House of Representatives

Explanatory Memorandum

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

Chapter 3 - Entitlement to the Baby Bonus

Outline of chapter

3.1 This chapter sets out the method for calculating the amount of a claimants Baby Bonus. In particular, it explains:

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the formula used to calculate the amount of the Baby Bonus; and

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special rules that apply to people whose taxable income is $25,000 or less.

Summary of new law

3.2 The Baby Bonus is available to a claimant, who may either be a primary person (as explained in Chapter 2) or the spouse of a primary person.

3.3 The maximum amount of the Baby Bonus that a person can claim in a year is one-fifth of the basic income tax liability in the base year.

3.4 The base year for a primary person may be either the income year before, or the income year in which, the primary person obtained legal responsibility for, and care of, the child. For a spouse, the base year will be the income year prior to transfer.

3.5 The amount of the Baby Bonus available to a person each year is limited to a maximum of $2,500.

3.6 The Baby Bonus entitlement is calculated by comparing the taxable income of a person in the base year to the taxable income in the claim year. If a person has any taxable income in the claim year, the Baby Bonus will be reduced by the proportion of claim year taxable income to base year taxable income.

3.7 Where a person has legal responsibility for, and care of, a child for only part of the year, that persons entitlement is pro-rated accordingly.

3.8 For claimants whose taxable income is $25,000 or less there is a minimum entitlement of $500.

3.9 Tables 3.1 and 3.2 illustrate how the amount of the Baby Bonus is affected by the levels of taxable income in the base year and claim year. Each table assumes that the person is legally responsible and cares for the child for the full year.

Table 3.1: Amount of the Baby Bonus where there is no taxable income in the claim year

Table 3.2: Amount of the Baby Bonus where the taxable income of the claim year is half of the taxable income in the base year

Detailed explanation of new law

When is a person entitled to claim the Baby Bonus?

3.10 A person is entitled to claim the Baby Bonus when they have satisfied the eligibility requirements for a particular income year. [Schedule 1, item 2, subsection 61-355(1)]

3.11 A claimant may be a primary person, that is, someone who satisfies the eligibility rules. Alternatively, the claimant may be the spouse of the primary person where the primary person has elected to transfer their entitlement to the Baby Bonus to their spouse.

Base year

3.12 Generally a claimants base year will determine the claimants basic income tax liability and establishes the base (maximum) amount of the Baby Bonus to which the claimant may be entitled. However, for those with an income of $25,000 or less in the claim year they will be entitled to a minimum $500.

3.13 Different rules apply for determining the base year of a primary person and the base year of a spouse of the primary person.

Base year of a primary person

3.14 A primary person, who is an Australian resident at any time in the income year before the event year, has a choice as to whether the base year is the income year before, or the income year in which, the child event occurred. Where no election is made, the base year will be the income year before the income year in which the child event occurred. [Schedule 1, item 2, paragraph 61-430(1)(a)]

3.15 If a primary person was not an Australian resident in the year before the event year, their base year is the event year. In this circumstance there is no choice of base year. [Schedule 1, item 2, paragraph 61-430(1)(b)]

3.16 It is usually beneficial for the primary person to elect as the base year the income year which has the higher taxable income. This will provide a higher basic income tax liability, and therefore maximise their entitlement. The base year will generally be the income year before the event year, as there is usually a period of absencefrom the workforce in the event year which will reduce the primary persons basic income tax liability for that year.

3.17 In some cases it may be more beneficial for the primary person to choose the event year as the base year. This will occur where the child event happens towards the end of the income year, or where the primary person has a lower basic income tax liability in the income year before the event year.

Example 3.1

Patricia has her first child, Naomi, on 6 December 2002. Patricia is the primary person in respect of Naomi. Patricia has a taxable income of $35,000 in the 2001-2002 income year, which results in a basic income tax liability of $6,880. Patricias taxable income in the 2002-2003 income year is $28,000 which results in a basic income tax liability of $4,780. Patricia chooses the 2001-2002 income year as her base year, that is, the income year before the event year, as she has a higher basic income tax liability in that year.

Example 3.2

Acacia adopts her first child, Helen, on 25 June 2003, that is, in the 2002-2003 income year. Acacia is the primary person in respect of Helen. Acacia has a taxable income of $30,000 in the 2001-2002 income year and a taxable income of $35,000 in the 2002-2003 income year. Her basic income tax liability for these years is $5,380 and $6,880 respectively. Acacia chooses the 2002-2003 income year (the event year) as her base year, as she has a higher basic income tax liability in that year.

Base year of spouse (transferee claimant)

3.18 A primary person may choose to transfer their entitlement to the Baby Bonus to their spouse, a transferee claimant. This is most likely to occur when, for example, the mother returns to work and the childs father leaves the workforce to care for the child, resulting in a reduction in his taxable income.

3.19 Where a primary person transfers their entitlement to the Baby Bonus for a particular child to their spouse, the base year for the spouse is always the income year before the first year for which entitlement for that child was transferred. [Schedule 1, item 2, subsection 61-430(4)]

3.20 A spouse cannot elect the income year of the transfer, or any other year, as an alternative base year.

3.21 Once the base year for a spouse has been determined it remains constant for the spouse in respect of that child. This means that a spouses base year cannot be changed in a later income year, regardless of the number of times entitlement is transferred to that spouse.

Example 3.3

Mei-Ling has a son, Yung Shen, on 23 July 2003, that is, in the 2003-2004 income year. She returns to work on 23 November 2003 and her husband, Chee Leong, stays at home to look after the baby.

Mei-Ling, being the primary person, elects 2002-2003 as her base year. After doing their calculations, Mei-Ling and Chee Leong decide that it would be more beneficial for Chee Leong to claim the Baby Bonus for the 2003-2004 income year. Mei-Ling transfers her entitlement to the Baby Bonus for that year to Chee Leong, her spouse.

The base year for Chee Leong is the income year before the first year for which entitlement was transferred for Yung Shen, that is, the 2002-2003 income year.

For the 2004-2005 income year, Mei-Ling stays home while Chee Leong returns to work. Mei-Ling does not transfer her entitlement for that year.

For the 2005-2006 income year, Mei-Ling returns to work, Chee Leong stays at home and Mei-Ling again transfers her entitlement to the Baby Bonus to Chee Leong. Chee Leongs base year remains the same as his earlier year of claim, and is therefore the 2002-2003 income year.

3.22 If, however, a primary person transfers their entitlement to the Baby Bonus for a particular child to a different spouse, there will be a new base year for the new spouse. The base year of the new spouse will be the income year before the income year in which the transfer to the new spouse occurred. As in the case of the original spouse, the base year for the new spouse will remain constant.

Example 3.4

Continuing on from Example 3.3, during the 2006-2007 income year the relationship between Mei-Ling and Chee Leong ceased, and Mei-Ling married Kim Fah.

Mei-Ling remained the primary person in respect of Yung Shen, and continued to work, while Kim Fah left the workforce to care for Yung Shen. Mei-Ling decided to transfer her entitlement to the Baby Bonus to Kim Fah, the new spouse, for the 2007-2008 income year. Mei-Ling could not transfer her entitlement to the Baby Bonus to Kim Fah for the 2006-2007 income year as Kim Fah was not her spouse for the entire period of entitlement.

Kim Fahs base year is the 2006-2007 income year, the income year before the first year for which entitlement for Yung Shen was transferred to Kim Fah.

How to elect a base year

3.23 The election of a base year must be in writing by the primary person in an approved form. There is no requirement to lodge the election of the base year with the ATO, however, the primary person is required to keep the election with their taxation records. [Schedule 1, item 2, subsection 61-430(2)]

3.24 The election cannot be made after the primary person has lodged a claim. [Schedule 1, item 2, paragraph 61-430(3)(a)]

3.25 The election of a base year by the primary person has to be made before the primary person chooses to transfer their entitlement to the Baby Bonus for any income year to their spouse [Schedule 1, item 2, paragraph 61-430(3)(b)] . This restriction prevents a primary person electing to transfer in the event year, and then in a later year choosing the event year as the base year, thus undoing the transfer.

3.26 The election of a base year is irrevocable. Once a primary person has elected a base year at the time of lodgment of the first claim, it cannot be changed in a later income year. [Schedule 1, item 2, subsection 61-430(2)]

Calculation of the Baby Bonus

Meaning of terms used in the calculation

Basic income tax liability

3.27 The basic income tax liability is the amount of income tax calculated on the taxable income after taking into account any special provisions but before taking into account any offsets or adjustments. [Schedule 1, item 2, subsection 61-420(1)]

3.28 The income tax on taxable income is calculated using the applicable income tax rate or rates (contained in the Income Tax Rates Act 1986 ). The special provisions which apply to working out the basic income tax liability are those provisions listed in section 4-25 of the ITAA 1997 .

3.29 Liabilities such as the Medicare levy and HECS are not included for the purposes of calculating the Baby Bonus. Similarly, offsets and adjustments are not included for the purposes of calculating the Baby Bonus. If offsets or adjustments were taken into account, then the amount of the Baby Bonus would be reduced.

3.30 A primary producer, for example, calculates their basic income tax liability using both Schedule 7 of the Income Tax Rates Act 1986 andsubsection 392-35(3) of the ITAA 1997(which is a special provision for calculating basic income tax liability) . A primary producer is not, however, required to calculate their tax offset under Subdivision 392-C of the ITAA 1997 for the purposes of the Baby Bonus .

Taxable income

3.31 Taxable income is equal to assessable income less allowable deductions.

Base Amount

3.32 The base amount of the Baby Bonus to which a claimant is entitled in an income year is the lesser of:

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one-fifth of the claimants basic income tax liability for the base year; and

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$2,500.

[Schedule 1, item 2, paragraphs 61-420(1)(a) and (b)]

Example 3.5

Nadia has her first child, Roman, on 25 June 2005, in the 2004-2005 income year. Nadia is the primary person in respect of Roman. Nadia had a taxable income of $55,000 for the 2003-2004 income year and a taxable income of $84,000 in the 2004-2005 income year. Nadia elects the 2004-2005 income year as her base year. The basic income tax liability on a taxable income of $84,000 is $26,860; 1/5th of this amount is $5,372. Since this amount is more than the maximum base amount of $2,500, the base amount to which Nadia is entitled is $2,500 per income year.

3.33 A claimant is entitled to the maximum amount of $2,500 where their taxable income in the base year is $52,666. Claimants whose taxable income in the base year exceeds $52,666 will still be entitled to a maximum base amount of $2,500 in any income year.

Calculation of the tax offset (Baby Bonus)

3.34 A claimants Baby Bonus for an income year is the base amount adjusted for any amount of taxable income in the claim year. This determines the entitlement amount. The entitlement amount is then adjusted for any period during the claim year where the claimant is not eligible to claim the Baby Bonus. [Schedule 1, item 2, sections 61-415 and 61-420]

Formula

entitlement amount * (total of the entitlement days / 365)


3.35 The Baby Bonus is calculated in accordance with the following formula:

3.36 The entitlement amount is the amount calculated using the following formula:

base amount * [1 - (your taxable income for claim year / your taxable income base year)]


3.37 The formula for calculating the Baby Bonus can also be represented in amalgamated form:

Baby Bonus = base amount * [1 - (TIi/TIb)] * (total entitlement days/365)


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Base amount is the base amount previously determined;

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TIi is the taxable income of the claim year;

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TIb is the taxable income of the base year; and

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Total of the entitlement days is the total number of days that a primary person was eligible for the Baby Bonus.

[Schedule 1, item 2, subsection 61-425(1)]

3.38 A claimants base amount will be reduced where the claimant earns taxable income in the claim year. The base amount is reduced by the proportion of taxable income in the claim year compared with the taxable income in the base year. For example, if a claimant returns to work and earns one-third of their base year taxable income in the claim year, the Baby Bonus will be reduced by one-third.

Example 3.6

Marys first child Belita was born on 1 April 2003, in the 2002-2003 income year. Mary is the primary person in respect of Belita. She elects her 2001-2002 income year to be her base year.

Marys base year taxable income of $40,000 gives her a basic income tax liability of $8,380 in the base year. Her base amount of the Baby Bonus is therefore $1,676 per income year (1/5th of $8,380).

Mary can claim the Baby Bonus in her 2002-2003 income tax return. Her taxable income for the 2002-2003 income year is $30,000.

As Mary has taxable income in her claim year, her Baby Bonus will be less than the base amount. Additionally, as her daughter was born on 1 April she is only eligible to claim the Baby Bonus for 91 days in that year.

Using the formula, Marys entitlement is calculated as follows:

Baby Bonus = base amount * [1 - (TIi/TIb)] * (total entitlement days/365)

$1,676 [1 - (30,000/40,000)] (91/365) = $105

The amount of Marys Baby Bonus is $105.

Taxable income of $25,000 or less in the income year

3.39 Where a claimants taxable income is $25,000 or less in the claim year, the claimant has a minimum entitlement amount of $500. [Schedule 1, item 2, subsection 61-420(2)]

3.40 The minimum entitlement amount will apply regardless of whether the claimant lodges an income tax return for the income year.

Example 3.7

Phillipa has a son, Alex, on 23 April 2003, that is, in the 2002-2003 income year. She is the primary person in respect of Alex. Phillipas base year is the 2001-2002 income year. Her taxable income for the base year is $26,000, giving her a base amount of $836.

Phillipa claims the Baby Bonus in her 2002-2003 income tax return.

Phillipa returns to work and for the 2003-2004 income year her taxable income is $23,000.

Using the formula, Phillipas entitlement in the 2003-2004 income year is:

Baby Bonus = base amount * [1 - (TIi/TIb)] * (total entitlement days/365)

$836 * [1 - (23,000/22,000)] (365/365) = 0

However, as Phillipas taxable income is less than $25,000 in the 2003-2004 income year, Phillipa is entitled to the minimum entitlement amount of $500 for that year.

3.41 The minimum entitlement amount will not limit a claimants Baby Bonus if the claimant is entitled to a greater amount using the formula.

Example 3.8

Lolas daughter, Dolores, was born on 28 February, in the 2002-2003 income year. Lola is the primary person in respect of Dolores.

Lolas taxable income in the base year (2001-2002) was $24,000 and her basic income tax liability was $3,580. Her base amount is therefore $716 per income year (1/5th of $3,580). Although Lola stays home to care for Dolores she continues to earn interest and dividend income, and in the 2003-2004 income year her taxable income is $4,000. As Lola is the primary person in respect of Dolores for the full year, her total number of entitlement days is 365 days.

Using the formula, Lolas base amount of $716 is reduced to $597. This is calculated as follows :

Baby Bonus = base amount * [1 - (TIi/TIb)] * (total entitlement days/365)

$716 [1 - (4,000/24,000)] (365/365)

Lola is also entitled to the $500 minimum base amount, as her taxable income in the claim year was less than $25,000. As Lolas Baby Bonus calculated using the formula is greater than $500, Lola is entitled to claim the greater amount of $597.

3.42 The Baby Bonus calculated using the formula will generally be higher than the minimum entitlement amount where the proportion of claim year taxable income compared with base year taxable income is low. Where the claim year taxable income is a higher proportion of the base year taxable income, the $500 minimum entitlement may provide a greater benefit than the formula amount.

No entitlement in a particular year

3.43 A claimant may not be entitled to claim the Baby Bonus in a particular income year because the taxable income of that year exceeds the base year taxable income. This does not preclude the claimant from entitlement in future income years.

Example 3.9

Jane has a son, Joseph, on 15 February 2006, that is, the 2005-2006 income year. Jane is the primary person in respect of Joseph.

Janes taxable income in the 2004-2005 income year is $30,000, and her taxable income in the 2005-2006 income year is $26,000. Jane chooses the 2004-2005 income year as her base year. Jane is entitled to claim the Baby Bonus for the 2005-2006 income year, as her taxable income is lower in that year than the base year.

Jane returns to work in August 2006 and her taxable income for the 2006-2007 income year is $35,000. Jane does not have any entitlement to the Baby Bonus in the 2006-2007 income year as her taxable income in the income year is higher than the base year and her taxable income exceeded $25,000 in that income year.

Jane resigns from her employment in August 2007, and her taxable income for the 2007-2008 income year is $10,000. Jane is entitled to claim the Baby Bonus for the 2007-2008 income year, even though she was not entitled to the Baby Bonus in the previous year.

Pro-rata of entitlement

Base year is the year before the child event

3.44 Where a claimants base year is the income year beforethe income year in which the child event happens, the first year a claim for the Baby Bonus can be made is the year of the child event. This will result in a pro-rating of the Baby Bonus entitlement in the year in which legal responsibility was obtained and in the year in which the child turns 5. [Schedule 1, item 2, subsection 61-425(2)]

3.45 The Baby Bonus will be pro-rated in the year in which legal responsibility was obtained as the claim can only be made for the period for which the claimant was eligible. The Baby Bonus will also be pro-rated in the year that the child turns 5, as eligibility to the Baby Bonus ceases when the child turns 5. The pro-rating in the year the child turns 5 will be the number of days from 1 July in the income year until the child turns 5.

Example 3.10

Fiona gives birth to a son, Damian, on 15 January 2002, that is, the 2001-2002 income year. Fiona is the primary person in respect of Damian. Fiona has taxable income of $40,000 in the 2000-2001 income year, with a basic income tax liability of $8,380, and chooses that year (i.e. the year before the child event) as her base year. Her base amount is $1,676 per income year (1/5th of $8,380).

Fionas first year of claim is the year of Damians birth, that is, the 2001-2002 income year. Her base amount of $1,676 is pro-rated from Damians date of birth, on a daily basis. Therefore, Fiona receives 166/365 days entitlement, being $762 for the 2001-2002 income year.

Assuming Fiona has no taxable income in the following income years, her entitlement would be $1,676 for the following 4 years (i.e. 2002-2003 to 2005-2006 income years), and the remaining 199 days entitlement of $913 in the 2006-2007 income year, the year in which Damian turns 5.

Base year is event year

3.46 Where a claimants base year is also the income year in which the child event occurs, the minimum entitlement of $500 will not apply for that year. The minimum entitlement will only occur where the base year is not the income year in which a claim is being made. [Schedule 1, item 2, subsection 61-420(2)]

3.47 If a claimant makes a claim in respect of an income year which is also the base year, the Baby Bonus will be nil. This is because as the base year and claim year are the same, the taxable income for both years are also the same. Therefore, where the base year is the event year, the first income year to claim the Baby Bonus is the income year following the base year.

3.48 In the year that the child turns 5, where the base year is the event year and no transfer of entitlement occurred in the event year, the total of the entitlement days will include the number of days in the base year for which a primary person was eligible for the bonus. This ensures that the primary persons total number of entitlement days is not less than 5 years. [Schedule 1, item 2, subsection 61-425(2)]

Example 3.11

In Example 3.10, if Fiona had taxable income in the 2001-2002 income year of $40,000 and choses the year of birth as her base year, she is not entitled to a Baby Bonus in the 2001-2002 income year.

In the income year of Damians 5th birthday (2006-2007), Fionas total entitlement days (365) includes 199 days from 1 July 2006 to Damians 5th birthday. The total entitlement days also include the number of days in the base year for which she is eligible for the Baby Bonus (15 January 2002 to 30 June 2002 - i.e. 166 days).

This means that in her 2006-2007 income tax return, Fiona is entitled to the full $1,676 amount, as the total entitlement days are 365.

Child dies before the age of 5

3.49 Where a child dies before reaching age 5, a claimant is entitled to the Baby Bonus for the remaining part of the year, irrespective of when the child died during the year. This is because the primary persons eligibility period is extended from the date of death of the child to the end of the income year. [Schedule 1, item 2, section 61-380]

Example 3.12

Victoria is the primary person in respect of her son Julius. Julius was born on 20 November 2002.

Julius died on 11 March 2004. Although Victoria only had legal responsibility for, and care of, Julius for 254 days in the 2003-2004 year, she is entitled to the full 365 days.