ATO ID 2004/282: Exemption with progression: work related expenses relating to exempt foreign employment income
Date of decision: 19 January 2004
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

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
Summary: 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: "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: 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.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1) section 23AG subsection 23AG(3)
Subject references: Exempt income Foreign income Foreign income deductions Foreign salary & wages International tax Salary & wages expenses Salary & wages income