The Commissioner of Taxation has forwarded the following memorandum for advice:

Section 13 of the Income Tax Assessment Act 1915 exempts the income derived from personal exertion of any person on active service.

Income from personal exertion, as defined by section 3, includes the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person.

Claims are being made on behalf of persons absent on active service to deduct from income derived from property the expenses incurred in gaining income from personal exertion, although such latter income is not assessable under section 13.

Section 18 provides that taxable income shall be calculated by taking the total income from all sources as a basis and deducting from it the deductions specified by the section.

I should be glad to learn whether such claims are legally tenable.

It appears to me equitable that if income from personal exertion in the cases mentioned is not taxable all deductions which are relevant thereto or are connected with the earning thereof should be excluded from consideration.

Section 13 of the Act provides that the Act shall not apply to any person who is on active service during the present war with the naval or military forces of the Commonwealth or any part of the King's Dominions, or of an ally of Great Britain, so far as regards income derived from personal exertion and earned prior to the commencement of this Act or during the present state of war.

By this section none of the provisions of the Act apply to the income from personal exertion of such a person.

In other words the Act must be read as only applying to the income from property, and, in the case of a person on active service, income throughout the Act means income from property.

On this construction, income, wherever occurring in section 18 means only the income from property in the case of a person on active service.

Section 18 allows a deduction for expenses incurred in producing the income referred to in that section, i.e. the income derived from property, but has no reference to income from personal exertion, as that is not income for the purposes of the Act.

In my opinion, the claim of this taxpayer to deduct the expenses incurred in gaining income from personal exertion from the income from property is not legally tenable.

[Vol. 14, p. 423]