From 1 July 2006, school leavers will be entitled to the same tax-free income threshold as most other taxpayers.
Under the previous rules, the threshold (currently $6,000) was pro rated in the year in which the student ceased full time study. Exemptions for income earned whilst studying served to make the tax calculation for your taxpayers unreasonably complex.
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.
The explanatory memorandum accompanying the amending legislation stated:
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.
I have always felt that this was an unfair measure squeezing a few extra dollars of tax out a young worker’s first tax refund. This reform is well overdue.