House of Representatives

Explanatory Memorandum

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

Chapter 1 - Child care tax offset

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide a 30 per cent tax offset for 'out-of-pocket' child care expenses, that is, fees incurred for approved child care less child care benefit, up to a maximum of $4,000 per child.

1.2 This Schedule also makes consequential amendments to the Taxation Administration Act 1953 (ITAA 1953) to exclude the child care tax offset from the calculation of the rate of pay as you go (PAYG) instalments.

1.3 Consequential amendments are also made to the A New Tax System (Family Assistance) (Administration) Act 1999 to allow the Secretary to the Department of Family and Community Services (FaCS Secretary) to disclose information (including tax file numbers) to the Commissioner of Taxation (Commissioner) for the purposes of the child care tax offset.

1.4 All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

1.5 In the 2004 election policy statement Extra Assistance for Families , the Government announced a 30 per cent child care rebate on families' out-of-pocket child care costs. Further policy details were provided in the Treasurer's Press Release No. 108 of 20 December 2004.

Summary of new law

1.6 The amendments to the ITAA 1997 will provide taxpayers with an entitlement to a 30 per cent tax offset for their out-of-pocket child care costs, up to a maximum of $4,000 per child, where the taxpayer:

•

has been entitled to child care benefit for approved care provided in a week

•

has a 50 hour, or more than 50 hours, limit in that week or a 24 hour care limit in that week. For example, to be entitled to child care benefit for up to 50 hours per week, either the taxpayer and their partner must meet the child care benefit work/training/study test, or have an exemption from meeting the test, or they are covered under other provisions where there is no requirement to meet the work/training/study test.

1.7 The tax offset will be non-refundable such that it can only reduce a taxpayer's basic income tax liability to zero. If the amount of the tax offset exceeds the amount of income tax liability, the excess may be transferred to the taxpayer's spouse.

Comparison of key features of new law and current law

Detailed explanation of new law

1.8 Schedule 1 inserts a new Division into the ITAA 1997 to allow taxpayers a 30 per cent child care tax offset for out-of-pocket expenses, up to a maximum of $4,000 per child. The out-of-pocket expenses represent the difference between the child care fees incurred by a taxpayer and the child care benefit entitlement. [Schedule 1, item 2, section 61-460]

1.9 Child care benefit for approved care reduces the cost of child care for eligible taxpayers who use this type of care. Child care benefit is paid through the Family Assistance Office either as a lump sum after the end of the income year or by way of ongoing fee reductions through the approved child care service.

1.10 Taxpayers need to have been entitled to child care benefit for approved care provided in a week in which a limit of 50 hours, or more than 50 hours, or a 24 hour care limit applies. For example, to be entitled to child care benefit for 50 hours per week:

•

either the taxpayer and their partner meet the child care benefit work/training/study test

•

have an exemption from meeting the test

or

•

they are covered by other provisions where there is no requirement to meet the work/training/study test (such as when the child has a disability and carer allowance is paid to the parent).

1.11 The offset is non-refundable, but the excess may be transferred to the taxpayer's spouse in the instance that the taxpayer does not have sufficient tax liability to utilise the entire offset. The offset is to be claimed in the tax return for the income year subsequent to when the child care costs were incurred.

Example 1.1

Brendan and Sue both work (Brendan works full-time while Sue works part-time) and they have one child Rebecca. From 1 July 2004 Sue put Rebecca into approved child care for three days a week for 40 weeks of the year. The cost of the child care was $150 for the three days. The total cost for the year was $6,000 ($150 * 40 weeks).

Sue claimed child care benefit for 2004-05 as a lump sum in July 2005 and her entitlement was determined by the Family Assistance Office to be $2,000. Sue's entitlement to child care benefit has a 50 hour limit per week as both Sue and Brendan are working and hence satisfy the child care benefit work/training/study test.

Sue's entitlement to the child care tax offset for Rebecca is 30 per cent of her out-of-pocket expenses up to a maximum of $4,000. That is, 30 per cent of her approved child care fees less the child care benefit she received for the period. For the 2004-05 year this was:

30% * ($6,000 - $2,000) = $1,200


Sue claims $1,200 child care tax offset in her 2005-06 tax return.

1.12 The object of the child care tax offset is to assist families with the cost of approved child care. [Schedule 1, item, 2 , section 61-465]

Entitlement to the child care tax offset

1.13 An individual is entitled to the child care tax offset if they had at least one 'child care base week' of approved care in the previous income year (the child care base year is the year in which the child care costs were incurred). [Schedule 1, item 2, subsection 61-470(1)]

1.14 For a taxpayer to have a child care base week they must have been entitled to child care benefit for approved child care in that week. In addition, their limit of hours in that week must be 50 hours, or more than 50 hours or a 24 hour care limit. These limits are set out in section 54-56 of the A New Tax System (Family Assistance) Act 1999 . [Schedule 1, item 2, subsection 61-470(2)]

1.15 Circumstances where the taxpayer has a 50 hour limit for a week include:

•

when the taxpayer and their partner meet the child care benefit work/training/study test

or

•

have an exemption from meeting the test and are therefore deemed to meet the test; or there are other circumstances where the taxpayer has a 50 hour limit for a week regardless of whether the taxpayer has met the work/training/study test (such as when the child has a disability and carer allowance is paid to the parent).

Example 1.2

After the birth of Rebecca, Sue returns to full-time study from 1 July 2004 to complete her final year of her university course to improve her employment prospects. Again Sue puts Rebecca into approved child care for three days while she attends lectures and studies.

Assuming the same facts as in Example 1.1, except instead of working, Sue studies full time; Sue would be entitled to a child care tax offset of $1,200 in her 2005-06 tax return because she satisfies the 50 hour limit. Sue satisfies the 50 hour limit as she meets the work/training/study test as she is undertaking an education course to improve her employment prospects.

Example 1.3

Jade puts her disabled child Ben in approved child care for one day a week. Jade is not working and doesn't satisfy the work/training/study test, but is in receipt of carer allowance for Ben. Jade is also entitled to child care benefit. Jade would also be entitled to the child care tax offset because she satisfies the 50 hour limit as Jade receives carer allowance in respect of Ben.

Meaning of approved child care

1.16 'Approved child care' is care provided by a child care service that is approved under section 195 of the A New Tax System (Family Assistance) (Administration) Act 1999 . [Schedule 1, item 2, subsection 61-475(1)]

1.17 The following services can apply to the FaCS Secretary to become an approved child care centre: centre based long day care services, family day care services, in-home care services, occasional care services, and outside school hours care services.

1.18 Approved child care also includes absences under section 10 or 10A of the A New Tax System (Family Assistance) Act 1999 . This includes circumstances when the child is away due to illness and a medical certificate covering the illness is obtained from a medical practitioner, the child is attending pre-school, the child has a pupil free day, or an absence occurs in permitted circumstances as specified in a determination under subsection 11(1) of that Act. There is no limit on the number of these absences that can occur during a financial year for which a taxpayer can be entitled to approved child care benefit and as such be eligible for the child care tax offset. Other absences not included in the previous list are classified as permitted absence days. There is a limit of 30 permitted absence days per financial year. [Schedule 1, item 2, subsection 61-475(2)]

Example 1.4

Continuing Example 1.3, Jade's son Ben is sick and doesn't attend his one day a week of child care. Jade obtains a medical certificate for Ben's illness. Even though Ben doesn't physically attend child care for that day it is still classified as a day of approved child care as the absence is covered under section 10 of the A New Tax System (Family Assistance) Act 1999 .

Meaning of 'entitled to child care benefit' and 'entitlement to child care benefit'

1.19 The amount of the taxpayer's entitlement to child care benefit is determined by the FaCS Secretary. The amount of child care benefit can be paid as a lump sum after the end of the year or can be provided by way of fee reduction through the approved child care service. [Schedule 1, item 2, section 61-480]

Example 1.5

In Example 1.1 Sue was entitled to child care benefit of $2,000. Sue could either choose to receive child care benefit by way of fee reduction or as a lump sum.

If Sue had decided to have fee reduction, the amount she would have paid to her child care service would have been reduced by $50 per week (fee reduction = $2,000/40 weeks = $50 per week). Thus Sue would have paid her child care service $100 each week for child care costs (total weekly fees of $150 less child care benefit of $50).

1.20 The amount of child care benefit is determined by the FaCS Secretary in respect of an income year. If the taxpayer does not have a determination of entitlement but has a determination of conditional eligibility and has received reduced fees, the taxpayer is still recognised as having an entitlement to child care benefit for the purposes of the child care tax offset. [Schedule 1, item 2, subsection 61-480(3)]

1.21 When a taxpayer receives a determination of entitlement for an income year, the amount of the taxpayer's entitlement to child care benefit is taken to be, and always to be the amount as determined. A taxpayer's entitlement to child care benefit is finalised once the FaCS Secretary has received child care usage data from the child care service and the family's adjusted taxable income from tax returns. [Schedule 1, item 2, subsection 61-480(4)]

Example 1.6

In Example 1.5 if Sue had decided to have fee reduction she would have had a fee reduction of $2,000. After the end of the year Sue's entitlement to child care benefit would be determined. This is done on the basis of child care usage data and her family's actual adjusted taxable income from tax returns. If Sue's child care benefit entitlement was determined to only be $1,800 then, for the purposes of the child care tax offset, Sue's entitlement to child care benefit is taken to be, and always to have been, $1,800.

Calculating the amount of the child care tax offset

1.22 The amount of the child care tax offset is calculated using the following five steps:

Step 1

For each child to whom you are entitled to the child care tax offset work out the amounts in accordance with steps 2 to 4.

Step 2

Work out the amount of approved child care fees for the child in each child care base week in the child care base year (in order for a taxpayer to have a child care base week they must have been entitled to child care benefit for approved care in that week and they must have had a 50 hour limit, or more than 50 hour, limit in that week or a 24 hour care limit in that week).

Step 3

Work out the amount of child care benefit you were entitled to for each child care base week in the year for that child.

Step 4

Work out the lesser of:

(a)

30% * (step 2 - step 3)

(b)

the 'child care offset limit' for the year. For the 2004-05 year the limit is $4,000. For later years this limit is subject to indexation [Schedule 1, item 2, section 61-495] .

Step 5

Add up the amount of child care tax offset for each child. The total is the child care tax offset for the year.

[Schedule 1, item 2, section 61-485]

Example 1.7

James has two children, Lucy and Simone who are both in an approved long day care centre. Lucy is in care for 50 hours per week for 40 weeks per year, while Simone is in care for 40 hours per week for 40 weeks per year. James incurred child care costs in 2004-05 and received the minimum rate of child care benefit of $0.471 per hour. The child care centre charges $8 per hour.

Step 1

For James to work out the amount Lucy contributes to his child care tax offset he would need to work out the following amounts:

Step 2

James' child care fees for Lucy would be:

total child care fees	= $8 per hour * 50 hours * 40 weeks
	= $16,000

Step 3

James' child care benefit entitlement for Lucy would be:

child care benefit	= minimum rate * hours of care * weeks of care
child care benefit	= $0.471 per hour * 50 hours * 40 weeks
	= $942

Step 4

James' entitlement to the offset for Lucy would be as follows:

total child care fees (step 2):	$16,000.00
less , child care benefit (step 3):	$ 942.00
net expenses after child care benefit (step 2 - step 3):	$15,058.00
30 per cent of net expenses after child care benefit:	$ 4,517.40
child offset for Lucy:	$ 4,000.00

Step 1

For James to work out the amount Simone contributes to his child care tax offset he would need to work out the following amounts:

Step 2

James' child care fees for Simone would be:

total child care fees	= $8 per hour * 40 hours * 40 weeks
	= $12,800

Step 3

James' entitlement for child care benefit for Simone would be:

child care benefit	= minimum rate * hours of care * weeks of care
child care benefit	= $0.471 per hour * 40 hours * 40 weeks
	= $753.60

Step 4

James' entitlement to the offset for Simone would be as follows:

total child care fees (step 2):	$12,800.00
child care benefit (step 3):	$ 753.60
net expenses after child care benefit (step 2 - step 3):	$12,046.40
30 per cent of net expenses after child care benefit:	$ 3,613.92
child offset for Simone	$ 3,614.00

Step 5

Therefore James would be entitled to a total offset of $7,614 ($4,000 for Lucy and $3,614 for Simone) claimable in his 2005-06 tax return.

Amount of approved child care fees

1.23 The amount of 'approved child care fees' is the total amount of fees incurred by a taxpayer and their partner for each child care base week [Schedule 1, item 2, subsection 61-490(1)] . It does not include separate fees itemised on the taxpayer's receipt from their child care service, for example excursions, that are charged in addition to the total child care fee.

1.24 In the instance where a taxpayer and their partner are both child care benefit claimants for the one child in the same week, the taxpayer cannot include the fees incurred by their partner for those periods of care for which the taxpayer was not entitled to child care benefit. [Schedule 1, item 2, subsection 61-490(2)]

Example 1.8

Sue and Brendan have their child Rebecca in an approved long day care centre for three days a week and an approved family day care centre the remaining two days a week.

Brendan and Sue have arranged their child care so that Sue receives child care benefit for the long day care centre and Brendan receives child care benefit for the family day care centre.

Sue's approved child care fees are only those that relate to care provided in the long day care centre. That is, Sue cannot claim the fees Brendan has incurred for the costs associated with the family day care centre.

Brendan's approved child care fees are only those that relate to care provided in the family day centre. That is, Brendan cannot claim the fees Sue has incurred for the costs associated with the long day care centre.

1.25 For those taxpayers who choose to receive child care benefit through reduced fees the amount of their approved child care fees are those fees that would have been incurred without the fee reduction. [Schedule 1, item 2, subsection 61-490(3)]

Example 1.9

In Example 1.5 Sue received child care benefit through reduced weekly fees. Sue's fees were reduced by $50. Sue would have paid $150 each week to her child care service in the absence of her receiving child care benefit. Sue's approved fees for the year were the total of the fees for all child care base weeks that would have been incurred if the fees had not been reduced throughout the year by child care benefit. That is, over 40 weeks Sue's approved fees were $6,000 (40 weeks * $150 per week).

Child care offset limit

1.26 The child care tax offset is claimable up to a maximum per child limit. For fees incurred in 2004-05, the maximum per child limit is $4,000. The limit is indexed each year in line with movements in the consumer price index. The relevant year to apply the change in the consumer price index is the child care base year, that is, the year in which the child care costs were incurred. [Schedule 1, item 2, section 61-495]

Entitlement to transfer

1.27 Where a person cannot utilise all of their child care tax offset (because they have insufficient tax liability) they can transfer the unused portion of the offset to the person who was their spouse at 30 June of the offset year. [Schedule 1, item 2, subsections 61-496(1 ) and ( 2)]

1.28 Where a transfer is made the transferee becomes entitled to the excess that is transferred and the transferor is no longer entitled to the excess transferred. Where a transfer is made it cannot be revoked. This means that the transferor cannot change their decision to transfer the excess of the offset to their spouse. [Schedule 1, item 2, subsections 61-496(3 ) and ( 4)]

Form of transfer

1.29 An election to transfer the unused portion of the child care tax offset must be in a form approved by the Commissioner and include the tax file number of the person transferring the offset, the tax file number of that person's spouse and the consent of their spouse to the disclosure of his or her tax file number on the form and consent for the transfer to occur. [Schedule 1, item 2, section 61-497]

Example 1.10

James nominated on his tax return to transfer any unused child care tax offset to his spouse Nicole. In order for this transfer to occur Nicole consented to the transfer and the provision of her tax file number on James' tax return.

James has a tax liability of $6,972, a child care tax offset of $7,614, a private health insurance offset of $1,000 and a medical expenses offset of $500. James will utilise $500 of medical expenses offset and the first $6,472 of the child care tax offset.

Thus, the remaining $1,142 of child care tax offset will be transferred to Nicole to reduce her tax liability. James will receive the full refund of $1,000 for the private health insurance offset (assuming he has not claimed the private health insurance offset throughout the year).

1.30 Where a taxpayer is not required to lodge a tax return they can transfer the child care tax offset to their spouse. The person with the entitlement to the offset (ie the person who is not required to lodge a tax return) needs to complete a form approved by the Commissioner that transfers the entitlement to their spouse (subject to the person receiving their spouse's consent).

Application and transitional provisions

1.31 The amendments made by Schedule 1 apply to assessments for income years commencing on or after 1 July 2005. [Schedule 1, item 14]

Consequential amendments

New definitions

1.32 The following new definitions are inserted into the Dictionary as a result of the child care tax offset:

•

Approved child care.

•

Approved child care fees.

•

Child care base week.

•

Child care offset limit.

•

Entitled to child care benefit.

•

Entitlement to child care benefit.

[Schedule 1, items 5 to 10, subsection 995-1(1)]

Amendments to the Income Tax Assessment Act 1997

1.33 Section 13-1 of the ITAA 1997 which lists tax offsets is amended to include a reference to the child care tax offset. [Schedule 1, item 1, section 13-1]

1.34 Subsection 65-25(2) of the ITAA 1997 is amended to include the child care tax offset in the priority of tax offsets table for the purposes of applying this offset and the carry forward tax offset rules. The child care tax offset will be applied before land care and water facility tax offsets, foreign tax credits and refundable tax offsets but after all other tax offsets. [Schedule 1, item 3, subsection 65-25(2)]

1.35 Section 960-265 of the ITAA 1997 is amended to include a reference to the child care tax offset limit in the table which lists the provisions for which indexation is relevant. [Schedule 1, item 4, section 960-265]

Amendments to the Taxation Administration Act 1953

1.36 Schedule 1 also amends sections 45-340 and 45-375 of the TAA 1953, which deal with PAYG instalments. The amendments ensure that a person's entitlement to the child care tax offset is not taken into account in the calculation of PAYG instalments. To achieve this, the offset will be disregarded in determining the 'adjusted tax' on 'adjusted taxable income' or on 'adjusted withholding income', and it will be disregarded in determining the 'adjusted assessed tax' on 'adjusted assessed taxable income'. [Schedule 1, items 12 and 13, sections 45-340 and 45-375]

1.37 This amendment is being made because it is not necessarily reasonable to assume that a taxpayer who receives a certain amount of offset in one year will have the same entitlement to the offset in the next year. PAYG instalment calculations or variations which take the offset from an earlier year into account would not necessarily be an accurate reflection of tax liability for the relevant year and might result in an over- or an under-payment of instalments.

1.38 On the assumption that the child care tax offset provisions commence after the mature age worker tax offset provisions (contained in Tax Laws Amendment (2005 Measures No. 1) Bill 2005) the necessary amendments to refer to the child care tax offset would require the insertion of a new paragraph (aaaaa) in step 1 to section 45-340 of the TAA 1953 and the insertion of a new paragraph (aaaa) in step 1 to section 45-375 of the TAA 1953. To overcome this complex numbering, step 1 of the method statement in both sections 45-340 and 45-375 is repealed and renumbered (re-ordered) in accordance with the numerical order of the provisions referred to in the ITAA 1997 and the Income Tax Assessment Act 1936 .

Amendments to the A New Tax System (Family Assistance) (Administration) Act 1999

1.39 The FaCS Secretary may, for the purposes of the child care tax offset, provide the Commissioner with information about people, including their tax file numbers, which has been acquired by an officer under the family assistance law. Information provided on this basis can be used only for those purposes. [Schedule 1, item 11, section 169A]

1.40 Section 164 of the A New Tax System (Family Assistance) (Administration) Act 1999 prohibits the unauthorised use of protected information. The inclusion of section 169A authorises the provision of information for the purposes of administering the child care tax offset. The onus of proving, for the purposes of section 164, that a disclosure was not authorised under section 169A rests with the prosecution.