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  ― 109 ―

Exempt Income

8.169. The present law requires that in calculating both the amount of a loss available for carry-forward and the income against which a loss may be applied, exempt income must be brought to account. Bringing to account exempt income in this way has been criticised on the ground that it partly neutralises the concession intended to be given by the exemption.

8.170. In one situation the exemption of income is given not by way of concession but as a means of preventing double taxation of income. There is a general provision whereby income derived from a foreign source which is taxed in the country of source is exempt from Australian tax. The provision is considered in Chapter 17. Bringing this income to account in applying the provisions in regard to carry-forward of losses could be seen as, in effect, taxing the same income a second time without any allowance for the tax already paid. If, of course, the income has only been subject to modest taxation abroad, there may be thought to be reason why it should not be relieved from taxation in Australia; but the loss carry-forward provisions do not differentiate in terms of the amount of tax paid abroad.

8.171. In Chapter 17 the Committee has proposed that the method of preventing double taxation of foreign-source income be replaced by a system under which the Australian resident brings that income to tax but receives credit for the foreign tax. If this system is adopted there can of course be no objection to the income being brought to account in the operation of the loss carry-forward provisions. And the new system will overcome another criticism of the existing system. A loss which has been suffered in operations that would have generated a tax liability abroad had they been profitable, is not available for application against income subject to Australian tax. The existing system thus requires a foreign profit to be brought to account in the operation of loss carry-forward but not a foreign loss. The system proposed by the Committee will allow the bringing in of a foreign loss.

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