What is NANE income?
Non assessable non exempt income (NANE) refers to specific types of income that are defined by tax laws or other Commonwealth legislation in Australia as being neither subject to tax (non assessable) nor exempt from tax. This classification has several implications:
- Since this income is not assessable, it is not subject to taxation.
- Expenses incurred in generating this income cannot be claimed as tax deductions.
- For certain types of this income, any capital gains or losses from assets used to produce the income are not considered for tax purposes.
- The presence of this income does not affect tax loss calculations.
Thus, NANE is a unique category of income that is tax free, but with specific restrictions on related deductions and capital gains or losses.
Why Income is Classified as NANE
The reasons for classifying certain income as NANE are varied. They include:
- To prevent the income from having any tax impact, regardless of the taxpayer’s other income or losses. For example, compensation for surrendered firearms.
- To avoid double taxation when the income is already taxed or is a substitute for income tax. This includes income from selling trading stock outside normal business operations or fringe benefits.
- When the income appears to be a gain but doesn’t actually benefit the taxpayer financially, like GST collected on goods and services.
Some types of income that were previously considered exempt before July 1, 2003, were reclassified as NANE to ensure they are treated correctly. These include private company dividends, family trust distribution tax, and certain income received by life insurance companies.
Key Categories of NANE Income
There is a comprehensive checklist of various types of income that are classified NANE under the Australian tax laws. We have discussed the key categories and examples below:
Payments for Firearms Surrender Under Government Programmes
Compensation payments made to taxpayers under firearms surrender arrangements in Australia are specifically categorised as non assessable non exempt income. This means that they are neither subject to tax (non assessable) nor classified as tax exempt income.
A firearms surrender arrangement refers to any law or administrative procedure implemented by the Commonwealth, State, or Territory governments in Australia following the agreement from the Police Ministers’ meeting on May 10, 1996. This agreement was focused on the surrender of prohibited firearms.
From July 1, 2003, certain mining related payments to indigenous groups in Australia are classified as non assessable non exempt income.
This classification means these payments are neither taxable nor tax exempt.
The law also specifies what counts as a mining payment and a distributing body. Mining payments include royalties and other payments related to mining on indigenous land. Distributing bodies are organisations like Aboriginal Land Councils that are responsible for distributing these funds.
However, there are some exceptions. The non assessable non exempt status does not apply to amounts a distributing body uses for its administrative costs, like employee salaries. Also, payments for goods or services provided to a distributing body are not included in this category.
Taxable Amounts Relating to Franchise Fees Windfall Tax
Refunds from State or Territory business franchise fees, when subject to the Commonwealth’s franchise fees windfall tax, are classified as non assessable non exempt income from July 1, 2003.
This means these refunds do not have any tax consequences for the recipient.
Under Australian tax laws, a fundamental rule applies to amounts received by taxpayers that must be repaid later and are non deductible: they are neither considered taxable income nor tax exempt. These repayable amounts fall into the category of non assessable non exempt income, ensuring they have no immediate tax implications upon receipt or repayment.
This rule includes various scenarios, whether the obligation to repay existed at the time of the initial payment or arose later. It even applies to government payments to industry (GPIs), including bounties, subsidies, grants, or rebates, as long as they are non deductible upon repayment.
However, there are exceptions to this rule. If taxpayers can claim a deduction for the repayment, especially in a business context, the rule does not apply. Similarly, when repayments are linked to compensation or damages for occupational matters, such as workers’ compensation or sickness allowances offset by a lump sum payment, the rule is also exempt.
Restricted Mutual Receipts
The Australian tax law addresses the treatment of certain income received by entities, specifically focusing on ordinary income that would typically qualify as mutual receipts.
Under the mutuality principle, income derived from members of clubs, unincorporated associations, or entities created for a common purpose is not considered assessable income. This principle generally applies to membership subscriptions and similar transactions with members, excluding income from dealings with non members, which may be taxable.
However, there is an exception to the mutuality principle. It states that when an entity’s governing documents prevent it from distributing income, whether in money or property, to its members, the income that would otherwise be mutual receipts becomes neither assessable nor exempt income. This specific classification places such income into the category of NANE income, effectively exempting it from taxation.
It’s crucial to note that the above ruling applies solely to ordinary income, with statutory income remaining unaffected.
When a company offers its shareholders the opportunity to buy additional shares or a unit trust offers unit holders the chance to acquire more trust units, it doesn’t trigger an immediate tax liability for these shareholders or unit holders. The market value of the rights when they’re issued is considered non assessable non exempt income.
However, there are certain conditions for this exemption to apply. First, the original shares or units and the rights must not be considered revenue assets or trading stock at the time of issuance. Second, it applies to shareholders or unit holders who would typically be subject to capital gains tax (CGT) for the original interests and the rights.
Native Title Benefits
Native title benefits, which include both monetary and non monetary gains, are derived from agreements made under Commonwealth, state, or territory laws. These benefits typically arise due to actions that either extinguish native title rights or interfere with their continued existence, enjoyment, or exercise.
As per Australian tax laws, when indigenous individuals or Indigenous holding entities receive native title benefits, these benefits are considered NANE income. This means that they are exempt from income tax.
Exclusions from NANE Income
There are certain scenarios where amounts or benefits are not regarded as NANE income. For instance, if these amounts are received to cover administrative costs, remuneration, or benefits that don’t meet the criteria for NANE income, they are not exempt from income tax.
Bushfire Assistance Payments for Volunteer Firefighters
Government support payments to volunteer firefighters in relation to the specified bushfires are considered NANE. In simpler terms, these payments are exempt from income tax and do not impact the recipients’ tax losses, whether in the current income year or carried forward from previous years.
Criteria for Tax Exemption
For a payment to qualify for this tax exemption, following criteria must be met:
- The payment must be compensation for the loss of income that volunteer firefighters experienced while performing their volunteer duties with a State or Territory fire service during the 2019/20 income year.
- The payment should be made by a State or Territory government and be covered by an agreement between the Commonwealth and that particular State or Territory.
- The payment must have been made on or after January 1, 2020.
This tax exemption does not apply to payments received by individuals in their capacity as employees or contractors, including paid leave entitlements. It also does not apply to workers’ compensation payments.
Sustainable Rural Water Use and Infrastructure Programme (SRWUIP) Payments
The SRWUIP is a programme in Australia that supports projects improving rural water delivery, mainly in the Murray Darling Basin.
The Australian tax law allows recipients of these payments to choose whether to treat them as NANE income. If they opt for this, they cannot deduct their project related expenses from their taxes.
Entities expecting SRWUIP payments have two choices:
- Forgo treating the payments as NANE income and claim deductions for project expenses.
- Treat the payments as NANE income but forgo claiming deductions for project expenses.
The election made for one SRWUIP programme applies to all SRWUIP payments and related expenditures for that programme. This choice is permanent. However, if an entity participates in multiple SRWUIP Programmes, they can make different elections for each programme.
SRWUIP payments can be direct payments from the Commonwealth or indirect payments from other entities reasonably attributable to Commonwealth payments. To be considered NANE income, indirect payments require the entity to own an asset (not through a financial arrangement) related to the SRWUIP programme.
To maintain integrity, an entity cannot treat a payment as NANE income if it’s reasonable to believe that:
- The entity will spend less on programme related works than the payment.
- An associate of the entity will cover the works’ costs.
- The associate has not and will not make an election for the programme.
Recovery Grants for Flood Affected Entities
Certain disaster recovery grants received by small businesses, primary producers, or non profit organisations related to flooding are considered non assessable non exempt income. This means these grants are not subject to income tax and don’t affect the recipient’s tax losses that can be carried forward and offset against future taxable income.
For a payment to qualify under this provision, it must meet two conditions:
- It must be a recovery grant provided as part of either Category C or Category D measures under the Disaster Recovery Funding Arrangements 2018.
- The payment must relate to the specified floods that occurred in Australia during the defined period.
Category C and Category D measures are explained in the Disaster Recovery Funding Arrangements 2018.
In essence, Category C involves a community recovery package to support the comprehensive recovery of regions, communities, or sectors severely impacted by an eligible disaster. Category D encompasses relief or recovery efforts conducted to alleviate distress or damage in exceptional circumstances as determined by the government.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.