As Australians prepare for the 2025 tax season, understanding what qualifies as exempt income could mean the difference between an unexpected bill and a healthy tax return. While most of us focus on taxable income, knowing the ins and outs of exempt income is just as crucial—especially with several fresh ATO policy updates rolling out this year.
What Is Exempt Income?
Exempt income refers to money you receive that the Australian Taxation Office (ATO) does not count towards your taxable income. This means you don’t pay tax on it and, in most cases, don’t need to declare it when lodging your tax return. However, some types of exempt income must still be reported for record-keeping and eligibility reasons. Getting this right is vital, as misreporting can affect your eligibility for tax offsets, government benefits, and even certain deductions.
- Key difference: Exempt income is not included in your assessable income, while tax-free income and deductions are handled differently.
- Common examples include certain Centrelink payments, some scholarships, and specific government allowances.
What Types of Income Are Exempt in 2025?
The ATO updates its list of exempt income types annually, reflecting shifts in policy and support measures. In 2025, the following are some of the most relevant categories for everyday Australians:
- Government Pensions and Allowances: Many Centrelink and Department of Veterans’ Affairs payments are exempt, including Family Tax Benefit, Carer Allowance, and certain lump sum payments following natural disasters.
- Scholarships and Education Grants: Some full-time education scholarships, particularly those from charitable organisations or the Commonwealth, remain exempt as long as they meet specific ATO criteria.
- COVID-19 and Disaster Relief Payments: In response to ongoing climate and health events, the ATO has extended the exemption for certain disaster recovery payments and pandemic-related government support in 2025.
- Foreign Income: Some foreign-sourced income (such as specific pensions or social security benefits) may be exempt, depending on Australia’s tax treaties and bilateral agreements. Always check if your income qualifies under current international tax rules.
Real-World Example: If you received the Australian Government Disaster Recovery Payment after the 2024 bushfires, this amount is exempt income and should not be included in your assessable income, though you may still need to note it for record-keeping.
ATO 2025 Updates: What’s Changed?
This year, the ATO has clarified reporting rules for several types of exempt income. Notably:
- Digital Lodgement Reminders: The myGov tax portal now prompts you to declare exempt income separately from regular income, making compliance easier but also increasing the chance of errors if you’re unsure what qualifies.
- Updated List of Exempt Payments: In 2025, additional one-off state and federal disaster relief payments are included as exempt. Check the ATO’s official list for specifics as these change frequently following emergencies.
- Superannuation and Exempt Pensions: Some superannuation pensions paid to individuals with a terminal illness remain exempt, but new eligibility checks apply to ensure the exemption is not misused.
For professionals and business owners, certain grants or payments may also be exempt—but the ATO has tightened definitions, so getting advice or consulting the latest rulings is essential.
Why Correctly Reporting Exempt Income Matters
Incorrectly reporting exempt income can have ripple effects. For example, over-reporting can reduce your entitlement to government benefits, while under-reporting may trigger an ATO review. Additionally, some offsets or family tax benefits rely on your total income figure (including exempt amounts), so full and accurate reporting is crucial.
- Student Example: A full-time student receiving a tax-exempt scholarship must still report the amount if applying for Youth Allowance, as it can affect eligibility.
- Retiree Example: Certain veterans’ pensions are exempt from tax, but reporting them incorrectly may affect means-tested benefits.
For 2025, the ATO is leveraging more data matching and digital cross-checks, so accuracy is more important than ever.
How to Ensure You’re Compliant in 2025
- Check the ATO’s latest exempt income list before lodging your return.
- Use the myGov tax portal’s guided questions to declare exempt income in the right section.
- Keep records of all payments and official ATO correspondence for at least five years.
- Review any Centrelink or DVA statements for clarity on whether payments are taxable, exempt, or non-assessable non-exempt (NANE) income.
Staying on top of these details isn’t just about tax—it can also help you access the full range of government support and avoid headaches down the track.
