Exempt Income
Income that is not subject to tax and does not need to be included in your tax return.
Exempt income is income that is specifically excluded from taxation under Australian tax law. You generally don't need to declare it in your tax return, and it doesn't affect your tax calculations. However, some types of exempt income may still be relevant for other purposes, such as determining eligibility for government benefits or calculating Medicare levy reduction thresholds.
Common examples of exempt income include: the tax-free component of super benefits received after age 60, certain government pensions and allowances for veterans, some scholarship payments, income earned by certain non-profit organisations, native title benefits, and foreign employment income that has been taxed overseas under specific exemption provisions.
It's important to distinguish exempt income from non-assessable non-exempt (NANE) income. While both are not taxed, NANE income can affect other tax calculations — for example, employer super contributions above the concessional cap that are included in assessable income. Incorrectly treating assessable income as exempt can result in penalties, so check the ATO's guidance if you're unsure about a specific income type.
How it works
Exempt income is income that Australian tax law specifically excludes from taxation, meaning it generally doesn't need to be declared in your tax return and has no effect on your tax calculation. It's a defined list of categories set out in the law, not a general concept you can apply to any income you'd simply prefer wasn't taxed — if a type of income isn't specifically listed as exempt, the default assumption is that it's assessable.
In practice, the type of exempt income most people encounter is the tax-free component of a superannuation benefit received after age 60, which doesn't need to be included in a tax return at all. Other examples include certain veterans' pensions and allowances, some scholarship payments, and income earned by certain non-profit organisations. Even though it's not taxed, exempt income can still matter for other purposes, like determining eligibility for a government benefit or working out a Medicare levy reduction threshold.
The distinction worth getting right is between exempt income and non-assessable non-exempt (NANE) income — both escape tax, but they're legally different categories, and some NANE amounts, like employer super contributions above the concessional cap, can still feed back into other tax calculations even though they're not directly taxed as income. Treating assessable income as if it were exempt is a genuine risk area; if you're unsure whether something qualifies, it's worth checking the ATO's guidance rather than assuming.
Example: separating exempt and assessable amounts in retirement
A retiree aged over 60 withdraws a $40,000 lump sum from their superannuation, which qualifies as exempt income and doesn't need to be reported in their tax return at all. In the same year, they also receive $20,000 from a taxable government pension, which is assessable and must be declared.
Even though $60,000 in total landed in their bank account that year, only the $20,000 pension amount enters their tax calculation as assessable income — the $40,000 super withdrawal sits outside it entirely because it's exempt, which is why their reported assessable income from these two sources is $20,000, not $60,000.
Related Terms
Assessable Income
All income you must report in your tax return, including salary, interest, dividends, rental income, and capital gains.
Taxable Income
Your assessable income minus allowable deductions — the figure used to calculate your income tax.
Income Tax
Tax levied by the federal government on your taxable income, calculated using progressive tax brackets.
Tax Return
An annual form lodged with the ATO reporting your income, deductions, and tax payable or refundable for the financial year.