Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon Peter Costello)Chapter 4 What if a child is a dependant of 2 or more people?
4.1 This chapter covers:
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- the allocation of dependants between 2 or more people.
Allocation of dependants
4.2 FTA benefits are intended, in the majority of cases, to be available to one person in respect of a child that is a dependant of two or more people during the same period. Since a child will frequently be a dependant of at least two people - his or her mother and father - the Bill contains rules for determining which person is able to claim the FTA benefits.
4.3 There are two broad categories of cases considered by the Bill. They are:
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- where a child is a dependant of two or more people who do not reside together [section 20 L] ; and
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- where a child is a dependant of two or more people who reside together [sections 20M, 20N and 20P] .
4.4 In the majority of cases, the relevant people will be able to make an agreement that a child be treated as the dependant of one of them, under section 20N (see paras 14 to 18 below).
Child a dependant of two or more people who do not all reside together
4.5 Where a child would otherwise be a dependant during a period of two or more people who do not all reside together, the child is allocated according to the number of nights that each person had the care of the child. As a minimum, a person must have the care of the child for 30% of the nights in the period. Where only one of the relevant persons has the care of the child for more than 30% of nights during the period, the child is treated as being a dependant of that person for the whole period [subsections 20L(1) to (4)] .
4.6 Persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together for the purposes of this rule [subsection 20L(5)] . For example, if one member of a couple temporarily is required to live in another location to fulfil employment obligations, section 20GA would not apply.
EXAMPLE 1
Jan and Gary are separated, but share the care of their son James, who is 8 years old. During the year, James spent 35% of nights with Jan, and the remainder with Gary. James is treated as a dependant of Jan for 35 % of the days in the year and of Gary for 65% of the days in the year.
EXAMPLE 2
As per example 1, but James spends only 15% of nights during the year with Jan.
James would be treated as a dependant of Gary for the whole year, and not a dependant of Jan.
Child or dependant of two or more people who reside together
4.7 There are three allocation rules which may apply in these circumstances.
(i). Where one person only entitled under new section 20D
4.8 Where a child would otherwise be a dependant during a period of 2 or more people who reside together, and one only of those people is entitled to a Part B benefit, the child is treated as being a dependant only of the person with the Part B entitlement, and not a dependant of any other person, for that period [subsections 20M(1) and (2)] .
4.9 Importantly, this rule only applies where the period or periods during which the relevant persons resided together includes the last day of the income year [seection 20M(1)] . This is because Part B entitlement is determined by reference to the income of the spouse of a taxpayer (if the taxpayer has one) on the last day of the income year. If 2 people who resided together during part of a year no longer reside together at the end of the year, it would be unfair to allocate a dependant they had during the period they resided together according to their new circumstances at the end of the year. For example, after separation, one of the persons may (because of the income of a new partner) be entitled to a Part B benefit, but the other person may not. For the rule which applies where people separate during a year, see paras 19 to 25 below.
4.10 In determining whether a period includes the last day of the year, the fact that a child has ceased to be a dependant during the year is disregarded [subsection 20M(5)] . This ensures that the rule in section 20M applies to people who continue to reside together, but whose children cease to be dependants because they turn 16 or 18, or leave secondary school, or for some other reason.
4.11 Where subsections 20M(1) and (2) apply to a child, any other child who would otherwise be a dependant of the same two or more people while they resided together during the relevant income year is also treated as being a dependant of the person with the Part B entitlement and not of any other person [subsection 20M(3)] . In this way, all of the children are treated as dependants of the one person.
4.12 It may be noted that subsection 20M(1) applies in respect of a period during which a child would be a dependant apart from section 20L . In a case where both sections apply (for example, where a couple have separated with shared care of their child, and have subsequently married new partners), the person to whom section 20M allocates a child may only have the child as a dependant for a part of the allocation period because of the rule in section 20L .
4.13 As with section 20L , persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together for the purposes of this rule [subsection 20M(4)] .
EXAMPLE 1.
Jim and Sharon have three children whose ages at 30 June are 6 years, 3 years and 6 mths. Jim's taxable income for the relevant year is $60,000. Sharon has a part-time job which provides her with a taxable income of $3,000. Jim and Sharon reside together for the whole year.
As Jim has an entitlement under section 20D to a Part B benefit, and Sharon does not, the children are treated as dependants of Jim only for FTA purposes.
EXAMPLE 2.
Jim and Sharon's eldest child, Cathy, is from a previous relationship Sharon had with Rob. Rob has the care of Cathy for 40% of nights during the year.
As between Jim and Sharon, section 20M allocates the children to Jim for FTA purposes for the whole of the year. However, under section 20L, Cathy is a dependant of Jim's for only 60% of the year.
(ii). Agreements
4.14 In every case other than that covered by paras 8 to 13 above, the persons who reside together may make an agreement that a child will be treated as a dependant of one only of them for the period they resided together [subsections 20N(1) and (3)] . The agreement must cover every child who would otherwise be a dependant of each of the persons while they resided together, nominating the same person as the person of whom the children are taken to be the dependants [subsection 20N(4)] .
4.15 Family agreements must generally be made before the first of the persons lodges his/her tax return, although the Commissioner has a discretion to allow a further time for agreements to be made [subsection 20N(2)] .
4.16 Agreements must be kept for five years from the time they are made. Failure to keep an agreement will mean the persons will be treated as if no agreement had been made [subsection 20N(5)] . If an agreement is lost or destroyed a copy of the agreement may suffice, if the Commissioner is satisfied the copy properly records all the matters set out in the agreement and was in existence when the agreement was lost or destroyed [subsection 20N(6)] . Alternatively, if there is no adequate copy of the agreement and the Commissioner is satisfied the agreement was lost or destroyed in circumstances beyond the control of the relevant people, the people will still be treated as having made an agreement [new subsection 20N(7)] .
4.17 As with new sections 20L and 20M, persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together [subsection 20N(9)] .
4.18 Again, it may be noted that subsection 20N(1) applies in respect of a period during which a child would be a dependant apart from section 20L . In a case where both sections apply (for example, where a couple have separated with shared care of their child, and have subsequently married new partners), the person to whom an agreement made under section 20N allocates a child may only have the child as a dependant for a part of the allocation period because of the rule in section 20L .
EXAMPLE 1.
Ric and Kay have 2 children, whose ages on 30 June are 9 years and 7 years. Ric and Kay's family income is below the family income threshold, with Kay being the main breadwinner. Ric and Kay reside together for the whole year.
As neither Ric nor Kay have an entitlement to a Part B benefit under section 20D, they may agree that their children be treated as dependants of one of them, and not the other, for FTA purposes for the relevant year.
EXAMPLE 2.
Greg and Mary separated on 15 January. They have a child Jordon who is 4 yrs old at 30 June.
For the period to 15 January, Greg and Mary may agree which one of them will be able to claim Jordan as a dependant for FTA purposes. Section 20M does not apply because they did not reside together on the last day of the year.
(Note:
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- if they cannot agree, see paras 19 to 25 below;
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- for the period after they have separated, if Jordan is still a dependant of each of them, see paras 5 and 6 above).
(iii). Where agreement not made - people no longer residing together
4.19 Subject to the exceptions below, where people to whom section 20N applies (see para 14 above) do not make an agreement, the child is taken, or the children are taken, not to be a dependant or dependants of those people [subsections 20P(1) and (2)] .
4.20 The first exception relates to people who resided together during a part of a year of income, but who no longer reside together. The Bill recognises that these people may not be able to reach an agreement on the allocation of a child who was a dependant of each of them while they resided together.
4.21 In these circumstances the child is allocated evenly between those people for the period they resided together [paragraph 20P(3)(a)] .
4.22 The second exception relates to people who resided together at the end of the year of income, but who cannot reach an agreement. In these circumstances the child may also be allocated evenly between those people for the period they resided together, provided section 20M does not apply and the Commissioner is satisfied that the reason why they cannot agree is because they no longer reside together [paragraph 20P(3)(b)] .
4.23 In determining whether a period includes the last day of the year, the fact that a child has ceased to be a dependant during the year is disregarded [subsection 20P(6)] . This ensures that the first exception mentioned above is only available to people who do not reside together at the end of the year, and not to people who did still reside together at the end of the year but whose children ceased to be dependants during the year. For these latter people it is appropriate that either section 20M applies or they make an agreement under section 20N , with the second exception mentioned above available as a last resort.
4.24 It may be noted that subsection 20P(1) applies in respect of a period during which a child would be a dependant apart from new section 20L . In cases where both new sections 20L and 20P apply to a child, the period allocated by new section 20P is the number of days a child would be a dependant of the people who reside together after the application of new section 20L [subsection 20P(4)] .
4.25 Again, for this rule, persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together [subsection 20P(5)] .
EXAMPLE 1.
Mike and Laura separated on 14 March. They have a child, Ben who is 3 years old at the end of the year.
Mike and Laura have the option of agreeing for the period to 14 March which one of them will be allocated Ben for FTA purposes.
If they do not agree, Ben will be allocated to each of them for half the period between 1 July and 14 March.
Example 2.
Mike and Laura separated on 12 July, before they had completed their returns for the year ended on the previous 30 June. Mike and Laura both work, with taxable incomes of $30,000 each, so that neither of them has an entitlement under section 20D to a Part B benefit for the year ended 30 June. They are unable to reach an agreement about the allocation of Ben for the year ended 30 June.
If the Commissioner is satisfied that the reason they cannot agree is because they no longer reside together, then Ben will be allocated to each of them for half of the year ended on the previous 30 June.