Income tax exemption

What it means

An income tax exemption means the income does fall within the scope of the tax, but the Act relieves it. That differs from income outside the scope altogether, which never enters the calculation, not even as an item to be taken out.

It is also confused with the tax-free allowance, which does not cancel the tax but merely lowers the base. An exemption always comes with a condition: a holding period, the use made of the asset, the type of taxpayer, or a ceiling above which tax applies.

Exempt income is also not the same as income taxed by withholding tax. There the tax is paid, only the payer of the income remits it on the taxpayer’s behalf and the withholding is final, which is why the income stays out of the return. An exemption means no tax arises at all.

How it works in practice

For an individual it is usually a sale after the statutory period has run, such as income from the sale of property five years after it was acquired. Occasional other income is exempt up to the limit set by the Act, and only the part above it is taxed.

A company books exempt income as usual and takes it out of the base in the return as a deductible item. Expenses incurred to earn that income are not tax expenses, so they are added back to the base instead.

When a client sells property we ask for the purchase contract and an extract from the land register. The period runs from the acquisition of ownership, meaning the date the registration was granted, not the signing of the contract or payment of the price, and a few weeks either way can decide the exemption.

What to watch out for

For property held as business assets the five-year test runs only from the day it left them. Sell a flat shortly after closing the trade licence and the whole gain is taxed although it was owned for ten years, with health insurance contributions on top.

The exemption limit for occasional income applies to its total for the whole year, not to each receipt separately. Anyone who applies it to every small job on its own skips a tax return they were obliged to file, and pays a penalty for not filing on top of the tax assessed.