House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 4 Amendments to support the child care sector

Outline of chapter

4.1 Schedule 4 to this Bill amends the Family Assistance Administration Act to:

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modify the calculation method used for Child Care Subsidy reconciliation to ensure a consistent outcome for individuals who have changed their relationship status during the financial year; and

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meet various circumstances of social and financial hardship being experienced by the child care sector and families, arising from emergency and disaster events including the Coronavirus by ensuring that payments of Additional Child Care Subsidy and certain grants can draw upon standing appropriations.

4.2 The amendments also require that the Minister make rules which prescribe the total amount that can be paid in a financial year.

Context of amendments

4.3 Part 1 of Schedule 4 to this Bill make amendments to modify the calculation method used for Child Care Subsidy Reconciliation to better reflect an individual's income capacity when the person is partnered for part of the year.

4.4 This provides a fairer more consistent outcome and assists families who are already struggling due to the financial impacts of the Coronavirus.

4.5 The amendments also ensure that payments of Additional Child Care Subsidy and certain grants that are prescribed in the Child Care Subsidy Minister's Rules can draw upon the standing appropriation under the Family Assistance Law.

4.6 This ensures that such payments are able to meet increased sector need and can provide much needed additional financial assistance for the child care sector during times of emergency and disaster, such as during the Coronavirus.

Summary of new law

4.7 The Family Assistance Administration Act is amended to modify how child care subsidy entitlements are reviewed when:

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an individual is a member of a couple for some but not all of the Child Care Subsidy fortnights in an income year; and

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that individual meets the Child Care Subsidy reconciliation conditions.

4.8 The Family Assistance Administration Act is also amended to ensure that payments of Additional Child Care Subsidy and funding agreements for certain grant programs (as prescribed by the Child Care Subsidy Minister's Rules) occur under the existing standing appropriation for payments made under Family Assistance Law.

4.9 New provisions inserted into the Family Assistance Administration Act require the Child Care Subsidy Minister's Rules to prescribe the total amount of funding that may be allocated for each of the grants programs that are prescribed in the Child Care Subsidy Minister's Rules.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments relating to the treatment of part year partner income in reviewing an individual's Child Care Subsidy entitlements

4.10 Currently a Child Care Subsidy claimant's entitlement to Child Care Subsidy is calculated using the methodology in Schedules 2 and 3 of the Family Assistance Act.

4.11 An individual's adjusted taxable income is one of the inputs used to calculate the individual's entitlement to Child Care Subsidy. During the year, an individual provides estimates of his or her adjusted taxable income (where it is not known) and, on this basis, the individual's estimated Child Care Subsidy entitlement is paid throughout the year.

4.12 Child Care Subsidy reconciliation occurs after the income year, when the individual meets the Child Care Subsidy reconciliation conditions, which in simple terms, is when the individual lodges their income tax return or notifies the relevant Departmental Secretary that they are not required to lodge an income tax return.

4.13 At that point, the relevant Departmental Secretary reviews all entitlement determinations made throughout the year in respect of that individual, using the person's actual adjusted taxable income (and other information relevant to the individual's entitlement), and remakes all entitlement determinations. This can result in individuals owing a debt or being paid more Child Care Subsidy (See sections 103A - 103C and 105E of the Family Assistance Administration Act).

4.14 Currently, as set out in clause 3AA(2)(b) of Schedule 3 to the Family Assistance Administration Act, the adjusted taxable income of an individual with a part year partner is determined by:

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calculating a percentage of the partner's income for the year that corresponds to the period of time the couple was together; and

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adding that to the individual's own adjusted taxable income.

4.15 This methodology has had unfair consequences for individuals in the annual cap result and applicable percentage result that is reached for these individuals throughout the year, resulting in some cases where these individuals owe debts at Child Care Subsidy reconciliation. The concepts of annual cap and applicable percentage are explained below.

4.16 The annual cap (currently $10,373) applies to an individual for an income year if their adjusted taxable income for the income year exceeds the annual cap income threshold (currently $188,163).

4.17 Where the individual's adjusted taxable income exceeds the annual cap income threshold (that is where the annual cap applies to the individual), the individual can only be paid up to the Child Care Subsidy annual cap amount in an income year. Any amounts in excess of the annual cap are recovered as debts at Child Care Subsidy reconciliation.

4.18 Where the individual's adjusted taxable income is below the annual cap income threshold (that is where the annual cap does not apply to the individual), there is no upper limit of Child Care Subsidy that can be paid to the individual in an income year.

4.19 An individual's applicable percentage is an input used in determining the hourly rate of Child Care Subsidy the person is entitled to for a session of care. An individual's applicable percentage will generally be either 0 per cent, 20 per cent, 50 per cent or 85 per cent determined by reference to the individual's adjusted taxable income. The higher the individual's adjusted taxable income, the lower their applicable percentage.

4.20 The hourly rate of Child Care Subsidy the individual is entitled to for a session of care is the lower of the two amounts, when the individual's applicable percentage is applied to:

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the hourly session fee for the individual (as set by the child care provider); or

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the Child Care Subsidy hourly rate cap for the session (a legislated limit set out in clause 2 of Schedule 2 to the Family Assistance Act).

4.21 This means that an individual's adjusted taxable income for the income year is artificially inflated on account of the current calculation of their adjusted taxable income when they have a part year partner. As a result, the annual cap may apply to them when it should not have and they may have received a lower hourly rate of Child Care Subsidy.

4.22 The amendments made by Schedule 4 to this Bill to section 105E of the Family Assistance Administration Act have the following effect:

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The annual cap will not apply to Child Care Subsidy fortnights where the individual was single and their actual personal adjusted taxable income was under the annual cap income threshold.

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This applies regardless of:

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when in the year the individual was single and their adjusted taxable income was under the annual cap income threshold;

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whether the annual cap income threshold applied to other Child Care Subsidy fortnights in the year; or

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whether the annual cap was reached in those fortnights where the individual's adjusted taxable income when combined with their part year partner's adjusted taxable income (combined adjusted taxable income) exceeded the annual cap income threshold.

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The annual cap will apply to Child Care Subsidy fortnights where the individual's actual personal, or combined adjusted taxable income, exceeds the annual cap income threshold.

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When during Child Care Subsidy fortnights where the annual cap applied an individual is paid up to the annual cap amount, no more Child Care Subsidy is payable to them:

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for the remainder of that period; or

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during any subsequent periods that the individual's personal or combined adjusted taxable income exceeds the annual cap income threshold.

4.23 For the purpose of determining the individual's applicable percentage, their adjusted taxable income will also be considered across Child Care Subsidy fortnights, depending on whether or not the individual was single or in a relationship with a part year partner.

4.24 New subsections 105E(4) to (7) of the Family Assistance Administration Act provide for fairer outcomes at Child Care Subsidy reconciliation for individuals with part year partners.

4.25 For the purposes of the new subsections, whether or not the individual was a member of a couple in a Child Care Subsidy fortnight is determined based on whether the individual was a member of a couple on the first Monday in the Child Care Subsidy fortnight.

4.26 New subsection 105E(4) of the Family Assistance Administration Act provides that if an individual is a member of a couple on one or more, but not all, of the first Mondays in Child Care Subsidy fortnights that start in an income year then, when reviewing child care decisions about the individual under subsection 105E(1) to (3) of the Family Assistance Administration Act, the Secretary must review those decisions in accordance with new subsections 105E(5) and (6) of the Family Assistance Administration Act.

4.27 Part 1 of Schedule 2 to the Family Assistance Act sets out the methodology for determining the amounts of Child Care Subsidy an individual is entitled to for a session of care provided in a week.

4.28 New subsection 105E(5) of the Family Assistance Administration Act provides that the relevant Departmental Secretary must apply Part 1 of Schedule 2 to the Family Assistance Act to an individual with a part year partner, for each Child Care Subsidy fortnight that starts in an income year, as if paragraph 3AA(2)(b) of Schedule 3 to the Family Assistance Act had not been enacted.

4.29 Paragraph 3AA(2)(b) of Schedule 3 to the Family Assistance Act provides that the adjusted taxable income of an individual with a part year partner is determined by calculating a percentage of the partner's income for the year that corresponds to the period of time the couple was together, and adding that to the individual's own adjusted taxable income.

4.30 The effect of applying Part 1 of Schedule 2 to the Family Assistance Act to an individual with a part year partner as if paragraph 3AA(2)(b) of Schedule 3 to that Act had not been enacted is that for the purpose of calculating the individual's adjusted taxable income for the income year:

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in those Child Care Subsidy fortnights that the individual was single, only their own personal adjusted taxable income counts towards their adjusted taxable income for the income year; and

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as per new subparagraph 105E(6)(a) of the Family Assistance Administration Act, in those Child Care Subsidy fortnights where the individual was a member of the couple with the part year partner, the individual's adjusted taxable income for the year includes both their own adjusted taxable income as well as the other member of the couple's adjusted taxable income for the income year.

4.31 The individual's adjusted taxable income will be used to determine whether the annual cap applies to the individual in each Child Care Subsidy fortnight and the individual's applicable percentage.

4.32 Subsection 105E(6) of the Family Assistance Administration Act amends paragraph 1(3)(b) of Schedule 2 to the Family Assistance Act, with the amendments applying in those Child Care Subsidy fortnights that start in an income year where the individual had a part year partner. It has the effect that, for those Child Care Subsidy fortnights where the annual cap applies to the individual, the annual cap is reached for a child for an income year if the following amounts together equal the annual cap:

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the amount of Child Care Subsidy the individual is entitled to be paid for sessions of care provided to the child in Child Care Subsidy fortnights starting in the income year; and

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the amount of Child Care Subsidy the other member of the couple is entitled to be paid for sessions of care provided to the same child in those fortnights.

4.33 The intention of subclause 1(3) of Schedule 2 to the Family Assistance Act is to avoid couples 'double dipping' and switching who is the Child Care Subsidy claimant in respect of the child in order to circumvent the annual cap limit. The amendment ensures that this provision continues to apply to individuals with part year partners, as appropriate.

4.34 New subsection 105E(7) of the Family Assistance Administration Act states that subsections 105E(5) and 105E(6) of the Family Assistance Administration Act have effect despite Part 1 of Schedule 2 to the Family Assistance Act. This is to ensure that these subsections have effect when the relevant Departmental Secretary reviews entitlement decisions of individuals with part year partners at Child Care Subsidy reconciliation.

4.35 For the avoidance of doubt, the effect of the amendments is that, at Child Care Subsidy reconciliation, for individuals with part year partners:

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paragraph 3AA(2)(b) of Schedule 3 to the Family Assistance Act is taken to not have been enacted; and

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when determining the amounts of Child Care Subsidy the individual was entitled to:

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for the Child Care Subsidy fortnights the individual was a member of the couple - Part 1 of Schedule 2 to the Family Assistance Act applies subject to the few amendments in subsection 105E(6) of the Family Assistance Administration Act; and

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for the Child Care Subsidy fortnights the individual was single - Part 1 of Schedule 2 to the Family Assistance Act continues to apply unamended.

Amendments relating to Additional Child Care Subsidy and funding agreement appropriations

4.36 Subsection 233(2) of the Family Assistance Administration Act is amended to ensure that payments of Additional Child Care Subsidy and funding agreements for certain grant programs (as prescribed by the Child Care Subsidy Minister's Rules) occur under the existing standing appropriation for payments made under Family Assistance Law (pursuant to subsection 233(1) of the Family Assistance Administration Act).

4.37 The amendments enable Additional Child Care Subsidy to be fully demand-driven and to ensure there is sufficient funding to meet the various circumstances of social and financial hardship being experienced by families arising from the Coronavirus.

4.38 The amendments also enable relevant grant programs which are designed to support child care services experiencing hardship in various circumstances to have access to sufficient funding to support the child care sector during the Coronavirus.

4.39 In particular, it is envisaged that the amendment will enable the Community Child Care Fund - Special Circumstances grant program to meet increased demand from child care services during the Coronavirus.

4.40 The Community Child Care Fund - Special Circumstances grant program will be prescribed in the Child Care Subsidy Minister's Rules as soon as possible after the amendments receive Royal Assent.

4.41 Notwithstanding these amendments, a child care service's eligibility to access Community Child Care Fund - Special Circumstances funding will continue to be set out in the program guidelines which are updated from time to time and publicly available on the Department of Education, Skills and Employment's website.

Requirement to prescribe total amount of money that may be paid for grants programs under a standing appropriation

4.42 New subsection 233(3) in the Family Assistance Administration Act requires the Child Care Subsidy Minister's Rules to prescribe the total amount of funding appropriated under subsection 233(1) of the Family Assistance Administration Act that may be allocated for each grants program that is prescribed in the Child Care Subsidy Minister's Rules for the purposes of subsection 233(2) of the Family Assistance Administration Act.

4.43 New subsection 233(4) of the Family Assistance Administration Act requires that the amount referred to in subsection 233(3) of that Act must be prescribed before the start of the relevant financial year, but may be varied at any time before the financial year ends.

4.44 New subsection 233(5) of the Family Assistance Administration Act provides the Minister with the discretion to further prescribe total standing appropriation funding limits for specific grants programs that are prescribed in the Child Care Subsidy Minister's Rules. This is intended to ensure that the allocation of funding for certain grants programs may be appropriately capped in accordance with Budget decisions.

4.45 This is an accountability measure intended to ensure that decisions on annual funding amounts for prescribed grants programs established under section 85GA of the Family Assistance Act may continue to be subject to Parliamentary scrutiny (through its inclusion in a legislative instrument).

4.46 These amendments do not commence until 1 July 2020. This means that the Child Care Subsidy Minister's Rules will be required to begin annually prescribing a cap for the total of all grants to be paid under the standing appropriation in subsection 233(1) of the Family Assistance Administration Act from the start of the 2020-21 financial year onwards.

Application and transitional provisions

4.47 Subitem 2(1) states that the amendments made by item 1 to Schedule 4 to this Bill apply to reviews, at Child Care Subsidy reconciliation, of child care decisions made for sessions of care provided in Child Care Subsidy fortnights starting in the 2019-2020 income year, and in later income years.

4.48 This enables the fairer amended entitlement methodology to be applied for Child Care Subsidy payable for sessions of care provided in the 2019-2020 income year and thereafter.

4.49 Subitem 2(2) states that the amendment made by item 1 Schedule 4 to this Bill has no effect to the extent (if any) to which it would:

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result in an acquisition of property (within the meaning of paragraph 51 (xxxi) of the Constitution) from a person otherwise than on just terms (within the meaning of that paragraph); or

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impose taxation (within the meaning of section 55 of the Constitution).

4.50 These Constitutional application provisions are included as a precautionary measure, in case they may be needed.

4.51 Item 5 to Schedule 4 to this Bill is a transitional provision which provides that paragraph 233(5)(a) of the Family Assistance Administration Act applies in relation to a financial year beginning on or after 1 July 2020.