House of Representatives

Tax Laws Amendment (2006 Measures No. 5) Bill 2006

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 ]


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