House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Family and Community Services, Senator the Hon Kay Patterson)

Schedule 3 - Family assistance amendments

This Schedule makes a range of family assistance amendments that can be broadly grouped as follows:

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Setting aside certain non-lodger debts;

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Writing off certain non-lodger debts;

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Clarify meaning of partner;

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Rent assistance and claims for FTB for a past period;

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Precluding FTB advances for child support debtor;

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Order of reduction rule for FTB Part B.

Each of these topics is addressed separately below.

Setting aside certain non-lodger debts

Summary

Where a 'non-lodger' debt arises because the relevant tax returns have not been lodged in relation to a particular entitlement year and the customer separates from his or her partner in the second income year after the end of the entitlement year, the non-lodger debt would be set aside after separation if it is only the ex-partner's tax return that has not been lodged. The customer's FTB entitlement would then be determined under an interim reconciliation on the basis of the customer's actual and ex-partner's estimate of income for the entitlement year.

Background

Section 28 of the Family Assistance Administration Act currently provides a two-year time limit for a customer and their partner to lodge tax returns to be entitled to a top-up of FTB. The two-year period consists of periods known as the first and second lodgment years. After the end of the first lodgment year, if tax returns have not been lodged where required, the customer's entitlement determination for the entitlement year is varied in accordance with subsection 28(2) of the Family Assistance Administration Act and an 'FTB non-lodger debt' is raised for the amount of FTB received during the entitlement year.

If the outstanding tax returns are lodged before the end of the second lodgment year, then the customer's entitlement determination is again varied in accordance with paragraph 28(3)(c), the FTB non-lodger debt is set aside and the normal FTB reconciliation process occurs to determine the customer's full entitlement for the entitlement year (which can include a top-up as appropriate).

If the outstanding tax returns are lodged after the end of the second lodgment year, then the customer's entitlement determination is again varied in accordance with paragraph 28(3)(d), the FTB non-lodger debt is set aside and a modified FTB reconciliation process occurs - the customer can only be entitled to the lesser of the amount of the customer's entitlement based on actual income or the amount that the customer was entitled to before the non-lodger debt was raised. A top-up is not available.

An unintended outcome may occur where a couple separate during the second lodgment year. It is not intended that the failure of an ex-partner to lodge his or her tax return by the end of the second lodgment year result in the customer being denied access to their full entitlement, including any FTB top-up payment as appropriate. However, that is the effect of the current legislation.

Amendments are made to section 28 of the Family Assistance Administration Act to ensure that an FTB non-lodger debt that was raised after the end of the first lodgment year should be set aside after separation if it is only the ex-partner's tax return that has not been lodged. Where this happens, an 'interim' FTB reconciliation would occur to determine whether the customer has a top-up or a debt. The interim reconciliation would use the customer's actual income, and the estimate of the ex-partner's income. When the ex-partner's tax return is lodged, a re-reconciliation would occur using the ex-partner's actual income, which could result in a top-up or a debt.

Explanation of the changes

Items 1 and 5 to 9 inclusive make the relevant amendments.

Item 8 inserts additional provisions into section 28 of the Family Assistance Administration Act to enable a non-lodger debt to be set aside by further variation of the individual's entitlement determination in certain circumstances.

A non-lodger debt can arise where existing subsection 28(2) applies because the relevant tax returns are not lodged by the end of the income year after the entitlement year, or under new subsection 28(6), which deals with the situation where, after a variation under new subsection 28(4) is made because the couple separate, the couple reconcile and the individual's partner has still not lodged a tax return for the entitlement year.

The circumstances in which a non-lodger debt can be set aside are where:

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the claimant and partner separate during the income year that began two years after the start of the entitlement year (the 'later income year');

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the individuals remain separated at the time of the decision to vary the claimant's entitlement determination under this provision;

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if the claimant was required to lodge a tax return for the entitlement year, the claimant has done so and the Commissioner of Taxation has determined the claimant's taxable income for that year;

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the ex-partner was required to lodge a tax return for the entitlement year but had not done so by:

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if the claimant was required to lodge a tax return for the entitlement year, the later of the time when separation last occurred or the time when an assessment of the claimant's taxable income is made; or

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otherwise, when separation last occurred;

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the Secretary is satisfied that the claimant was eligible for an amount of FTB for some or all of the entitlement year.

Where these conditions are satisfied, the 'no entitlement' determination made under subsection 28(2) must be varied (and the non-lodger debt set aside) and the claimant becomes entitled to be paid FTB in accordance new subsection 28(5).

If the claimant was required to lodge a tax return for the entitlement year and has done so before the end of the later income year, then the claimant is entitled to be paid their full entitlement. The outcome is the same if the claimant is not required to lodge a tax return for the entitlement year.

If the claimant lodges the relevant tax return after the end of the later income year, then entitlement is limited to the lesser of the claimant's full entitlement or the amount that the claimant was entitled to be paid before the 'no entitlement variation' that triggered the non-lodger debt. This is consistent with the outcome in existing subsection 28(3) that applies where the relevant tax returns are finally lodged but outside the required time frames.

If the separated couple reconcile after a variation has been made under new subsection 28(4) with the effect of restoring the claimant's entitlement and the claimant's partner has still not lodged a tax return for the entitlement year, then new subsection 28(6) operates to negate again the claimant's entitlement for the entitlement year. A non-lodger debt will then arise.

This rule ensures that claimants who are members of a couple are ultimately treated in the same way, even if there has been a separation and reconciliation.

Under subsection 28(3), a determination that has been varied under subsection 28(2) with the effect that the claimant is not entitled to be paid FTB for an entitlement year must again be varied after all the relevant tax returns have been lodged. The outcome of the required variation is set out in subsection 28(3). Item 5 makes a consequential amendment to subsection 28(3) to ensure that this provision also operates where a claimant is not entitled to be paid FTB for an entitlement year because of new subsection 28(6) and all the relevant tax returns are subsequently lodged.

Item 1 inserts a definition of 'member of the same couple' into subsection 3(1) of the Family Assistance Act. This term is used in section 28 of the Family Assistance Administration Act, as amended, and elsewhere in the family assistance law. Its meaning will be the same as the meaning of 'member of a couple' which, in turn, is defined by reference to the Social Security Act.

Item 6 makes a consequential amendment that ensures that subsection 28(3) cannot apply if new subsection 28(4) applies.

Item 7 is a minor technical correction to the terminology used in paragraph 28(3)(c).

Item 9 sets out the application and transitional rules that apply in relation to these amendments.

The substantive amendments made to section 28 of the Family Assistance Administration Act apply in respect of a cancellation income year (entitlement year) that is the 2001-02 income year or a later income year (subitem 9(1) refers). This coincides with the first income year affected by changes that extended by 12 months the time frame for payment of top-ups of FTB. These changes were made by the Family Assistance Legislation Amendment (Extension of Time Limits) Act 2004.

The effect is that claimants who have a non-lodger debt for 2001-02 and who separate during 2003-04 will benefit from the new rules, provided they have lodged their tax return (if required) for 2001-02. The same will apply in relation to non-lodger debts for subsequent income years.

There are some individuals who may have been paid an amount equal to a top-up payment of FTB under the act of grace provisions in the Financial Management and Accountability Act 1997 as they were not able to access a top-up payment because of the current operation of section 28 of the Family Assistance Administration Act. The amendments made by item 8 to section 28 would enable these customers to be paid a top-up of FTB under section 28. The intention is not to pay these customers a top-up twice, once under the act of grace rules and once under section 28, as amended. Subitem 9(2) therefore precludes such a payment under new section 28(5) in circumstances where an amount equal to a top-up payment of FTB has already been paid to the customer by act of grace payment.

The existing date of effect rules in sections 107 and 109E of the Family Assistance Administration Act limit the availability of arrears of FTB where there is a favourable review decision relating to payment of FTB by instalment. A transitional provision is inserted by subitem 9(3) to ensure that these date of effect rules do not apply in relation to a review decision that is made on or before 30 June 2006 that results in a decision under new subsection 28(4) in respect of the 2001-02, 2002-03 or 2003-04 income year.

Writing off non lodger debts

Summary

If there is a non-lodger debt (either FTB or CCB) and separation occurs more than two years after the end of the entitlement year, there would be capacity to write off the non-lodger debt after separation but only if it is the ex-partner's tax return that has not been lodged.

Background

If an FTB or CCB non-lodger debt has been raised as a result of the application of section 28 or section 60D of the Family Assistance Administration Act, and separation occurs after the second lodgment year, the legislation currently provides that the non-lodger debt can only be set aside (through further variation of the relevant entitlement determination) if both the customer and the ex-partner have lodged their tax returns.

However, where the sole reason for being unable to set aside a non-lodger debt is a delay by the customer's ex-partner in lodging their tax return, the taking of action to recover the non-lodger debt from the customer is an inappropriate outcome for the customer. If there is acrimony between the customer and the ex-partner, there is the possibility that the ex-partner may not co-operate with lodging their tax return as soon as possible.

This situation is addressed by amendments to the write off provisions in the Family Assistance Administration Act to enable recovery of the non-lodger debt to be suspended pending the lodgment of the ex-partner's tax return.

Explanation of the changes

Items 14 to 17 make the relevant amendments.

Section 95 of the Family Assistance Administration Act enables the Secretary to write off a debt (for a stated period or otherwise) where certain conditions are met. As a general proposition, if a debt is able to be recovered by withholding future payments (either ongoing, arrears or advances) or by setting off against an income tax refund, then the debt cannot be written off unless recovery would cause the customer severe financial hardship.

Item 16 inserts two new provisions into section 95 that set out additional circumstances in which certain debts can be written off.

New subsection 95(4A) applies to a debt that arises because of subsection 28(2) or 28(6) of the Family Assistance Administration Act, that is, an FTB non-lodger debt. An FTB non-lodger debt can be written off if the following conditions are satisfied:

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the claimant and partner (as referred to in subparagraph 28(1)(b)(iii)) cease to be members of the same couple more than two years after the end of the entitlement year;

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if the claimant was required to lodge a tax return for the entitlement year, the claimant has done so and the claimant's taxable income has been assessed under the relevant tax law;

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the claimant's ex-partner was required to lodge a tax return for the entitlement year but still has not done so by the time that the claimant and ex-partner separated.

New subsection 95(4B) applies to a debt that arises because of subsection 60D(2) of the Family Assistance Administration Act, that is, a CCB non-lodger debt. A CCB non-lodger debt can be written off if the following conditions are satisfied:

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the claimant and partner (as referred to in paragraph 60D(1)(b)) cease to be members of the same couple more than two years after the end of the entitlement year;

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if the claimant was required to lodge a tax return for the entitlement year, the claimant has done so and the claimant's taxable income has been assessed under the relevant tax law;

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the claimant's ex-partner was required to lodge a tax return for the entitlement year but still has not done so by the time that the claimant and ex-partner separated.

The write off would take effect as currently provided for in subsection 95(5) of the Family Assistance Administration Act - in practice, suspension of recovery action would commence on the date on which separation occurs. The write off would operate until such time as the ex-partner's actual income is known (ie, the ex-partner has lodged the relevant tax return and an assessment of income has been made by the Commissioner of Taxation).

Existing subsection 95(6) makes it clear that action to recover a debt that has been written off can recommence at any time. If the separated couple reconcile after the debt has been written off under the new provisions, then recovery of the debt can recommence under existing subsection 95(6).

Item 14 makes a consequential amendment to subsection 95(1) to ensure that write off is also available where new subsection 95(4A) or (4B) applies.

Item 15 makes a consequential amendment to subsection 95(2) to remove some words that become superfluous because of the amendment made by item 14.

Notes after items 15 and 16 insert appropriate headings to subsections 95(2), (5) and (6).

Item 17 provides that the amendments made by items 14 to 16 (write off of certain non-lodger debts) apply to the 2000-01 and later income years.

However, subitem 17(2) modifies the application of these amendments in relation to FTB non-lodger debts for 2000-01, to reflect the different rules that applied in respect of that income year.

For 2000-01, the relevant tax returns needed to be lodged by the end of the income year after the relevant income year in order to avoid loss of entitlement to payment of FTB in respect of the relevant income year. If the relevant tax returns were subsequently lodged, the customer could only be entitled to the lesser of the amount actually received in respect of the relevant income year or their entitlement - there was no capacity to pay a top-up in this situation.

For 2001-02 and subsequent years, the relevant tax returns still needed to be lodged by the end of the income year after the relevant income year in order to avoid loss of entitlement for the relevant income year. However, if the relevant tax returns were lodged before the end of two years after the relevant income year, the customer's full entitlement for the relevant income year could be restored. If the relevant tax returns were subsequently lodged, the customer could only be entitled to the lesser of the amount actually received in respect of the relevant income year or their entitlement based on actual income - there was no capacity to pay a top-up in this situation. The relevant amendments were contained in the Family Assistance Legislation Amendment (Extension of Time Limits) Act 2004.

Clarify meaning of 'partner'

Summary

The meaning of 'partner', as used in the non-lodger provision applicable to CCB will be clarified, consistent with the equivalent FTB provision. Partner will mean a person who was the customer's partner at the end of the second income year after the entitlement year and was also the customer's partner at some time in the entitlement year.

Background

Section 60D of the Family Assistance Administration Act provides a two-year time limit for a CCB customer and 'partner' to lodge their tax returns. After the end of the second lodgment year, if tax returns have not been lodged where required, a CCB 'non-lodger debt' may be raised equal to the amount of CCB above the minimum rate that was received during the entitlement year. If the outstanding tax returns are subsequently lodged, the non-lodger debt is set aside (through further variation of the customer's entitlement determination), and the normal reconciliation process occurs to determine whether the customer has a top-up or a debt.

The legislation is not precise about which 'partner' is being referred to in section 60D, noting that a person can have more than one partner in the course of the three year time span covered by the provision. This can be contrasted to section 28 of the Family Assistance Administration Act that clearly refers to the customer's partner at the 'particular time', provided he or she was also the customer's partner at some time in the relevant income year (the 'cancellation income year').

Amendments are made to clarify the meaning of 'partner' in section 60D, consistent with the meaning in section 28 of the Family Assistance Administration Act.

Explanation of the changes

Item 13 amends section 60D of the Family Assistance Administration Act to clarify the meaning of 'partner' as used in that provision. Partner will mean a person who was the claimant's partner at the end of the second income year following the particular income year, provided that the person was also the claimant's partner in the particular income year.

While section 60D has been reworked to accommodate this clarification, this is the only substantive change to the provision.

Rent assistance and claims for FTB for a past period

Summary

An amendment is made to ensure that eligibility for rent assistance under an FTB past period claim made in the second income year after the relevant income year is treated the same as eligibility for rent assistance under a claim made in the first year. The general effect is that an individual is only eligible for rent assistance for a past period if the individual claims fortnightly payments of FTB at the same time.

Background

When FTB was introduced, the policy for rent assistance in FTB was that an individual would need to claim fortnightly payments through Centrelink, rather than a lump sum through the Australian Taxation Office. The effect is that an individual can get rent assistance for a past period only if they also claim fortnightly payments of FTB at the same time.

In 2004, the family assistance law was amended to extend the time limit for claiming FTB by a further year. This allowed for a lump sum claim to be made by the end of the second lodgment year after the relevant income year.

Due to the extended time limit, a further amendment is needed to ensure that rent assistance eligibility for a past period claim made in the second lodgment year after the relevant income year is treated the same as a claim made in the first lodgment year.

Explanation of the changes

Items 2 and 3 make the relevant amendments.

Clause 13 of Schedule 1 to the Family Assistance Act sets out the eligibility rules for rent assistance. Under subclause 13(2), rent assistance is not available as part of a past period claim for FTB for the previous income year unless accompanied by an instalment claim.

Item 2 amends this provision to ensure that rent assistance is also not available as part of a claim for a past period that occurs in the second income year before the one in which the claim is made. This ensures that the eligibility rules for rent assistance on effective past period claims are consistent.

This amendment commences on 1 July 2005. Given the two-year time limit in which to make an effective past period claim, this amendment can apply in relation to a period that occurs in the 2003-04 income year and subsequent income years (item 3 refers). A past period claim for FTB for 2003-04 that is made during the second income year after 2003-04 will first occur from 1 July 2005.

Precluding FTB advance for child support debtor

Summary

This measure makes amendments to preclude a family tax benefit advance for certain child support debtors.

Background

The Child Support Legislation Amendment Act 2001 included amendments to allow certain child support debts to be recovered from the debtor's FTB. New section 227 of the Family Assistance Administration Act and new section 72AB of the Child Support (Registration and Collection) Act 1988 allow this recovery from the debtor's FTB by instalment or FTB for a past period.

However, none of the amendments allow similar deductions from an FTB advance, nor is an FTB advance precluded for a child support debtor. This is a weakness in the amendments because a debtor could undermine the debt recovery process by choosing to reduce his or her FTB by instalment entitlement into an FTB advance.

Accordingly, the amendments made by this Part will prevent a debtor from doing this by making an advance unavailable in these circumstances. This is equivalent to the current situation for people who owe a social security or family assistance debt.

However, an individual who has repaid a debt he or she may have had at the start of an FTB advance 'standard advance period' (which would have precluded the advance at that point) should be able to get an advance for the remaining period. This extra refinement is also addressed by these amendments.

Explanation of changes

Items 10 to 12 make minor amendments to preclude an FTB advance for certain child support debtors, as described under 'background' above.

Item 10, commencing on 1 January 2006, repeals current subsection 33(1A) of the Family Assistance Administration Act, and substitutes a new subsection (1A) to extend the coverage of paragraph 33(1)(d) in precluding an FTB advance. That will now apply, not only for the existing range of debtors covered by subsection (1A) (notably, family assistance and social security debtors), but also for certain child support debtors. These child support debtors are individuals who are currently having their FTB instalments reduced under section 227 of the Family Assistance Administration to recover debts as required under section 72AB of the Child Support (Registration and Collection) Act 1988.

Items 11 and 12, commencing on Royal Assent, insert a new subsection 33(2A) to alter the meaning of the individual's 'advance assessment day' for the purposes of the FTB advance entitlement in these circumstances. This will ensure that an individual who has repaid a debt he or she may have had at the start of an FTB advance 'standard advance period' (which would have precluded the advance at that point) will have access to an advance for the remaining period.

Order of reduction rule for FTB Part B

Summary

An order of reduction rule for FTB Part B will be introduced. The rule specifies the order in which the income test for FTB Part B affects the components of rate.

Background

An individual's Part B rate is calculated using the method statement set out in clause 29 of Schedule 1 if the individual is a member of a couple. The first step is to add together the individual's standard rate and the FTB Part B supplement - the result is the individual's 'maximum rate'. An income test is then applied to the maximum rate to arrive at the individual's Part B rate.

The legislation is silent on how the reduction for income is applied to the components of rate. Amendments are made to introduce a sequential order of reduction whereby any required reduction for income affects the individual's standard rate first and then, if necessary, the individual's FTB Part B supplement.

Explanation of the changes

Clause 29 of Schedule 1 to the Family Assistance Act sets out the overall rate calculation process for FTB Part B. Item 4 amends step 3 in the method statement in clause 29 to ensure that any reduction required under the Part B income test (the 'reduction for adjusted taxable income') affects the components of rate in the following order:

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standard rate;

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FTB Part B supplement.

The new sequential order of reduction rule for FTB Part B commences on 1 January 2005 (which coincides with the commencement date for the FTB Part B supplement).