign company rules. Similarly, certain non-portfolio dividends received from a foreign company are generally non-assessable non-exempt income in terms of section 23AJ.

Income which has been previously attributed to an attributable taxpayer under the transferor trust rules may be non-assessable non-exempt income when later received by a beneficiary.

Income distributed to a resident taxpayer may be non-assessable non-exempt income under section 23AK of the ITAA 1936 to the extent to which you have previously paid tax on that income under the former foreign investment fund rules.

A taxpayer who is a non-resident of Australia for income tax purposes and operates through a permanent establishment in Australia that receives an amount of dividend, interest or royalty income on which withholding tax is payable, has generally met its final tax liability on that income in Australia. Section 128D of the ITAA 1936 provides that those amounts on which withholding tax is payable are exempt from tax and shall not be included in assessable income under subsection 6-5(3) of the ITAA 1997.

However, franked dividends received by a non-resident are non-assessable non-exempt income in accordance with section 128D of the ITAA 1936, notwithstanding that they are not subject to withholding tax.

    Last modified: 21 Feb 2012QC 25356