Part-year Resident and Tax-free Threshold

Is the taxpayer, who is a resident for part of the year of income, entitled to a pro-rating of the tax-free threshold under section 20 of the Income Tax Rates Act 1986 (ITRA)?

Yes, the taxpayer, who is a resident for part of the year of income, is entitled to a pro-rating of the tax-free threshold under section 20 of the ITRA.

The taxpayer is an Australian citizen who departed Australia in August 1999 to work overseas. The taxpayer had no definite plan for returning to Australia, although intended to return eventually. The taxpayer ceased to be a resident of Australia for taxation purposes. The taxpayer returned to Australia in May 2001 and resumed residency of Australia for taxation purposes.

Where a taxpayer either becomes a resident or ceases to be a resident of Australia during a year of income, the period of part-year residency for calculating the pro-rating of the tax-free threshold is determined under section 18 of the ITRA.

If the taxpayer was a resident at the start of the year of income, the period of residency is from the first month of the year of income to the end of the month in which they ceased to be a resident. If the taxpayer was a resident at the end of the year of income, the period of residency is from the start of the month they became a resident to the end of the year of income. If the taxpayer becomes a resident and ceases to be a resident during a year of income, the period of residency is from the start of the month they became a resident to the end of the month they ceased to be a resident.

Section 20 of the ITRA provides the calculation for the pro-rating of the tax-free threshold for taxpayers who have part-year residency. The pro rata tax-free threshold for the 1999-2000 income year is calculated as $450 multiplied by the number of months of the part-year residency period of the taxpayer.

As the taxpayer was a resident of Australia for two months of the 1999-2000 income year (including the month the taxpayer ceased to be a resident), the tax-free threshold for that year will be $900.

For the 2000-2001 and subsequent income years the monthly tax-free threshold amount increased to $500. As the taxpayer was a resident of Australia for two months in the 2000-2001 income year (including the month in which the taxpayer became a resident), the tax-free threshold for that year will be $1000.