Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 3 Removing the part-year tax-free threshold for taxpayers who have ceased to be full-time students
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Rates Act 1986 to remove the part-year tax-free threshold for taxpayers who cease to be engaged in full-time education for the first time.
Context of amendments
3.2 In the 2006-07 Budget the Government announced that it would remove the part-year tax-free threshold for taxpayers ceasing full-time education for the first time, with effect from the 2006-07 income year.
3.3 Under the current law, taxpayers who cease full-time education for the first time are not eligible for the full tax-free threshold of $6,000.
3.4 The reduced tax-free threshold for taxpayers who cease to be full-time students is calculated by multiplying the number of months in the income year that the taxpayer was not studying full-time by the monthly equivalent of the tax-free threshold ($500). If the taxpayer derives income during the year which is attributable to the period of full-time education, the adjusted threshold is increased by that amount up to the standard tax-free threshold (currently $6,000).
3.5 The removal of the part-year tax-free threshold reduces compliance costs for taxpayers who have finished full-time education for the first time. The part-year tax-free threshold is complex and has limited application since many students undertake part-time work while studying and are therefore often entitled to the full tax-free threshold.
Summary of new law
3.6 These amendments extend the standard tax-free threshold of $6,000 to students who cease full-time education for the first time in the same way that it applies to other resident taxpayers.
Comparison of key features of new law and current law
| New law | Current law |
| Resident taxpayers who cease full-time education for the first time will be entitled to the standard tax-free threshold (currently $6,000). | Resident taxpayers who cease full-time education for the first time are not eligible for the full tax-free threshold. Rather, they are entitled to a reduced tax-free threshold that depends on the number of months they are not studying as well as their income during the full-time education period. |
Detailed explanation of new law
3.7 These amendments remove the part-year tax-free threshold for taxpayers ceasing full-time education. This means that students who cease full-time education for the first time are entitled to the standard tax-free threshold of $6,000 that applies to all resident taxpayers. [ Schedule 3, items 1 to 8 ]
Example 3.1
Fergus ceases full-time education for the first time in November 2006 and starts a job on 2 March 2007. Fergus does not earn any income whilst studying.
Under the current law Fergus would have a reduced tax-free threshold. This would be calculated by multiplying the number of months Fergus was not studying (eight) by the $500 monthly equivalent. Hence Fergus's tax-free threshold would have been $4,000.
Under the new law Fergus has a tax-free threshold of $6,000.
Application and transitional provisions
3.8 These amendments apply to assessments for income years commencing on or after 1 July 2006, as announced in the 2006-07 Budget. [ Schedule 3, item 9 ]