The Rates Act, Schedule 7 & the tax free thresholdTax free part of income: ceasing full time education or changing residence
The Rates Act, Schedule 7 & the tax free threshold
Tax free part of income - reduced if changed resident status
Tax free part of income - reduced if ceased education
The Rates Act, Schedule 7 & the tax free threshold
You will probably be aware that the first $5400 of taxable income is not subjected to income tax. (refer paragraph 41-000 CCH Master Tax Guide)
This is authorised by the Income Tax Rates Act 1986. Each time the income tax rates are changed, a new schedule is prepared for this Act.
The schedule authorising the rates of tax for the year ended 30/6/98 is Schedule 7. Part 1, which deals with resident taxpayers, shows the rates that apply to various ranges of income.
The first such range is $5,400 to $20,700 that attracts a rate of 20%
So income below $5,400 attracts a tax rate of 0%
If you divide $5,400 by 12 you get a figure of $450 you could derive every month without paying any tax.
Part 2 of Schedule 7 applies to non-residents and authorises a rate of 29% on all income up to $20,700 - in other words all the income from the first dollar is subject to income tax.
Answer this question….
Could a taxpayer who is not a resident of Australia derive $450 a month of taxable income from sources in Australia and not pay tax on the income?
Yes No
The tax free threshold in Part 1 of Schedule 7 applies only to residents
The tax free part of income is reduced if changed resident status. But what happens if a person becomes a resident of Australia part way through an income year?
The short answer is that such a person will not receive the benefit of the full $5400 tax free threshold.
A partial tax-free range less than $5400 will be applied in calculating the tax payable.
Just how partial the tax free range is depends upon the number of months the taxpayer was resident in Australia - the
part year residency period.Section 18 defines part year residency period for a
person who commenced to be a resident during a month of the year of income as ....the period from the beginning of that month
UNTIL ... the end of the year of income.
For a
person who ceases to be a resident a similar constriction of the tax free range applies. In this case, the part year residency period isfrom the start of the year to the end of the month in which the taxpayer ceases to be a resident.
Where the taxpayer
both begins and ceases to be a resident in the one year the part year residency period is the period from the beginning of the month is which residency begins to the end of the month in which residency ceases.
Section 18(2) states that a part year residency period shall not be taken to be any period during which the taxpayer was an eligible pensioner.
Eligible Pensioner is defined in section 16 as
a person receiving a Social Security pension other than
So if you are a eligible pensioner, you can get the benefit of the full tax free income range.
If not, section 20 of the Income Tax Rates Act 1986 says that the Rates Act does not apply to authorise tax free range between 0 to $5400. Instead, it applies as if the tax free range is 0 to an amount calculated in accordance with the formula AB + C
AB + C - GOT ANY IDEA WHAT THAT MEANS?
A is $450
, which you may recall is the monthly amount of tax free income ($5,400 divided by 12)
B is
the number of partial threshold allowance months, defined in section 16 as .... the whole of part of the part year residency period
So much for AB - but what about C?
C is
so much of the part year residency period income derived by the taxpayeras does not exceed
the amount calculated by the formula DE.
In the simplest case, we can say that the
income derived outside the part year residency period can be added to the reduced threshold, as long as it does not exceed $450 per month.D is said to be $450
E is the number of months outside the part year residency period In other words, the number of months the taxpayer was a not a resident.
Answer this question….
A taxpayer takes up resident in Australia in February.
He derived no Australian source income prior to becoming a resident
How much income could he earn before being subject to tax?
art year residency period goes from beginning of February to end of year
Feb Mar Apr May Jun = 5 months
$450 per month (A) multiplied by 5 months (B) = 2250
Tax free part of income - reduced if ceased education
If you aren't familiar with the term
partial threshold allowance and the formula AB + C means very little to you, may we suggest you go back and read the previous topic
That will save us repeating here what has already been said elsewhere.
Section 17 of the Income Tax Rates Act 1986 defines
part year workforce period.If a taxpayer
then the
period from the beginning of the month in which the cessation of full time education takes place to the end of the year is the part year workforce period
Section 16 includes part year workforce period in the definition of
partial threshold allowance months
Section 20 requires that the reference to $5400 (tax free income range) in Part 1 of Schedule 7 shall be read as a reference to the amount calculated in accordance with the formula
AB + C.You will probably recall that
A is $450, or 1/12 of the $5400 tax free rangeB is
the number of partial threshold allowance months (in other words, the number of months from cessation of full time education to 30 June) NOT INCLUDING any partial threshold allowance month before the commencement of the part year workforce period.
In other words, if the taxpayer gave up full time education more than once, we go from the LAST TIME the taxpayer ceased full time education.
So much for AB - but what about C?
C is
so much of the pre-workforce income derived by the taxpayer, AS DOES NOT EXCEED the amount calculated by the formula DE.
Pre workforce income is defined in section 19 for a several classes of income.
We will look at the simplest one only - SALARY & WAGES - in other words, the part time job the student to get money while studying full time.
In such a case, the pre workforce income would be the salary & wages less any related deductions.
You can look up the other types of income yourself if you are interested.
So now we know what pre workforce income is - how does it affect the $5400?
In the simplest case, we can say that the
pre workforce income can be added to the reduced threshold, as long as it does not exceed $450 per month.D is said to be $450
E is the number of months BEFORE the part year workforce period
In other words, the number of months the taxpayer was a full time student.
Answer this question….
A student earns $1000 from a part time job, but takes up full time employmnent on completion of his course in February.
What will be his tax free threshold?
B = number of months after cessation of full time education = 5
A=$450 per month. So A x B = 5 x 450 = 2250.
But we can add a maximum of 7 months pre workforce period @ $450 per month
7 x 450 = 3150, but pre workforce income was only 1000, so include it all
2250 + 1000 = 3250
Just a couple more matters before we leave this topic.
Section 17 deems a full time who takes up another course of full time education with 4 months of ceasing the previous course to have remained a full time student - there is NO part year workforce period for that student.
Section 17(2) has the effect of making the cessation of full time education a once in a lifetime occurrence - there can be NO part year workforce period for a taxpayer if he has had one in a previous year.
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