What is a tax ememption?
A tax exemption is an item of expenditure made in the tax year which you can claim as an expense incurred in the course of earning your living. It is often quite complicated to work out what the correct amount of tax to be paying because you need to understand the income concepts which are used in the tax law. In the first place, there is the definition of income which comes from the INCOME TAX ASSESSMENT ACT 1936 (Cth) – SECT 6 which actually relates to the defintion of ‘assessable income’, defined as follows: “assessable income” has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (Cth). This piece of legilsation refers to 6.5 of the same act which states:
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .
Ordinary income is composed of statutory income, which can include anything from a long list of items list in 10.5 of the Act. The key to the law of income tax deductions is found in the defition of a statutory deduction in the following piece of the legislation:
INCOME TAX ASSESSMENT ACT 1997 – SECT 8.1
General deductions
(1) You can deduct from your assessaable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your asseable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your asseable income.
Importantly, the legislation also prevents you from making a deduction in relation to a loss or outgoing of capital, or of a capital nature; or a loss or outgoing of a private or domestic nature; or if there is another piece of the legislation which prevents the claiming of the dedcution, or is it is not part of your assesable income. For this reason, the way that many people try to reduce their tax liability is to claim that there is an item of income that is not assessable or if it is asssessable then it is exempt. Obviously it is necessary to ensure that this occurs legally to avoid the penalties which can flow from tax evasion or the late payment of taxation such as general interest charge and penalties. Because of the immense complexity of the tax law in Australia, there is an army of professional services which assist in the interpretation and application of the taxation law. Accountants can provide some guidance. However, in many cases it can become necessary to obtatin the opinion of a taxation lawyer to assist in with the interpretation of taxation law or if necessary litigation which involves the Australian Taxation Office, although this is usually only a last resort. It is also possible to prospectively obtain private rulings from the Australian Taxation Office in order to get some certainty of a tax position if this is a serious concern and a taxation lawyer can also assist with this. We have tax lawyers available online now to discuss this with you or you can post your query in the contact form to the right.
