Invalid Relative Tax Offset - separate net income exceeding cut-out threshold

Is the taxpayer entitled to an invalid relative tax offset under section 159J of the Income Tax Assessment Act 1936 (ITAA 1936) where the relative's separate net income (SNI) exceeds the cut-out threshold?

No. The taxpayer is not entitled to an invalid relative tax offset under section 159J of the ITAA 1936 as the relative's separate net income exceeds the cut out threshold.

The taxpayer's disabled relative is in receipt of a disability support pension which exceeds the cut-out threshold for an invalid relative tax offset.

The taxpayer provides additional financial support and maintenance for the relative as their pension does not cover all their needs.

Section 159J of the ITAA 1936 allows a dependant tax offset where a resident taxpayer contributes to the maintenance of an invalid relative.

An invalid relative is defined in subsection 159(6) to mean a person who is not less than 16 years of age and is a child, brother or sister of the taxpayer and the relative: • is paid a disability support pension or special needs disability support pension under the Social Security Act 1991 (SSA 1991); • is paid a rehabilitation allowance under the SAA 1991 and immediately before becoming eligible for that allowance was eligible to receive an invalid pension under the SAA 1991; or • a certificate is obtained by the taxpayer from a medical officer of the Department of Health (or a medical practitioner appointed to examine claimants for disability support pensions) certifying that the relative has a continuing inability to work within the meaning of the SAA 1991.

The amount of the invalid relative tax offset available to a taxpayer must be reduced by $1 for every $4 that the SNI exceeds $282 (subsection 159J(4) of the ITAA 1936).

SNI is generally the gross income derived by the person less all deductions relating to that income. However, the definition of SNI in subsection 159J(6) of the ITAA 1936 does provide some exclusions from SNI for certain payments made. In Case N49 81 ATC 243 (at 244); (1981) 25 CTBR (NS) Case 3 (at 12), the No. 2 Board of Review found that: 'separate net income is the dependant's gross income after deduction of the expenses which may be regarded, in accordance with ordinary accounting and commercial principles, as direct charges against that income. In short, separate income means gross income less the expenses incurred in deriving it - and no other expenses.'

Thus, SNI includes all income (such as disability pensions even though it may not be taxable) less any direct expenses incurred in gaining that income (for example, bank fees associated with receiving the disability support pension).

The taxpayer provided support and maintenance to their invalid relative. The relative received a disability support pension which exceeded the amount at which the invalid relative tax offset cuts out. Accordingly, the taxpayer will not be entitled to the invalid relative tax offset under section 159J of the ITAA 1936.