What Is Exempt Income? What You Don’t Pay Tax on in Australia

Exempt income refers to money you receive that’s not taxed and not included in your assessable income. While it still needs to be reported on your tax return, it doesn’t contribute to how much tax you owe.

Exempt income is not the same as tax-free thresholds or deductions — it’s income the ATO specifically excludes from taxation under law.

Common Types of Exempt Income

• Certain government pensions (e.g. Disability Support Pension under age pension age)
• Some foreign income, such as military pay earned overseas (under strict conditions)
• Certain scholarships or awards
• Specific natural disaster relief payments
• Some grants or rebates (e.g., certain COVID-19 support payments)

Note: Even if income is exempt, you still must report it — often under a separate section in your return.

Exempt vs Non-Assessable Non-Exempt (NANE) Income

Feature	Exempt Income	NANE Income
Taxed?	❌ No	❌ No
Reported in tax return?	✅ Yes (as exempt income)	✅ Yes (under NANE)
Affects carry-forward losses?	✅ Yes	❌ No
Examples	Certain pensions, grants	COVID-19 Cash Flow Boost, JobKeeper

ATO Reporting Requirements

• Declare all exempt income in the correct section of your tax return
• Keep records or statements confirming the nature of the income
• If unsure, check ATO rulings or get advice — especially for grants or foreign income

Failing to classify income correctly can lead to penalties or incorrect assessments.

How Exempt Income Affects You

Even though it’s tax-free, exempt income can:

• Impact your eligibility for other tax offsets or government payments
• Influence child support assessments
• Affect how tax losses are carried forward

How Ozobooks Helps

• Reviews income sources for correct classification
• Flags exempt vs taxable items in grant or benefit payments
• Prepares compliant tax returns with correct disclosures
• Offers guidance for sole traders, investors, and NFPs receiving mixed income

FAQ

Q1: Do I need to include exempt income in my tax return?
Yes. It won’t be taxed, but the ATO still requires it to be reported.

Q2: Is exempt income the same as tax-free income?
Not exactly. Tax-free income usually refers to amounts below the tax-free threshold, while exempt income is excluded by law regardless of amount.

Q3: What if I incorrectly report exempt income as taxable?
You might pay more tax than required. A tax professional like Ozobooks can help amend your return.

Q4: Are COVID-19 grants exempt income?
Some are. Others fall under NANE or are fully taxable — check the grant conditions or ATO guidance.