House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Eligibility for the Baby Bonus

Outline of chapter

2.1 This chapter explains the eligibility rules for the Baby Bonus. In particular it explains:

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who is eligible for the Baby Bonus;

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what are the eligibility rules for the Baby Bonus; and

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transfer of the Baby Bonus.

Context of reform

2.2 The eligibility rules provide that the Baby Bonus is available to a person in recognition of a fall in income following the arrival of their first child on or after 1 July 2001.

Summary of new law

2.3 To be eligible for the Baby Bonus for a particular period a person is required to:

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have a child on or after 1 July 2001;

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continue to have legal responsibility for, and care of, that child; and

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meet certain residency requirements.

2.4 A person who meets the eligibility criteria has a primary entitlement to the Baby Bonus. For the purposes of this explanatory memorandum that person will be referred to as the primary person.

2.5 Generally, the Baby Bonus is available to the natural mother. However, where the natural mother is not eligible, the natural father or adoptive parent may be eligible.

2.6 The Baby Bonus is available to the primary person until the child turns 5 years of age. There are special rules to ensure that if a child dies before the age of 5, the primary person can still be eligible in respect of the next child.

2.7 The amount of the Baby Bonus is usually based on a primary persons gross income tax liability in the year before the person became legally responsible for the child. The amount can be adjusted as a result of a comparison between the persons taxable income in that year and the persons taxable income in the year for which they are making a claim for the Baby Bonus. For low income earners ($25,000 or less in the claim year) a minimum amount is generally available. [Schedule 1, item 2, section 61-350]

2.8 The primary person may choose to transfer their entitlement to the Baby Bonus to their spouse. The decision to transfer remains with the primary person each year. [Schedule 1, item 2, section 61-350]

Detailed explanation of new law

Who is eligible for the Baby Bonus?

2.9 A person will be eligible for the Baby Bonus if they have legal responsibility for, and care of, a child. This person may be:

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the childs parent by birth;

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the childs adoptive parent; or

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a person who otherwise obtains legal responsibility for the child, such as through an order issued by the Family Court.

What are the eligibility rules?

2.10 A primary person is eligible to claim the Baby Bonus for a time in the income year for a child if they satisfy all of the following eligibility rules:

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Rule 1 - the person had a child event;

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Rule 2 - the child is a first child of the person;

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Rule 3 - the child was less than 5 years old throughout the period of entitlement;

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Rule 4 - the person was legally responsible for the child;

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Rule 5 - the child was in the persons care;

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Rule 6 - the person was an Australian resident throughout the period of entitlement;

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Rule 7 - no other person has legal responsibility and care of the child and has or had primary entitlement for another child; and

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Rule 8 - the selection rules select the person to have the primary entitlement to the Baby Bonus.

[Schedule 1, item 2, section 61-355]

Rule 1 - a child event

2.11 A child event needs to occur before a person can become eligible for the Baby Bonus. There are 3 different events that lead to a child event - the birth of a child, the adoption of a child and where a person otherwise obtains legal responsibility of a child.

2.12 A person has a child event at a particular time ( event time ) if:

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the person becomes legally responsible for a child at the event time;

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the event time is on or after 1 July 2001;

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the person is an Australian resident at the event time;

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the person has not previously been legally responsible for the child before 1 July 2001; and

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there is no other person who is also legally responsible for the child at the event time and who was also legally responsible for the child at a time before 1 July 2001.

[Schedule 1, item 2, section 61-360 and item 5]

2.13 All 5 of the above criteria need to be met to have a child event.

Legal responsibility

2.14 A person has legal responsibility for a child at an event time, if that person is legally responsible for the day-to-day care, welfare and development of the child. Giving birth is generally an example of becoming legally responsible for a child. [Schedule 1, item 6]

Australian resident

2.15 The term Australian resident takes on the same meaning as that under subsection 6(1) of the ITAA 1936.

Example 2.1

Sue and Colin are Australian residents who have their first child Isabella on 1 December 2001. Isabella is the first child of both Sue and Colin.

Both Sue and Colin have a child event in respect of Isabella as:

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they became legally responsible for Isabella at the time of birth;

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the event time (the date of Isabellas birth) was on or after 1 July 2001;

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they are Australian residents at the event time (time of birth);

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they were not previously legally responsible for Isabella; and

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there was no other person who was legally responsible for Isabella at both the time of her birth and before 1 July 2001.

Example 2.2

Sue and Colin are Australian residents who marry on 20 October 2002 and have their first child Isabella on 1 December 2003. Isabella is the first child of Sue, but Colin has another child, Amy, from a previous marriage. Amy was born on 3 July 2001.

Both Sue and Colin still have a child event in respect of Isabella as:

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they became legally responsible for Isabella at the time of birth;

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the event time (the date of Isabellas birth) was on or after 1 July 2001;

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they are Australian residents at the event time;

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they were not previously responsible for Isabella before 1 July 2001; and

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there was no other person who was legally responsible for Isabella at both the time of her birth and before 1 July 2001.

Colin still has a child event in respect of Isabella, even though he has had an earlier child.

2.16 Although a child event has to be on or after 1 July 2001, it is possible to be eligible in respect of a child born before this date. For example, a person can adopt a child born before 1 July 2001 and still become eligible for the Baby Bonus as long as the child is under 5 years of age. This is because the event time (adoption) occurs on or after 1 July 2001. [Schedule 1, item 2, section 61-360]

Example 2.3

Kasey adopts Brett on 1 December 2001. Brett was born on 5 June 1998. Kasey has a child event for Brett. This is because the child event (adoption) happened on or after 1 July 2001 and the child is under 5 years of age and all the other eligibility rules are satisfied.

Example 2.4

Mark and Jenny are Australian residents who marry on 20 October 2002 and have their first child Sarah on 1 December 2003. Sarah is the first child of Jenny, but Mark has another child, Jill, from a previous marriage. Jill was born on 3 July 2000. Jenny adopts Jill on 31 March 2004, so that both she and Mark are legally responsible for Jill.

Both Jenny and Mark still have a child event in respect of Sarah and Jenny would be entitled to the Baby Bonus in respect of Sarah.

Mark does not have a child event in respect of Jill as he was legally responsible for Jill before 1 July 2001.

Jenny determines if she has had a child event in respect of Jill as follows:

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she became legally responsible for Jill at the event time (time of adoption);

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the event time was on or after 1 July 2001;

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she was an Australian resident at the event time;

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she was not previously responsible for Jill before 1 July 2001; and

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there was a person (Mark) who was legally responsible for Jill at both the time of adoption and before 1 July 2001.

Jenny does not have a child event in respect of Jill, as Mark was legally responsible for Jill at the time of adoption and before 1 July 2001.

2.17 The final test for a child event is designed to prevent a person claiming the Baby Bonus when they obtain legal responsibility for a child where another person is also legally responsible for the child at that time and before 1 July 2001.

Example 2.5

Paul and Louise are married and are the natural parents of Linda who was born on 6 May 1999. Louise re-marries and the stepfather adopts Linda. The stepfather will not satisfy the final test for a child event as Louise (the natural mother) is also legally responsible for Linda at the time of the adoption and she was also legally responsible for Linda before 1 July 2001.

2.18 A stillborn child born on or after 1 July 2001 does not constitute a child event.

Rule 2 - eligible for first child only

2.19Where aprimary person has more than one child event, they can only be a primary person in respect of the earliest occurring child event. This rule applies irrespective of the period for which the person had primary entitlement to the Baby Bonus for the earliest occurring child event. [Schedule 1, item 2, section 61-365]

2.20 This rule also means that there can only be one claim per primary person in any one income year.

Example 2.6

Peng and her husband have a baby boy, Lo, who was born on 2 March 2003. Peng was eligible for and has been claiming the Baby Bonus each year. The couple adopt a second child, Mei-Ling, in January 2005. Mei-Ling was born on 18 October 2002 (before Peng gave birth to Lo).

As Peng gave birth to Lo before adopting Mei-Leng, the birth of Lo is her earliest occurring child event. Even though Mei-Ling was born before Lo, Peng is eligible for the Baby Bonus in respect of Lo only.

Example 2.7

Sue and Colin are married, are Australian residents and have their first child Isabella on 1 December 2003. Isabella is the first child of Sue, but Colin has another child, Amy, from a previous marriage. Amy was born on 3 July 2001.

Both Sue and Colin have a child event in respect of Isabella. Colin still has a child event for Isabella, even though he had an earlier child, Amy.

The first child only rule operates to determine the birth of Amy as Colins earliest occurring child event because Amy was born before Isabella. This means Colin cannot have primary entitlement to the Baby Bonus in respect of Isabella.

Rule 3 - child less than 5 years old

2.21 A primary person is only eligible to claim the Baby Bonus up to the day of the childs 5th birthday. This rule restricts a persons eligibility for the Baby Bonus to a child under the age of 5 years. [Schedule 1, item 2, subparagraph 61-355(3)(c)(i)]

2.22 If a child turns 5 during an income year, then primary entitlement to the Baby Bonus will end when the child turns 5.

Example 2.8

Alenka and Phillip have a child born on 31 October 2002. In the income year in which the child turns 5, the total of the entitlement days will begin on 1 July and end on 30 October.

2.23 Although the total number of entitlement days will generally end on the day before the childs 5th birthday, there are circumstances which will extend the claim period to beyond the 5th birthday (see paragraph 2.35 - rules concerning death of the child).

Rule 4 - legal responsibility

2.24 Legal responsibility can arise in various ways - through birth, adoption or other Court orders (e.g. parenting orders).

Rule 5 - child in the primary persons care

2.25 For a child to be in a persons care, it is not a requirement for the child to be living with the person on a daily basis. In other words, a mother continues to have the care of the child for periods when she and the child are apart. This applies even if the mother and child are temporarily not living in the same house, such as when the child stays with a relative for a holiday.

2.26 A parent who deserts a child would not be considered to be caring for the child as they have ceased to be involved in the childs daily life.

Rule 6 - residency

2.27 A primary person must be a resident of Australia for taxation purposes:

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at the event time; and

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throughout the period of entitlement.

Example 2.9

Francesca, Tony and their baby, Gino, became residents of Australia on 20 November 2002. Gino was born on 7 August 2002 before they left Italy.

Francesca is not eligible to claim the Baby Bonus in respect of Gino as she was not a resident at the event time (the time of Ginos birth).

Francesca and Tony have a second child, Tina, who is born in Sydney on 18 October 2003. Francesca is eligible for the Baby Bonus for Tina as she meets the eligibility criteria.

Tina is Francescas first child born since Francesca became an Australian resident and Francesca was a resident throughout the period of entitlement (2003-2004 income year).

Rule 7 - another carer with entitlement for another child

2.28 A person cannot be the primary person (i.e. have primary entitlement to the Baby Bonus) for a child for a particular period if:

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another person has both legal responsibility for, and care of, that child for that particular period; and

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the other person has already been a primary person (i.e. the person has already had a primary entitlement to the Baby Bonus) for another child.

[Schedule 1, item 2, section 61-370]

2.29 The practical effect of this rule is that where a couple have a baby neither parent is entitled to the Baby Bonus if one of those parents has previously been, or currently is, entitled to the Baby Bonus for another child.

Example 2.10

Bob and Wendy are Australian residents who marry on 20 October 2004 and have their first child Lisa on 1 December 2005. Lisa is Bobs first child, but Wendy already has another child, Lofty, from a previous relationship. Lofty was born on 3 July 2002.

Bob adopts Lofty on 31 March 2006, so that now both Wendy and Bob are legally responsible for Lofty.

Wendy has a child event for Lisa even though she has had an earlier child. However, Wendy does not have primary entitlement for Lisa because she has already had an earlier occurring child event in respect of Lofty (see paragraph 2.20 which explains the first child only rule).

Bob has a child event in respect of Lisa. However, Bob does not meet all the eligibility rules and cannot be the primary person for Lisa because:

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Wendy has both legal responsibility for, and care of, Lisa for the particular period; and

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Wendy has already had a primary entitlement to the Baby Bonus for Lofty. Therefore, both Wendy and Bob have no primary entitlement for Lisa.

Rule 8 - the selection rules

2.30 There are situations where more than one person meet eligibility rules 1 through 7 inclusive for a particular period. In such cases the selection rules (eligibility rule 8) determine who has primary entitlement to the Baby Bonus.

2.31 The following selection rules identify (in the following order) which person has primary entitlement to the Baby Bonus:

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the natural mother is the primary person [Schedule 1, item 2, paragraph 61-375(3)(a)] ;

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the adoptive mother is the primary person [Schedule 1, item 2, paragraph 61-375(3)(b)] ;

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the woman is the primary person [Schedule 1, item 2, paragraph 61-375(3)(c)] ;

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the natural father is the primary person [Schedule 1, item 2, paragraph 61-375(3)(d)] ;

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the adoptive father is the primary person [Schedule 1, item 2, paragraph 61-375(3)(e)] ;

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in any other case - the primary person will be determined by the Commissioner having regard to any agreement between the competing persons and any other matters relevant to identify the primary person [Schedule 1, item 2, subparagraphs 61-375(3)(f)(i) and (ii)] .

2.32 Table 2.1 illustrates who has primary entitlement to the Baby Bonus when there is more than one person who has legal responsibility for, and care of, a child.

Table 2.1: Selecting the primary person

Eligibility and the total number of entitlement days

2.33 The total number of entitlement days is the period in an income year for which a primary person satisfies the eligibility criteria for the Baby Bonus. The number of entitlement days is needed to calculate the amount of the Baby Bonus. The total number of entitlement days may be for less than an income year.

2.34 For example, the total number of entitlement days for the 1st and 5th years may be less than 365 when the base year elected is the year prior to the birth of the child. Where a child is born halfway through the year the total number of entitlement days will be 182 days. The total of the entitlement days may also be less than 365 where there is a change in legal responsibility.

Example 2.11

John and Sandra have a baby, Luke, who was born on 13 April 2002. After a period of separation, sole legal responsibility for Luke is awarded by the Family Court to John from 10 May 2005. Prior to this date Sandra had been eligible to claim the Baby Bonus. Sandra is eligible for part of the 2004-2005 income year, before she lost legal responsibility of her son. From 10 May 2005, John becomes eligible for the Baby Bonus.

Example 2.12

Jessie was born on 10 July 2003. She was placed for adoption by her natural mother on 2 November 2003. Jessie was adopted by Tania and Ross on 15 March 2004. The natural mother is eligible for the Baby Bonus for the period that she cared for Jessie that is, from birth date (10 July 2003) to the date that she placed Jessie for adoption (2 November 2003). Following Jessies adoption, Tania becomes eligible for the Baby Bonus for part of the 2003-2004 income year, that is, from 15 March 2004.

Special extension of eligibility where a child dies before the age of 5

2.35 If a child dies before the age of 5, the year of death will be the last year that a primary person will be eligible for the Baby Bonus in respect of that child. The persons primary entitlement for the child will be extended from the date of death to the end of the income year. [Schedule 1, item 2, subsection 61-380(2)]

Eligibility for a subsequent child where the first child dies before the age of 5

2.36 Where a primary person already has another child (who was born on or after 1 July 2001) at the time of the first childs death (before the age of 5), the primary person is eligible for the Baby Bonus in respect of the younger child until that younger child turns 5 years old. This means that a primary person may be eligible for the Baby Bonus for more than 5 years in cases where there has been the death of a child before the child turned 5. [Schedule 1, item 2, subsection 61-380(3)]

Example 2.13

Anne and Brian have a son, Tom, who was born on 11 August 2002, a daughter Sally who was born on 15 October 2004 and another son Alan who was born on 12 February 2006. Tom dies on 30 May 2006.

Anne is the primary person and is eligible to claim for Tom for the full year in her 2005-2006 income tax return. She is then eligible to claim for Sally in her 2006-2007 and later income tax returns, until Sally turns 5.

2.37 Where a primary person did not have another child (who was born on or after 1 July 2001) when the first child died (before the age of 5), they will be eligible for the full 5 year Baby Bonus upon the arrival of their next child. [Schedule 1, item 2, subsection 61-380(3)]

Example 2.14

Olivia and Owen have a daughter, Ellen, who was born on 5 November 2003. At the time of Ellens death on 8 February 2004, Olivia and Owen have no other children.

Olivia and Owen have another child, Matthew, on 11 December 2007.

Olivia is the primary person, and is able to claim for Ellen in her 2003-2004 return for the period 5 November 2003 to 30 June 2004.

Olivia will later be eligible to claim for Matthew until he turns 5 years old.

Transfer of the Baby Bonus

To whom can the Baby Bonus be transferred?

2.38 A primary person may transfer their entitlement for a particular income year to their spouse. The spouse will then become the transferee for that year. The spouse of the primary person includes a person, who although not legally married to the primary person lives with the primary person on a genuine domestic basis as the primary persons husband or wife. [Schedule 1, item 2, section 61-385]

Restrictions on transfer

2.39 For a primary person to transfer their entitlement:

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the transferee must have been the spouse of the primary person at all times when the primary person had a primary entitlement for the child for the income year;

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the transferee must not have a primary entitlement for any child for any time during the income year; and

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the primary person must not have already made a claim for that income year.

[Schedule 1, item 2, section 61-385]

2.40 A primary person is taken to have made a claim at the time of lodging their claim form for the relevant income year.

How can a transfer be made?

2.41 At the end of an income year a primary person may elect to transfer their entitlement to the Baby Bonus to their spouse. The transfer must be made in the approved form.

2.42 The transfer is made by both the primary person and their spouse signing a document specifying the following:

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the name of the primary person and their spouse;

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the name of the child and the date of the child event;

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the income year to which the transfer relates; and

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the total number of days the primary person was eligible for the Baby Bonus.

[Schedule 1, item 2, section 61-385]

2.43 Consistent with the self-assessment system these elections will not need to be sent to the Commissioner, however, they will need to be retained for verification purposes.

2.44 Where a primary person elects to transfer their entitlement to the Baby Bonus to their spouse, the primary person ceases to be entitled to the Baby Bonus for that income year. [Schedule 1, item 2, section 61-395]

2.45 Where the primary person makes a transfer, their spouse becomes entitled to the Baby Bonus for that income year. [Schedule 1, item 2, section 61-400]

2.46 A transfer for a given year is irrevocable once made. [Schedule 1, item 2, section 61-390]

Example 2.15

Sarina Smith is a resident of Australia and gives birth to her first child William on 25 March 2002.

Sarinas partner, Chip Jones, lives in the USA and will be arriving in Australia on 1 July 2002. Sarina stays at home to look after baby William and claims the Baby Bonus for the first 3 years. She returns to the workforce on 1 February 2005 and Chip cares for William from February 2005 onwards.

Sarina becomes eligible for the Baby Bonus because she satisfies all the eligibility criteria.

Sarina chooses not to transfer the Baby Bonus to Chip for the first 3 years while she is at home caring for the baby.

Sarina returns to work in the 2004-2005 income year and transfers her primary entitlement to the Baby Bonus to Chip (the transferee) for that income year. There are no restrictions on Sarinas ability to transfer the entitlement to the Baby Bonus to Chip because:

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Chip is Sarinas spouse throughout the whole 2004-2005 income year that Sarina had primary entitlement for William (even though Chip is not legally married to Sarina, Chip lives with Sarina on a daily basis as her husband); and

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Sarina has not already made a claim for the 2004-2005 income year.

Sarina and Chip complete an election that would look like the following:

Primary person: Sarina Smith

I agree that my Baby Bonus entitlement for the 2004-2005 income year be transferred to my spouse.

Spouses name: Chip Jones

Childs name: William Jones

Date of child event: 25 March 2002

Total number of days eligible: 365

Spouses signature: ..

Primary persons signature: ..