ATO Interpretative Decision

ATO ID 2004/282

Income Tax

• This ATO ID has been amended to clarify its scope by the inclusion of the last sentence and Note.

Issue

Are work related expenses incurred by a resident taxpayer that relate wholly to salary and wage income which is exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) taken into account in working out 'notional gross tax' and 'notional gross taxable income' under subsection 23AG(3) of the ITAA 1936?

Decision

Yes. Work related expenses incurred by a resident taxpayer that relate wholly to salary and wage income which is exempt under section 23AG of the ITAA 1936 are taken into account in working out 'notional gross tax' and 'notional gross taxable income' under subsection 23AG(3) of the ITAA 1936.

Facts

The taxpayer is a resident of Australia for tax purposes.

The taxpayer worked overseas as an employee.

The taxpayer received salary and wages in relation to their work overseas.

The salary and wages are exempt under section 23AG of the ITAA 1936.

The taxpayer incurred work related expenses in relation to their employment.

The work related expenses do not relate to the taxpayer's income earning activities in Australia.

The expenses would have been deductible under section 8-1 and section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) had the salary and wages not been exempt.

Reasons for Decision

Subsection 23AG(3) of the ITAA 1936 provides that where the income of a taxpayer of a year of income consists of an amount that is exempt from tax under section 23AG (the 'exempt amount') and other income, the amount of tax (if any) payable in respect of the other income is calculated using the formula:

(Notional gross tax / Notional gross taxable income) * Other taxable income


"Notional gross tax" means the number of whole dollars in the amount of income tax that would be assessed under this Act in respect of the taxpayer's taxable income of the year of income if:

(a)

the exempt amount were not exempt income; and

(aa)

if the exempt amount is an exempt resident foreign termination payment (within the meaning of Subdivision AA of Division 2) - the exempt amount (excluding any part of that amount that represented contributions made by the taxpayer) were assessable income of the taxpayer; and

(b)

the taxpayer were not entitled to any rebate of tax.

"Notional gross taxable income" means the number of whole dollars in the amount that would have been the taxpayer's taxable income of the year of income if the exempt amount were not exempt income.

Central to the meaning of these two terms is the calculation of an amount that would have been the taxpayer's taxable income of the year of income if the exempt amount were not exempt income.

The term 'taxable income' is defined in subsection 6(1) of the ITAA 1936 to have the same meaning as in the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 defines taxable income as having the meaning given by section 4-15 of the ITAA 1997.

Section 4-15 of the ITAA 1997 states that taxable income is assessable income less deductions.

Subsection 995-1(1) of the ITAA 1997 defines a deduction as an amount that you can deduct. The term 'deduct' is further defined by subsection 995-1(1) of the ITAA 1997 as having the meaning given by sections 8-1 and 8-5 of the ITAA 1997.

Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that:

(a)

it is incurred in gaining or producing your assessable income, or

(b)

it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Section 8-5 of the ITAA 1997 further provides that you can deduct from your assessable income an amount that a provision of the ITAA 1997 (outside Division 8 of the ITAA 1997) allows you to deduct.

Subsection 40-25(1) of the ITAA 1997 states that you can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a depreciating asset that you held for any time during the year.

Subsection 40-25(2) of the ITAA 1997 states that you must reduce the deduction by the part of the asset's decline in value that is attributable to your use of the asset, or your having it installed ready for use, for a purpose other than a taxable purpose.

Paragraph 40-25(7)(a) of the ITAA 1997 states that a taxable purpose is the purpose of producing assessable income.

Section 6-15(2) of the ITAA 1997 states that if an amount is exempt income, it is not assessable income.

The taxpayer has incurred expenses that cannot be deducted under section 8-1 and section 40-25 of the ITAA 1997 as the expenses wholly relate to the production of income that is exempt under section 23AG of the ITAA 1936. However, those expenses would have been deductible had the taxpayer's salary and wages been assessable income under subsection 6-5(2) of the ITAA 1997.

Accordingly, the expenses may be deducted from the taxpayer's exempt salary and wages to determine the taxpayer's 'notional gross taxable income' and 'notional gross tax' for the purposes of working out the tax payable on the taxpayer's other assessable income under subsection 23AG(3) of the ITAA 1997.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   subsection 6(1)
   section 23AG
   subsection 23AG(3)

Keywords
Exempt income
Foreign income
Foreign income deductions
Foreign salary & wages
International tax
Salary & wages expenses
Salary & wages income

Siebel/TDMS Reference Number:  3816244

Business Line:  Public Groups and International

Date of publication:  26 March 2004

ISSN: 1445-2782