House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Family and Community Services, Senator the Honourable Jocelyn Newman)

Schedule 3 - Family actual means test

1. Summary of proposed changes

This Schedule amends the Social Security Act 1991 (the Social Security Act) to incorporate youth allowance family actual means test provisions currently contained in the Social Security (Family Actual Means Test) Regulations 1998 (the FAMT Regulations). Those Regulations will lapse on the repeal by this Schedule of the present enabling provision.

2. Background

As a general principle, the family actual means test provisions are to be moved in this way without making any change in their effect. Those provisions themselves were originally set up with the intention of preserving the effect of the pre-existing AUSTUDY provisions so that students did not suffer any disruption to their payments because of the youth allowance changes, which happened half way through the academic year.

However, the new family actual means test provisions have been drafted on the basis that:

•

the drafting style and structure of the new provisions be more in keeping with the rest of the Social Security Act, including the standard provisions already set up there;

•

modifications be made to certain of the provisions to improve their structure and clarify their intent; and

•

certain technical and other minor changes be made to ensure that the original AUSTUDY provisions are correctly reflected and to refine certain aspects of the provisions, as outlined in detail below.

For the most part, there is no change in effect between the provisions of the FAMT Regulations and those of the new Module G of the Youth Allowance Rate Calculator. Only the following technical and minor departures have been made:

1

For the definition of designated parent, the various criteria are to be measured against the base tax year (ie, the tax year ending in the calendar year before the current one), rather than the appropriate tax year (which may be the base tax year or the following tax year). (This is in line with the pre-existing AUSTUDY provisions.)

2

The definition of the after-tax income concession for a secondary student has been redefined to reflect more succinctly the longstanding policy intent. The intent is to identify the costs of boarding a secondary student away from home, ie, the difference between the away from home and the at home rates, taking into account tax and Medicare levy. This figure is used in an exclusion from a persons actual means.

3

The rule about spending by a person other than a family member of a student for the benefit of the student being taken to be spending by the student (and therefore to be included in actual means) has been refined (in line with the pre-existing AUSTUDY provision).

3. Clauses and Schedule involved in the changes

4. Explanation of the changes

Background

One of the elements of the rate calculation process for youth allowance under the Youth Allowance Rate Calculator in section 1067G of Social Security Act is the family actual means test. This test may apply to a youth allowance claimant or recipient who is not independent (within the meaning of section 1067A of the Social Security Act).

The effect of the family actual means test on a person's youth allowance rate is described at Steps 10, 11 and 13(c) and (d) of the overall rate calculation method statement in point 1067G-A1. If the person is not independent and the family actual means test is applicable, the person's reduction for actual means is worked out under Module G and taken away from the maximum payment rate to give the actual means test reduced rate. If this rate should be nil, then youth allowance is not payable to the person. The person's youth allowance rate is assessed under both the family actual means test and the parental income test under Module F. Whichever of these would produce the lower youth allowance rate is the test that is applied to the person.

The new Module G provides the details necessary for the operation of the family actual means test.

New section 10B - Family actual means test definitions

Item 2 sets up a new section 10B containing the definitions used in new Module G of the Youth Allowance Rate Calculator, which is substituted by item 3 .

The definitions contained in new subsection 10B(2) are generally drawn from FAMT Regulation 4.

New subsection 10B(3) contains the definition of designated parent, which is drawn from FAMT Regulation 5. The definition is necessary for new point 1067G-G2, which specifies to whom the family actual means test applies. (It applies to a person who claims or receives youth allowance, is not independent and has a parent who is a designated parent.) A parent of a youth allowance customer is a designated parent if one of a number of circumstances applies. These circumstances are indicators that the parent might have financial means that should be taken into account in working out the young persons youth allowance entitlement, eg, having an interest in assets outside Australia or in a company, deriving certain income from a source outside Australia, being able to claim a tax deduction for a business loss or being self-employed or a member of a partnership.

New subsection 10B(4) contains the meaning of income assistance, drawn from FAMT Regulation 6. This is a term needed for new point 1067G-G9 in which certain amounts are excluded from a persons actual means. It means a specified kind of income support, whether youth allowance, austudy payment, an untaxable social security or veterans affairs payment, a payment under a Student Financial Supplement Scheme, ABSTUDY or the Assistance for Isolated Children Scheme, a payment of the former AUSTUDY, a scholarship or a State or Territory education payment.

New subsection 10B(5) defines savings, drawing on the former definition in FAMT Regulation 7. Savings are normally part of a persons actual means under new point 1067G-G8. The definition makes it clear that savings include certain amounts, although they are not limited to these amounts. The amounts included are a persons share in any profit retained by a company or partnership of which the person is a director, shareholder or member (respectively) if the person has a substantial influence over the distribution of the profit that could potentially benefit the person or a member of the family. Similarly, savings includes any undistributed trust profit if the trust is attributable to the person or if the person is a trustee or beneficiary of the trust who has specified controlling powers under the trust or substantial influence over the potentially beneficial distribution of the trust profit. New subsection 10B(6) describes for this purpose when a person controls a trust.

New Module G - Family actual means test

Item 3 repeals the old Module G of the Youth Allowance Rate Calculator, under which the FAMT Regulations were made, and substitutes a new Module G. Accordingly, the Regulations will lapse and will be replaced with the substantive provisions contained in the new Module.

Submodule 1 - Preliminary

This new Submodule describes the overall structure of the family actual means test, in which it is necessary to work out: whether the test applies to a person; the appropriate tax year that applies in respect of the person; the actual means of the persons family for that year; the persons family actual means free area; and the persons reduction for family actual means.

Submodule 2 - Persons to whom family actual means test applies

This new Submodule provides that the family actual means test applies to a person who claims or receives youth allowance, is not independent (as provided by section 1067A) and has a parent (as provided by paragraph (b) of the definition of parent in subsection 5(1)) who is a designated parent (as provided by new subsection 10B(3)).

However, certain people are excluded from the application of the family actual means test. The test does not apply while a family member of the person is receiving an exceptional circumstances relief payment under the Farm Household Support Act 1992 . Nor does it apply for the remainder of the calendar year after the relief payment stops. In this sense, exceptional circumstances relief payment includes the former drought relief payment.

Submodule 3 - Identification of appropriate tax year

The appropriate tax year is the period in respect of which a persons family actual means are calculated. The same period applies under the youth allowance parental income test in Module F of the Youth Allowance Rate Calculator. Under new point 1067G-G4, the appropriate tax year for a particular youth allowance payment period is generally the base tax year. The latter term (defined in parental income test point 1067G-F5) is the tax year that ended on 30 June in the calendar year that came immediately before the calendar year in which the youth allowance payment period ends. However, if a determination of the appropriate tax year has been made by the Secretary under point 1067G-G6, the tax year so determined is the appropriate tax year.

If new point 1067G-G5 applies to a person, then the person may, under new point 1067G-G6, request the Secretary to determine that the appropriate tax year is the tax year following the base tax year. This is designed to allow a person the benefit of having a lower family actual means figure taken into account if that lower figure would result from using the tax year following the base tax year as the basis for the assessment.

For this concession to be available, it must first be the case either that youth allowance would not be payable because of the rate being nil under the family actual means test or that the rate would be reduced under the test.

The person must give evidence or an estimate that his or her amount of family actual means is substantially less in the year following the base tax year than it was in the base tax year for one of three reasons - because of an event that is beyond the control of the person and family, because the person or a family member is undertaking full-time study in the tax year following the base tax year or because a designated parent has ceased to fall within one of the specified categories of the definition of designated parent.

The person must give evidence of the reason mentioned above and, if the decrease in actual means is based on an estimate, give an agreement to have his or her rate of youth allowance recalculated if the actual means for the tax year ends up being more than the amount estimated.

The amount of family actual means must be unlikely to increase beyond that reduced evidenced or estimated level for 2 years following the specified date.

It is also made clear that an expected decrease in the profitability of a business is not ordinarily to be taken to be an event that is beyond control, for the purposes of one of the acceptable reasons for the application of this Submodule.

Lastly, the request must be made in accordance with an approved form.

If the Secretary receives such a request, he or she must determine the persons appropriate tax year to be the tax year following the base tax year for a youth allowance payment period specified. However, if the request is based on an estimate, the Secretary may not make such a determination unless he or she is satisfied that the estimate is current and reasonable.

Submodule 4 - Actual means of persons family

New point 1067G-G7 explains the basic principle that the actual means of the family of a person (known here as the claimant/recipient) is worked out by first calculating, under this Submodule, the individual actual means of the claimant/recipient and of each person who is a family member of the claimant/recipient. (Having done that, the formula in new subpoint 1067G-G13(1) provides for each individual amount of actual means to be added together to form part of the calculation of the actual means of the family of the claimant/recipient.)

Accordingly, the following provisions of the new Submodule generally apply equally to any relevant person, ie, the claimant/recipient or a family member.

New point 1067G-G8 lays down the meaning of the actual means of a relevant person (again, a person who is either the youth allowance customer or a family member of customer). The actual means of a relevant person for the appropriate tax year is the total amount of the spending and savings of the person in that tax year.

Furthermore, an amount of spending or savings is taken to have been spent or saved in the appropriate tax year if the Secretary considers that the amount should be so taken.

New point 1067G-G9 adds to the meaning of actual means laid down above by recording certain amounts that are not to be included in a persons actual means for the appropriate tax year.

Not to be included are amounts such as spending or savings from any income assistance (see new subsection 10B(4)) received in the appropriate tax year, maintenance payments, certain costs of boarding away from home a family member who is studying, money spent to assist with a disability, money spent from any arms length loan received in that year, any loan repayments (or interest payments) on another kind of loan, spending or savings from certain liquidation proceeds or from a windfall gain that is not a gift, spending or savings of up to $6,000 from certain tax-exempt income and spending or savings from a tax-exempt part of a compensation payment.

Further, the amount of the income or resources of a business of the relevant person that is tax deductible as an expense necessarily incurred in carrying on the business is not to be included in actual means. However, certain amounts are not drawn into this exemption - any business losses carried forward from a previous tax year and any superannuation contribution from the business that exceeds a specified level for an employee or for a person engaged other than as an employee.

Nor is the amount of any reduction in liquid assets held by the person at the beginning of the appropriate tax year and not already taken into account above to be included in actual means.

New point 1067G-G10 provides a further exclusion from actual means for the appropriate tax year for a person who is a particular family member of a youth allowance customer (a family member described in one of three particular subparagraphs of the definition of family member in subsection 23(15) of the Social Security Act). This exclusion is spending or savings of up to $6,000 from any income of that family member from independent employment (defined in new subsection 10B(2)).

New point 1067G-G11 is to specify what the term after-tax income concession for a secondary student means. This term is used in subparagraph 1067G-G9(2)(d)(v) in calculating the amount of spending, in certain cases of boarding away from home a family member who is a secondary student, that is excluded from actual means. The concession is worked out under a formula that aims to identify the costs of boarding a secondary student away from home, ie, the difference between the away-from-home and the at-home rates of youth allowance, taking into account tax and Medicare levy. To do this, the after-tax income of the family is compared to a notional after-tax income that would apply if the student were not boarded away from home.

New point 1067G-G12 gives the Secretary a discretion to consider whether an amount of spending that would otherwise be included in a relevant persons actual means represents fair market value. If not so satisfied, the Secretary must assess the fair market value of the matter - the resulting amount is the amount that will be included in the persons actual means.

Furthermore, the Secretary has the discretion to consider whether spending by someone other than a family member of a relevant person is spending for the benefit of the relevant person. If so satisfied, the Secretary must assess the fair market value of the spending - the resulting amount will be included in the relevant persons actual means.

Having worked out, under the preceding points, the individual actual means of the youth allowance customer and of each family member, new point 1067G-G13 provides the culminating rule of how to calculate the family actual means of the youth allowance customer.

It is worked out using a formula which has regard to the following factors: GAM, being the sum of the actual means of each person in the family; TNITML, being the sum of the notional amounts of tax and medicare levy payable by each parent to achieve an after-tax income of half of GAM; TFTI, being a percentage of the family tax assistance increased tax-free threshold calculated under the Income Tax Rates Act 1986 ; and NPBL, being any net passive business loss (which takes its meaning from parental income test subpoint 1067G-F11(4)) of each parent.

Submodule 5 - Family actual means free area

This new Submodule is to identify the amount of family actual means a person may have without it affecting his or her youth allowance entitlement. The free area in this case is exactly the same as the parental income free area under Module F of the Youth Allowance Rate Calculator. Thus, the relative outcomes under both tests may be compared to ascertain which one should apply to the person (ie, the one that would produce the lower rate of youth allowance).

Submodule 6 - Reduction for family actual means

This new Submodule provides for a youth allowance customers rate of payment to be reduced for excess family actual means. A persons family actual means excess for the appropriate tax year (ie, the difference between the actual means of the persons family for that year and the free area) is divided by 4 and rounded down as described. The result is then converted to a fortnightly figure for the youth allowance rate calculation.

5. Commencement

This Schedule will commence on Royal Assent.