When you derive foreign earnings that are exempt, the amount that is exempt is used to determine the tax payable on your income that is taxable.
We use exempt income in the calculation of tax payable to ensure that taxpayers with foreign earnings that are exempt from Australian tax under the exempt employment and approved projects provisions are levied a similar rate of tax on their assessable income as taxpayers earning the same overall income from assessable sources.
If we do not take exempt income into account in calculating tax payable, a taxpayer with exempt foreign earnings and assessable income would have the advantage of lower marginal tax rates and the full amount of concessional deductions to significantly reduce Australian tax, compared with a taxpayer earning the same overall income from Australian sources.
What are apportionable deductions?
In calculating tax payable on assessable income, certain deductions must be apportioned between exempt and assessable income.
Apportionable deductions are those deductions allowed or allowable in respect of gifts to a specified institution, funds, etc. These are deductions that cannot be appropriately related to the earning of the assessable income. The deduction is apportioned (based on quantum) between the exempt and assessable income.
Other deductions in respect of tax agents’ fees and superannuation contributions are not apportionable and are therefore treated as relating exclusively to assessable income.