The 2011-2012 Budget disallows deductions against government assistance payments where the taxpayer has no other assessable income. This is in response to the Full Federal Court decision in FCT v Anstis [2010] HCA 40, in which the taxpayer, a full–time university student, was entitled to deduct self–education expenses from her receipt of the Youth Allowance under S8-1 of the Income Tax Assessment Act 1997(Cwlth).
The new rules apply from 1 July 2012. Individuals will not be able to deduct a loss or expense they incur in gaining or producing benefits that can be offset by tax rebates. These benefits include the Austudy Living Allowance, NewStart Allowance, and Youth Allowance. The beneficiary rebate extinguishes the tax on the government assistance payment, leaving the taxpayer with no tax liability to claim deductions against.
Taxpayers who have other assessable income, such as employment or investment income, in addition to their taxable government assistance payment can reduce their tax liability by claiming deductions on their assessable income. As a result, these taxpayers can still have the tax on their government assistance payment extinguished by the beneficiary rebate and be taxed on any other assessable income at their marginal tax rate.