Explanatory Memorandum
(Circulated by the authority of the Minister for Families, Community Services and Indigenous Affairs, the Hon Mal Brough MP)Schedule 1 - FTB Part A income free area
Summary
From 1 July 2006, the lower income free area for FTB Part A will be further increased to $40,000. This amount will then be indexed in accordance with movements in the Consumer Price Index (CPI) on 1 July 2007 and each subsequent 1 July.
Background
An individual's annual rate of FTB is comprised of a Part A rate and a Part B rate. FTB Part A can be worked out using one of two methods. Method 1 is used where the individual's adjusted taxable income does not exceed the higher income free area or where either the individual or the individual's partner is receiving certain income support payments. Method 2 is used where the individual's adjusted taxable income exceeds the higher income free area and neither the individual nor the individual's partner is receiving certain income support payments.
The rate calculation process for deriving a method 1 rate is set out in the method statement in clause 3 of Schedule 1 to the Family Assistance Act. There are various components of rate that make up an individual's 'maximum rate'. An income test is then applied to determine whether the individual's maximum rate needs to be reduced because of income. The maintenance income test then applies to reduce the maximum rate further (if applicable) to the 'base rate'.
The income test is set out in the method statement in clause 18 of Schedule 1 to the Family Assistance Act. An individual's adjusted taxable income above the 'income free area' is used to work out the individual's 'income excess'. The income excess is then subject to a 20% taper to arrive at the individual's 'reduction for adjusted taxable income', which, in turn, reduces the individual's maximum rate.
Clause 19 of Schedule 1 defines an individual's income free area. The income free area is indexed every 1 July in accordance with movements in the CPI. The relevant indexation provisions are table item 13 in each of clauses 2 and 3 of Schedule 4 to the Family Assistance Act.
From 1 July 2005, the income free area is $33,361. This is the amount a family can earn in 2005-06 before their FTB is reduced in accordance with the income test taper rules.
Amendments were made by Schedule 1 to the Family Assistance, Social Security and Veterans' Affairs Legislation Amendment (2005 Budget and Other Measures) Act 2006 to increase the FTB Part A income free area to $37,500 from 1 July 2006. This increase will now not happen.
Instead, the FTB Part A income free area will be increased to the higher amount of $40,000 from 1 July 2006. This new higher amount of $40,000 will then be subject to indexation in accordance with movements in the CPI on 1 July 2007 and each subsequent 1 July.
Explanation of the changes
Item 1 replaces the existing amount of the income free area in clause 19 of Schedule 1 to the Family Assistance Act with the amount of $40,000. In accordance with subitem 3(1) , this new amount is applicable in relation to FTB for the 2006-07 income year and later income years.
Item 2 makes a technical amendment to the relevant indexation provision. In accordance with subitem 3(2) , this change applies in relation to FTB for the 2007-08 income year (acknowledging that the new amount of the income free area is first indexed on 1 July 2007) and later income years.
Item 4 is a transitional provision, ensuring that the income free area is not indexed on 1 July 2006 (because it is being replaced with a new and higher amount). Indexation will then occur on 1 July 2007 when the new amount of $40,000 will be indexed in accordance with movements in the CPI and each subsequent 1 July.
Item 5 repeals Schedule 1 to the Family Assistance, Social Security and Veterans' Affairs Legislation Amendment (2005 Budget and Other Measures) Act 2006 which would have increased the FTB Part A income free area to $37,500 from 1 July 2006. Instead, this Schedule increases the income free area to the higher amount of $40,000, from 1 July 2006.