House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Families, Community Services and Indigenous Affairs, the Hon Mal Brough MP)

Schedule 5 - Maintenance income test

Summary

This Schedule amends the maintenance income test (MIT) provisions in the Family Assistance Act.

The amendments made by Part 1 clarify the meaning of 'amount received' and 'amount payable' in the formula used to work out the notional amount of maintenance income an individual is taken to have received under a child support agreement or court order where there is an underpayment of child support that is registered for collection by the Child Support Agency (CSA).

The amendments made by Part 2 clarify that maintenance income received by a payee for one or more children will reduce the payee's amount of FTB Part A above the base rate for those children only.

Part 3 makes amendments that relate specifically to the maintenance income credit (MIC) provisions. These amendments:

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ensure that the benefits of the MIC are available only where FTB is claimed through Centrelink or Medicare Australia and not through the tax system from the Australian Taxation Office (ATO);

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refine the MIC provisions so that they operate as intended; and

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reflect the new FTB treatment of child support agreements and lump sum child support under the child support reforms in the MIC provisions.

Part 1 - Notional assessments

Background

As part of the recent child support reforms, the MIT provisions for FTB and relevant definitions are being modified from 1 July 2008. For child support agreements, or court orders for non-periodic amounts that reduce a child support liability, the changes ensure that an individual's child maintenance is not determined on the basis of the amount actually received in the relevant income year (as is currently the case). Rather, the payee's entitlement to FTB Part A will be determined on the basis of the amount of child support that would be transferred under an administrative assessment if the agreement or order had not been made (that is, the individual's notional assessment).

New clause 20B of Schedule 1 to the Family Assistance Act, as inserted by Schedule 5 to the New Formula Act, applies where child maintenance is payable to an individual under a child support agreement or a court order and there is, in relation to that agreement or order, a notional assessment of the annual rate of child support that would be payable to the individual for a child if worked out under the child support formula in Part 5 of the Child Support Assessment Act.

Subclause 20B(3) deals with the situation where the amount of child support received by the individual is less than the amount payable under the agreement or order. The formula in this provision ensures that the amount deemed to be the amount of child support received for the child for the period would be the proportion of the notional assessed amount commensurate with the proportion of the amount of child support payable that was received.

This formula does not currently take account of reductions in the amount payable under an agreement or order due to non-periodic payments or amounts credited against the amount payable under an administrative assessment in the case of lump sum payments. Amendments are made to address these situations.

Explanation of the changes

Item 1 inserts new subclauses 20B(3A) and 20B(3B) into Schedule 1 to the Family Assistance Act.

New subclause 20B(3A) modifies the meaning of 'amount received' in the formula in subclause 20B(3).

In the case of a non-periodic payments agreement or order, the amount received by the individual under the agreement or order for the child for the period is taken to include the amount by which the annual rate of child support payable is reduced for the period under the agreement or order.

A 'non-periodic payments agreement or order' is defined in new subclause 20B(8), inserted by item 2 , to mean:

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an agreement containing non-periodic payment provisions; or

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a court order made under section 124 of the Child Support Assessment Act including a statement that the annual rate of child support payable under an administrative assessment is to be reduced by the child support ordered to be provided by the liable parent.

If the agreement or order is also a lump sum payments agreement or order, the amount received by the individual under the agreement or order for the child for the period is taken to include the total amount of the lump sum payment that is credited for each day in the period under section 69A of the Child Support Registration and Collection Act against the amount payable under the liability under the agreement or order.

A 'lump sum payments agreement or order' is defined in new subclause 20B(8), inserted by item 2 , to mean:

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an agreement containing lump sum payment provisions; or

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a court order under section 123A of the Child Support Assessment Act.

New subclause 20B(3B) modifies the meaning of 'amount payable' in the formula in subclause 20B(3).

In the case of a non-periodic payments agreement or order, the amount payable to the individual under the agreement or order for the child for the period is taken to include the amount by which the annual rate of child support payable is reduced for the period under the agreement or order. New subclause 20B(8) defines the term 'non-periodic payments agreement or order' in the manner described above.

As a lump sum payment is credited under section 69A of the Child Support Registration and Collection Act rather than reducing the amount payable to an individual, a lump sum payments agreement or order does not need to be addressed when considering the meaning of 'amount payable'.

These amendments commence on 1 July 2008.

Examples of how these amendments work where there are non-periodic reductions (example 1), and crediting of a lump sum payment (example 2), are shown below.

Example 1

Agreement is for periodic payments, plus non-periodic payment provisions that reduce annual rate payable under agreement by 50 per cent. After reduction, the remaining amount payable is CSA collection.

The relevant amounts for the income year are as follows:

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Notional assessed amount = $5,000

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Amount payable under agreement (before non-periodic reduction) = $4,000

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Non-periodic reduction amount = $4,000 x 50% = $2,000

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Amount payable under agreement (after reduction) = $4,000 - $2,000 = $2,000

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CSA collection amount received = $1,000

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Amount received under agreement (including reduction amount) = $1,000 + $2,000 = $3,000

Notional amount paid

[Amount received (including reduction amount) / Amount payable (including reduction amount)] x Notional assessed amount =

($3,000 / $4,000) x $5,000 = $ 3,750

Example 2

Agreement is for periodic payments, plus lump sum payment that is to be credited against 50 per cent of amount payable under agreement. After crediting, the remaining amount payable is CSA collection.

The relevant amounts for the income year are as follows:

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Notional assessed amount = $5,000

•

Amount payable under agreement = $4,000

•

Amount credited = $4000 x 50% = $2,000

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CSA collection amount received = $1,000

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Amount received under agreement (including amount credited) = $1,000 + $2,000 = $3,000

Notional amount paid

[Amount received (including amount credited) / Amount payable] x Notional assessed amount =

($3,000 / $4,000) x $5,000 = $ 3,750

Part 2 - Maintenance income ceiling

Background

As part of the recent child support reforms, the MIT provisions are amended from 1 July 2008 to ensure that maintenance income received by a payee for one or more children would reduce the payee's amount of FTB Part A above the base rate, including any rent assistance, for those children only. This is done by introducing a maintenance income ceiling that represents the amount of maintenance income that limits the maximum reduction under the MIT to the children for whom maintenance income is paid. Any amounts paid in excess of the ceiling are disregarded for the purposes of applying the MIT.

New clauses 24F and 24M of Schedule 1 to the Family Assistance Act, inserted by Schedule 8 to the New Formula Act, state when the new maintenance income ceiling provisions do not apply. These provisions currently refer to situations where there is an entitlement to maintenance income from one payer only for all of the FTB children in a household. However, it is possible for the individual to have a combination of FTB children and regular care children, and therefore to receive maintenance income for the FTB children only, and not for all the children in the household who attract payment of FTB. (A regular care child who is also a rent assistance child can attract payment of FTB in the form of rent assistance and is relevant in working out the amount of rent assistance to which the individual is eligible.)

This scenario needs to be accounted for in the maintenance income ceiling provisions so that the reduction under the MIT is limited to the children for whom maintenance income is paid.

Explanation of the changes

Items 3 and 4 amend clauses 24F and 24M respectively to include an additional condition that the individual does not have a regular care child who is also a rent assistance child. The effect is that the maintenance income ceiling provisions will not apply where there is an entitlement to maintenance income from one payer for all FTB children in the household and the individual has no regular care children who are also rent assistance children.

These changes commence on 1 July 2008.

Part 3 - Maintenance income credit

Background

An individual who is entitled to maintenance income that is registered for collection by the CSA but who does not receive the correct amount of maintenance when it is due may accrue a MIC. The individual must be eligible for FTB, or the partner of an individual who is eligible for FTB, for an accrual to occur. Accruals to the MIC represent the unused amount of the maintenance income free area (MIFA) under the MIT for FTB Part A. Before introduction of the MIC, any unused MIFA could not be carried forward from one year to the next, thereby disadvantaging families who receive child support late.

Under the MIT, any maintenance received in the relevant income year above the MIFA reduces a customer's FTB Part A by 50 cents in the dollar until the 'base rate' is reached. When the person receives arrears of maintenance income, the MIC is drawn upon to reduce the amount of arrears counted under the MIT.

The beneficial effect of the MIC for a given income year applies on income reconciliation after the end of that income year. This means that the MIC will first be applied after 1 July 2007, when reconciliation for the 2006-07 income year occurs. However, the earliest date for accrual to a MIC balance is the later of 1 July 2000 or when the individual or their partner became eligible for FTB.

The rules relating to the MIC are set out in Subdivision B of Division 5 of Part 2 of Schedule 1 to the Family Assistance Act (clauses 24A to 24E of Schedule 1 refer).

FTB claims through the tax system and the MIC

In broad terms, families may receive their FTB payments by fortnightly instalments or an annual lump sum through Centrelink or Medicare Australia, or as an annual lump sum or reduced tax withholdings through the tax system.

To implement the MIC measure into the tax system, a significant number of changes would be required to ATO IT systems and the FTB tax claim form and instructions. Fewer than 400 families a year who claim their FTB through the tax system are estimated to receive arrears of child support and potentially benefit from the MIC. Given the relatively small number of families, it is more cost effective to have these families claim their FTB through Centrelink or Medicare Australia. Amendments are therefore made to ensure that the benefits of the MIC are available only where an individual claims FTB from Centrelink or Medicare Australia and not through the tax system with the ATO. Any potential ATO claimants from July 2007 will be advised that they must claim FTB for 2006-07 through Centrelink or Medicare Australia to benefit from the MIC.

While this approach limits the FTB delivery choices for these families, other families claiming rent assistance, health care cards and income support payments are already required to claim FTB from Centrelink or Medicare Australia.

Minor amendments to the maintenance income credit provisions

The process of developing the IT system for the MIC and other implementation tasks have identified a number of changes and refinements that are required to the MIC provisions so that they work in the required manner.

Changes are required to ensure that a MIC balance for a registered entitlement at the end of an income year (starting with 30 June 2006) cannot exceed the total arrears owing from that registered entitlement at that time. The existing provisions refer to a MIC balance 'at any particular time'.

Further rounding and annualisation rules are required.

The MIC rules also need to take account of the situation where the same entitlement to receive maintenance income may be a registered entitlement for part of an income year and not a registered entitlement for a different part of the same income year (that is, where there is a mix of CSA and private collection methods in the same income year).

Child support agreements and lump sum child support and the MIC

As part of the recent child support reforms, the MIT provisions for FTB and relevant definitions are being modified from 1 July 2008. For child support agreements, or court orders for non-periodic amounts that reduce the child support liability, the changes ensure that an individual's child maintenance is not determined on the basis of the amount actually received in the relevant income year (as is currently the case). Rather, the payee's entitlement to FTB Part A will be determined on the basis of the amount of child support that would be transferred under an administrative assessment if the agreement or order had not been made (that is, the individual's notional assessment).

Consequential amendments are required to the MIC provisions for cases involving child support agreements or orders where there is a notional assessment of child support relating to the agreement or order. The intention is that the amount of child maintenance that is due to an individual would not be determined on the basis of the amount actually due in the relevant income year but rather on the notional assessment.

Explanation of the changes

Division 1 - Amendments commencing on 1 July 2006

FTB claims through the tax system and the MIC

There are three key elements in the MIC provisions: accrual, depletion, and disregarding. MIC balances, including rules around accruals and depletions, are dealt with in clauses 24A to 24E of Schedule 1 to the Family Assistance Act. The amount by which a MIC balance is depleted in accordance with clause 24E is then disregarded in working out the individual's annualised amount of maintenance income in accordance with paragraph (c) of step 1 of the method statement in clause 20 of Schedule 1.

This measure relates to the 'disregarding' aspect of the MIC provisions only, and not to accruals or depletions. The intention is that a person should not have any arrears disregarded under paragraph (c) of step 1 of clause 20 for a period in a particular income year if the person's claim for FTB for that period is a claim made with the ATO. However, the person could still have an accrual or depletion for that year. Those aspects could impact on the application of the MIC provisions for a subsequent year if the person later claims through Centrelink or Medicare Australia.

It would be possible to satisfy the MIC disregarding for part of an income year and not satisfy it for another period in the same income year. This could happen where, for example, the person was an instalment claimant for the first part of the year but swapped to being an ATO claimant for the later part of the same income year.

Item 5 inserts new subclause 20(3) into Schedule 1. This new provision ensures that the disregard in paragraph (c) of the method statement in clause 20 of Schedule 1 does not apply to an amount received by the individual or their partner if the MIT is applied in relation to a claim for FTB for a past period that falls wholly within that year and the claim is in a form that has been approved by an officer of the ATO for the purposes of subsection 7(2) of the Family Assistance Administration Act (that is, the claim is an FTB tax claim).

Consistent with the commencement of the MIC measure, this amendment is taken to have commenced on 1 July 2006 and applies to FTB for the 2006-07 income year and later income years ( item 6 refers). As the benefits of the MIC on FTB are available on income reconciliation (after the relevant reconciliation conditions have been satisfied), this means that families will first benefit from the MIC from July 2007 for the 2006-07 income year. The amendment will therefore not have an adverse retrospective effect on families.

Minor amendments to the MIC

Subclause 24A(2) of Schedule 1 to the Family Assistance Act currently states that a MIC balance for a registered entitlement 'at any particular time' cannot exceed the total arrears owing from that registered entitlement.

The first income year for which the beneficial effect of the MIC (that is, disregarding the amount of arrears depleted from a MIC balance) can be applied is 2006-07. It would be unnecessary and administratively difficult to determine the total arrears owing at any time throughout the previous income years between 1 July 2000 and 30 June 2006. A comparison based on the amount at the end of 30 June 2006 will ensure the intended MIC balance applies before the start of 2006-07 and any depletion that may occur for that year. Comparisons based on the amounts at the end of each subsequent 30 June will ensure the intended MIC balance applies before the start of subsequent income years.

Item 7 therefore amends subclause 24A(2) to ensure that the relevant comparison occurs at the end of an income year.

Item 8 is an application provision which ensures that the comparisons under subclause 24A(2) are based on the total arrears owing at the end of 30 June 2006, and the total arrears owing at the end of each subsequent income year (that is, 30 June 2007, 30 June 2008, etc). The total arrears owing at the end of 30 June 2006 is relevant for the purposes of applying the MIC for 2006-07 which occurs on income reconciliation after July 2007. The change is therefore not retrospective in its effect on families. As subclause 24A(2) can reduce the MIC balance, and the amendment will restrict the comparison under this provision to the end of an income year rather than at any time, any impact of the change can only be beneficial.

Where the conditions in clause 24B of Schedule 1 are met, an individual can accrue an amount, for a day in an income year, to their MIC balance for a registered entitlement. The amount of accrual is worked out under clause 24C. In broad terms, the amount of accrual will equal the amount of the maintenance income free area that would have been used if the 'correct' amount of maintenance income had been received when due.

The method statement at the end of subclause 24C(1) applies where the individual has one registered entitlement (and therefore only one MIC balance) and the individual's partner (if any) does not have a registered entitlement. The method statement at the end of subclause 24C(2) applies where there are multiple registered entitlements (and therefore multiple MIC balances) and enables the accrual amount determined under the method statement in subclause 24C(1) to be apportioned between the relevant MIC balances on an equal basis, subject to a 'daily cap'.

Under step 4 of the method statement at the end of subclause 24C(1), the amount worked out under step 3 is required to be divided by 365 to arrive at a daily amount which is the amount that accrues to the MIC of the individual for the relevant day(s). Item 9 inserts a rounding rule into step 4 so that the result is rounded to the nearest cent (rounding 0.5 cents upwards).

The first step in the method statement at the end of subclause 24C(2) is to work out a daily cap for each relevant MIC balance. The daily cap is then defined by reference to the amount due in an income year and the maintenance income received in that year.

The calculation required by step 1 works as required in cases where the registered entitlement to which the balance relates covers the whole income year. However, this is not the case where the registered entitlement covers only part of an income year. In these cases, the amount due in an income year from the registered entitlement and the amount of maintenance income received in the income year from the registered entitlement need to be annualised, consistent with the annual nature of the MIT into which the MIC provisions link (see step 1 of the method statement in clause 20 of Schedule 1 to the Family Assistance Act).

Items 10 reworks step 1 in the method statement at the end of subclause 24C(2). In working out the daily cap for each relevant balance under new step 1, the amount due in an income year from a registered entitlement is the annualised amount mentioned in paragraph 24D(1)(a). Similarly, the amount of maintenance income received in an income is annualised in accordance with the formula in new subclause 24C(4), inserted by item 12 .

The daily cap for a relevant balance (where there are several registered entitlements and therefore more than one relevant balance) is then worked out as the excess of the annualised amount of maintenance income due in the year from the registered entitlement over the annualised amount of maintenance income received from the same entitlement, divided by 365. The amount of accrual to each relevant balance is then worked out applying apportionment rules and adding together the amounts distributed under those rules as required by step 5.

Items 10 and 11 insert rounding rules for the amounts arrived at under steps 1 and 5 of the method statement at the end of subclause 24C(2). These amounts are rounded to the nearest cent (rounding 0.5 cents upwards).

Item 13 makes a minor technical amendment to paragraph 24D(1)(a) of Schedule 1 to the Family Assistance Act to make it clear that the amounts referred to are annualised amounts. These amounts are annualised using the formula in subclause 24D(2).

Consistent with the commencement of the MIC measure, the amendments made by items 9 to 13 are taken to have commenced on 1 July 2006. As these changes relate to accruals to a MIC balance, the amendments apply to FTB for the 2000-01 income year and later income years ( item 14 refers). Again, this is consistent with the application of the MIC accrual rules originally inserted into Schedule 1 to the Family Assistance Act. As the benefits of the MIC on FTB are available on income reconciliation (after the relevant reconciliation conditions have been satisfied), families will first benefit from the MIC from July 2007 for the 2006-07 income year. The changes will therefore not have a retrospective adverse effect on families.

Division 2 - Amendments commencing on 1 July 2007

This Division contains amendments to the MIC provisions to take account of cases where the same entitlement to receive maintenance income is a 'registered entitlement' (as defined in subsection 3(1) of the Family Assistance Act) for part of an income year, and is not a 'registered entitlement' for part of the same income year. This arises when the method of collection swaps during an income year between CSA collection and private collection of the same entitlement.

Any accrual to a MIC balance for a registered entitlement should only apply for the days in the income year that the entitlement is a registered entitlement (that is, CSA collection). The current provisions correctly reflect this.

However, the calculation of an annualised amount due for a registered entitlement that has a mix of CSA and private collection methods in an income year should combine the amount due in the income year under both CSA and private collection. Similarly, the number of days in the income year covered by the registered entitlement should count all the days in that year covered by CSA and private collection for that entitlement. This is because the annualised amount due should be consistent with how the annualised amount of maintenance income is calculated. Annualised maintenance income for a mixed collection method entitlement combines the amount received in the income year from both CSA and private collection, and the relevant period under clause 20A for calculating annualised maintenance income from the entitlement covers both CSA and private collection.

Item 21 inserts new subclause 24D(5) that defines 'private collection entitlement'. A private collection entitlement of an individual means an individual's entitlement to receive maintenance income from a payer where the payer's liability is a registrable maintenance liability but not an enforceable maintenance liability. Under new subclause 24D(4), a private collection entitlement is related to an individual's registered entitlement if the two relate to the same registrable maintenance liability (that is, the same liability has a mix of CSA and private collection).

This new concept of a related private collection entitlement is then incorporated as appropriate into step 1 in the method statement at the end of subclause 24C(2), new subclause 24C(4) (as inserted by Division 1 of Part 3 of this Schedule), paragraph 24D(1)(a) and subclauses 24D(2) and (3). The relevant amendments are made by items 15 to 20 .

The amendments made by Division 2 commence on 1 July 2007 and apply to FTB for the 2007-08 income year and later income years ( item 22 refers).

An example of how these changes would work is set out below.

Example

An individual is entitled to receive maintenance income under a maintenance liability for the whole of an income year. The individual has CSA collection of the liability for the first six months of the income year (184 days), and private collection of the liability for the second six months (181 days). The amount due in the income year from CSA collection of the liability is $2,000, and the amount due in the income year from private collection of the liability is $3,000. The amount received in the income year from CSA collection of the liability is $1,000, and the amount received in the income year from private collection of the liability is $3,000.

Currently, the amount worked out using the formula in subclause 24D(2) would be $2,000 x 365 / 184 = $3,967.39. Applying the formula as amended, the amount worked out using the formula in subclause 24D(2) would be $5,000 / 365 x 365 = $5,000.

Division 3 - Amendment commencing on 1 July 2008

This Division makes a consequential amendment to the MIC provisions to use a notional amount due rather than the actual amount due in certain circumstances. For accruals to a MIC balance, the unused MIFA will be based on the notional assessment rather than the actual entitlement. Similarly, for depletions from a MIC balance and the resulting disregarding of arrears, the depletion and disregarding will be based on the notional arrears rather than the actual arrears.

References in the MIC provisions to 'annualised amount of maintenance income' or to 'maintenance income received' would automatically be affected by the deeming rules in subclauses 20B(2), (3) and (4) that commence from 1 July 2008. That is, a notional rather than actual amount received would apply. However, this is not the case with references to 'amount due', which still require modification. The relevant MIC provisions affected are subclause 24B(5), step 1 of the method statement in subclause 24C(2) which refers to the formula in subclause 24D(2), subclause 24D(2), subclause 24D(3) and paragraphs 24E(1)(b) and (2)(a).

Item 23 inserts new clause 24EA that modifies references to amount due in the relevant provisions.

New clause 24EA applies if an individual receives child maintenance for an FTB child under a child support agreement or court order that is wholly or in part a registered entitlement and there is, in relation to the agreement or order, a notional assessment (subclause 24EA (1) refers).

In these circumstances, the 'amount due' under the agreement or order (whether from the registered entitlement or from a related private collection entitlement) for the period is taken to be the amount that would have been due if the amount due to the individual had been the annual rate of child support for the period that is included in the notional assessment. This rule is in subclause 24EA(2).

New subclause 24EA(3) clarifies that subclause 24EA(2) does not apply to the reference to total arrears owing from a registered entitlement as mentioned in subclause 24A(2).

This amendment commences on 1 July 2008.