Explanatory Memorandum
Circulated By the Authority of the Minister for Families, Housing, Community Services and Indigenous Affairs, the Hon Jenny Macklin MPSchedule 3 - Determinations of adjusted taxable income
Summary
This Schedule introduces an election commitment from the Government's package , Strengthening Compliance - child support. The measure modifies the current rules applicable to the Child Support Registrar in determining a person's adjusted taxable income where a parent's taxable income has not been formally assessed. This new, more accurate, default income arrangement will use a parent's previous taxable income, indexed by growth in wages, instead of a lower default income (two-thirds of Male Total Average Weekly Earnings), in cases where they have not lodged a tax return.
Background
The child support income of both parents is used to calculate their child support assessment for a child support period. A parent's child support income is worked out by deducting specified amounts and allowances from their adjusted taxable income (ATI) (section 41 of the Child Support (Assessment) Act 1989 ( Child Support Assessment Act) refers). A component of a parent's ATI is their taxable income for the last relevant year of income, as assessed under the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997 ( subsection 43(1) of the Child Support Assessment Act refers).
In situations where a parent has not lodged a tax return for the last relevant year of income, current section 58 of the Child Support Assessment Act sets out circumstances when the Registrar may determine the amount of the parent's ATI for the purposes of making a child support assessment.
Currently, where a parent has not lodged a tax return for the two previous years, and the Registrar or the Commissioner of Taxation does not have information that allows a parent's ATI to be worked out, the Registrar may determine that the parent's ATI is at least two-thirds of the annualised Male Total Average Weekly Earnings (MTAWE) figure for the relevant September quarter. This can understate a parent's capacity to pay child support. This leads to less money being transferred for the benefit of children.
These amendments replace the current rules for determining a parent's ATI with new rules that will more accurately reflect a parent's income and ensure better support for children. The amendments are also expected to provide a greater incentive for parents to lodge their tax returns on time.
The amendments made by this Schedule commence on 1 July 2011.
Explanation of the changes
Amendments to the Child Support Assessment Act
Item 1 inserts the term ATI indexation factor into the list of definitions in subsection 5(1). This term will have the meaning given by new subsection 58AA(1).
Item 2 adds subsection (5) to the end of section 5A, which provides the definition of annualised MTAWE figure. New subsection (5) provides that, where the Australian Statistician publishes a later MTAWE figure for a relevant September quarter, in substitution for a MTAWE figure that was previously published, the later figure is to be disregarded for the purposes of the Child Support Assessment Act.
Item 3 amends section 55J, which contains a simplified outline of Division 7 of the Child Support Assessment Act. The change in the simplified outline reflects a minor change to the trigger for when the Registrar may determine a parent's ATI under section 58. That is, it was previously when a parent had not lodged a tax return, and it will now be when the parent's taxable income has not been assessed.
Item 4 repeals the heading to Subdivision B of Division 7 of Part 5 and substitutes it with a new heading, 'Adjusted taxable income determined by reference to taxable income etc.'.
Item 5 repeals existing section 58 and replaces it with new sections 58 and 58AA.
New subsection 58(1) provides that section 58 applies if a parent is to be assessed for child support in relation to a child support period, and either:
- •
- the parent's taxable income for the last relevant year of income has not been assessed by the Australian Taxation Office; or
- •
- the Registrar is unable to ascertain whether or not the parent's taxable income has been so assessed.
Information or document in the possession of the Registrar etc.
New subsection 58(2) provides a discretion for the Registrar to make a determination of a parent's ATI based on information or a document that is in the possession of the Registrar or the Commissioner of Taxation. The Registrar may exercise this discretion only if an amount is specified in that information or document to be the parent's ATI for the last relevant year of income, or if the information or document allows the amount of the parent's ATI for the last relevant year of income to be worked out.
Further, the Registrar must also be satisfied that the specified amount, or the amount so worked out, is a reasonable approximation of the parent's ATI for that year. The following are examples of when the Registrar may or may not be satisfied that the amount specified or worked out is a reasonable approximation of the parent's ATI for the last relevant year of income.
Example 1: A parent has not yet lodged their tax return for the last relevant year of income, but has advised the Registrar of their ATI for the last relevant year of income. The Registrar may be satisfied that the amount advised by the parent is a reasonable approximation because that amount was similar to the amount of ATI for the previous year, in which a tax assessment has been made. Where a parent's taxable income has not been assessed by the Australian Taxation Office for a number of years, the Registrar may not be satisfied that the ATI as advised is a reasonable approximation of the parent's actual ATI. In such a case, the Registrar may decide not to determine the parent's ATI to be the amount advised by the parent.
Example 2: A parent's tax return for a previous year of income may show that their ATI comprises only income from salary from a single employer. In such a case, the Registrar may be satisfied that the salary amount recorded on a PAYG payment summary provided by an employer to the Australian Taxation Office is a reasonable approximation. However, where a parent's tax return for a previous year of income shows that the parent has derived significant amounts of investment income or foreign income, the Registrar may not be satisfied that the salary amount alone contained in the PAYG payment summary is a reasonable approximation of the parent's actual ATI. (This is because section 43 provides that the ATI comprises a parent's taxable income, foreign income and total net investment loss, amongst other things.)
Parent's taxable income assessed for the previous year of income
New subsection 58(3) provides that, if the parent's taxable income has been assessed for the year of income before the last relevant year of income, the Registrar may determine the parent's ATI to be the amount worked out by multiplying the parent's ATI from the previous year by the ATI indexation factor. The ATI indexation factor is derived from a formula in subsection 58AA(1).
Parent's taxable income assessed for an earlier year of income
New subsection 58(4) provides that, if a parent's taxable income has not been assessed for the previous year, but has been assessed for an earlier year of income, then the Registrar may determine that the parent's ATI for the last relevant year of income is the greater of the following amounts:
- •
- the amount worked out by multiplying the parent's ATI for the earlier year of income by the ATI indexation factor (defined in subsection 58AA(1));
- •
- two-thirds of the annualised MTAWE figure (defined in subsection 5A(1)) for the relevant September quarter in relation to the child support period.
This rule will ensure that, if a parent's income has not been assessed for two or more consecutive years, their last known income, indexed in line with average wage growth, is used if it is higher than two-thirds of the annualised MTAWE figure. This rule will remove the unintended incentive for parents, on higher incomes, to benefit from a lower child support assessment based on two-thirds of annualised MTAWE by failing to lodge a tax return to have their current income assessed by the Australian Taxation Office.
Other circumstances
New subsection 58(5) provides that, if subsections 58(2), (3), and (4) do not apply in relation to the parent, or if the Registrar decides not to make a determination in relation to the parent under one of those subsections, the Registrar may determine that the parent's ATI is an amount that is at least two-thirds of the annualised MTAWE figure. This is intended to cover circumstances such as where a parent has never lodged a tax return, or where the Registrar is unable to ascertain a person's tax file number.
If the ATI determined under section 58 results in the parent being assessed based on an income that is higher than their actual income, the parent may choose to lodge their tax return so their assessment would be amended to reflect their actual ATI. However, the new assessment can only take effect with retrospective effect in a limited range of situations (see subsection 58A(2)).
ATI indexation factor
New subsection 58AA(1) provides the formula for calculating the ATI indexation factor, as the term is used in subsection 58(3) and 58(4). The ATI indexation factor is:
AWE amount for the September quarter of the last relevant year of income
AWE amount for the September quarter of the tax return year
This replaces the 'factor' referred to in current subsection 58(3A), which is described in regulation 7A of the Child Support (Assessment) Regulations 1989. The ATI indexation factor, as applied in subsection 58(3), is a reflection of the growth in average weekly wages in Australia between the last relevant year of income and the year prior to that.
Example 1:
This example assumes that the Registrar was assessing a parent in relation to the child support period 1 January 2011 to 30 March 2012. The parent's last relevant year of income (that is, 2009-10) has not been assessed, but their income for 2008-09 has been assessed. The 'AWE amount for the September quarter of the last relevant year of income' (that is, the AWE amount for August 2009) is $934.70. The 'AWE amount for the September quarter of the tax return year' (that is, the AWE amount for August 2008) is $897.90. The ATI indexation factor is therefore calculated to be $934.70 ÷ $897.90 = 1.041 (calculated to three decimal places, in accordance with subsection 58AA(2)). That is, the 2008-09 ATI figure is indexed by 4.1 per cent to ascertain the parent's ATI for 2009-10.
Assuming the ATI for 2008-09 is $50,000, the Registrar would determine, under subsection 58(3), the parent's ATI for the child support period 1 January 2011 to 30 March 2012 to be $50,000 × 1.041 = $52,050.
Example 2:
This example assumes the Registrar was also assessing a parent in relation to the child support period 1 January 2011 to 30 March 2012, but that the most recent year in which the parent's income has been assessed is the 2005-06 financial year. The 'AWE amount for the September quarter of the last relevant year of income' is $934.70 (see above). The 'AWE amount for the September quarter of the tax return year' (that is, the AWE amount for August 2005) is $805.40. The ATI indexation factor is $934.70 ÷ $805.40 = 1.161. That is, the ATI figure for 2005-06 would be indexed by 16.1 per cent to ascertain the parent's ATI for 2009-10. Assuming the ATI for 2005-06 was $50,000, the Registrar would determine, under subsection 58(4), the parent's ATI for the child support period 1 January 2011 to 30 March 2012 to be $50,000 × 1.161 = $58,050.
Item 6 repeals section 150C. Subsection 150C currently provides that, if the Registrar asks a person for their tax file number, and the person does not comply, section 58 applies to the person as if the request for the tax file number were a request under 58(2)(c) and the person had refused to comply as per paragraph 58(2)(d). Under the amended section 58, if a parent fails to comply with a request for their tax file number, the Registrar could determine the parent's ATI under subsection 58(2) if the Registrar had information or a document, or otherwise under subsection 58(5). The operation of section 150C is redundant following the changes made by this Bill.
Item 7 inserts new subsection 155(2A), which provides that the Secretary must publish in the Gazette, before the end of each calendar year, the AWE amount for the quarter ending on 30 September of that year. This mirrors the current requirement for the Secretary to publish the MTAWE figure . Item 8 amends subsection 155(3) to make it clear that the instrument published under subsection 155(2A) is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. This provision is merely declaratory of the law, and not an actual exemption from the Legislative Instruments Act 2003.
Application provisions
Item 9 provides that new subsection 5A(5) applies in relation to the MTAWE figure that is published before or after the commencement of the item. This would not have an adverse effect on anyone.
Item 10 provides that new subsection 58AA(3) applies in relation to an AWE amount that is published before or after the commencement of this item. This would not have an adverse effect on anyone.
Saving provision
Item 11 provides that determinations made under the current section 58 before the commencement of this item would have effect, after that commencement, as if they had been made under new section 58. This saving provision would aid in the interpretation of other provisions in the Child Support Assessment Act (such as section 58A) that refer to section 58.