House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 10 - Baby Bonus (first child tax offset) and adoption

Outline of chapter

10.1 Schedule 10 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to:

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allow adoptive parents, once legally responsible for an eligible child, retrospectively to lodge a claim for the first child tax offset for the period between the date they commenced care of the child and the date they were granted legal responsibility for the child (but not for any period before 1 July 2001); and

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allow adoptive parents to choose for their 'base year', either the income year in which they commenced care of the child or the income year before they commenced care of the child (but not being an income year earlier than 2000-2001).

Context of amendments

10.2 Section 61-355 of the ITAA 1997 outlines the eligibility criteria for the first child tax offset, including that the taxpayer must be legally responsible for the child. Adoptive parents are considered to be legally responsible for the child when an adoption order is issued. However, this will generally not be issued for at least six to twelve months after the child entered into the care of the adoptive parents, and the period of care prior to legal responsibility can be longer for special needs children or some international adoptions. Adoptive parents are currently not entitled to claim the first child tax offset for the period between commencing care of the child and being granted legal responsibility.

10.3 Section 61-430 of the ITAA 1997 stipulates that the 'base year' is the income year in which the taxpayer gained legal responsibility for the child, or the income year immediately prior to the income year in which the taxpayer gained legal responsibility for the child. The first child tax offset entitlement is calculated based on the size of the reduction in income of a parent from the 'base year' to the 'claim year'. Adoptive parents are currently excluded from claiming the offset in respect of the period between commencing care of the child and being granted legal responsibility - years in which their claim may be the largest.

Summary of new law

10.4 The amendments will ensure that adoptive parents, once they are legally responsible for an eligible child, will now be entitled to the first child tax offset from 1 July 2001 or the date the child entered into their care, or the date they become an Australian resident, whichever is the later date. The date that the taxpayer commenced caring for the child will be the date evidenced as being so by Court documentation or as documented by the relevant State department.

10.5 The amendments will allow adoptive parents to choose as their 'base year', either the income year in which they commenced care of the child or the income year before they commenced care of the child, but not an income year before 2000-2001.

10.6 Adoptive parents who will be disadvantaged by the amendments maintain an entitlement under the law as it was at 30 June 2004. However, adoptive parents claiming a greater entitlement under the old law cannot nominate the year of care or year prior to care as their base years and thus would not be entitled to the tax offset for the period between obtaining care of the child and gaining legal responsibility for the child.

Comparison of key features of new law and current law

Detailed explanation of new law

10.7 An adoptive parent may claim the first child tax offset if a child is in their care before they legally adopt the child, under the following conditions:

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at the time the child is first in the care of the adoptive parents:

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the adopted child is less than five years of age;

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the child is in their care (but they are not legally responsible for the child); and

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the parent is an Australian resident;

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the adoptive parent meets the general conditions for eligibility for the first child tax offset in subsection 61-355(3) of the ITAA 1997;

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the parent becomes legally responsible for the child by adopting the child; and

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the time adoptive parents became legally responsible for the child is on or after 1 July 2001 but before 1 July 2004.

[Schedule 10, item 20, section 61-440]

10.8 A child is first in the care of the adoptive parents on the date evidenced in writing by a court or relevant department of the relevant State or Territory. [Schedule 10, item 20, section 61-445]

Transferring entitlements

10.9 An adoptive parent can transfer their entitlement to another person. However, where the adoptive parent has an entitlement to the first child tax offset under new section 61-440 (for the period between care and legal responsibility) and also an entitlement under existing section 61-355 (after gaining legal responsibility), both entitlements or neither entitlement can be transferred to another person for a particular income year. [Schedule 10, item 13, paragraph 61-385(1A)]

Base year election

10.10 The amount of first child tax offset to which a parent is entitled is based on the reduction in income from the base year to each subsequent claim year. The default 'base year' for adoptive parents will be the income year prior to the income year when the child was first in their care and they were an Australian resident, or 2000-2001, whichever is later. [Schedule 10, item 20, subsection 61-450(2)]

10.11 Adoptive parents can elect as their 'base year' the year in which the child is first in their care provided they were Australian residents and that this is not before 2000-2001. However, they cannot change this 'base year' election once it is made [Schedule 10, item 20, subsection 61-450(3)]. Moreover, either the choice must be made before a claim under section 61-440 is made or before an entitlement under section 61-440 is transferred under section 61-385 [Schedule 10, item 20, subsection 61-450(4)]. The 'base year' for a transferred entitlement is the income year before the first income year for which the entitlement was transferred [Schedule 10, item 20, subsection 61-450(5)].

Example 10.1

Mary resigned from her $30,000 per year job in October 2001 in preparation for travelling overseas to adopt a child from a country where many young children had been orphaned by war. This country is not a signatory to the Hague Convention on intercountry adoption. On returning to Australia with her child in November 2001, Mary was required to obtain a formal adoption order from an Australian Court which was ultimately not granted until November 2002.

Under the old law, Mary can only claim the first child tax offset from November 2002. Under the new law, Mary will be able to claim the offset from November 2001 until the date when the child turns five years of age. Mary's offset will be based on her reduction in income from $30,000 to nil.

Example 10.2

Martha and Paul applied to adopt a child and were awarded care of a newborn child with special needs at the end of June 2002. The child was assessed by social workers in the new home environment for 12 months before a formal adoption order was made, to ensure that Martha and Paul were able to meet the special needs of the child. As a result, the formal adoption order was not made by the courts until July 2003. Paul gave up his fulltime employment (which earned him $100,000 a year) when they were first given care of the child in June 2002 and is not intending to go back to work until the child goes to school.

Under the amended provisions for adoptive parents, Martha can transfer her first child tax offset to Paul who can then claim the maximum amount of $2,500 for each full year the child is in his care until the child turns five years of age (plus a pro-rata entitlement for part years of care) based on a 'base year' income of $100,000. Under the old law, Paul's 'base year' income of zero at the time they gained legal responsibility for the child will only entitle him to the minimum first child tax offset of $500 per full year of care from the date of gaining legal responsibility in July 2003 until the child is five years old.

Adoptive parents who would be better off under the old law

10.12 Adoptive parents whose greatest fall in income occurs after they have gained legal responsibility for the child could be disadvantaged if they are required to nominate a 'base year' before the year of legal responsibility for the child.

10.13 The amended provisions ensure that no adoptive parent will lose their existing entitlement or have a reduced entitlement to the first child tax offset because of the amendments. [Schedule 10, item 20, section 61-455]

10.14 Adoptive parents who would be entitled to a lesser amount of tax offset under the amended law than they would have been entitled to under the old law retain their entitlement to the first child tax offset under the law as it was in force on 30 June 2004.

10.15 However, adoptive parents claiming the tax offset under the old law would not have an entitlement to the tax offset for the period in which they had care of the child prior to obtaining legal responsibility for the child.

10.16 To ensure that they do not receive a lesser amount of first child tax offset under the new law, adoptive parents may compare the amount they would receive under the new law - potentially five years worth of claims, and the amount they could continue to claim under the old law - which may be a greater annual amount for a shorter period since the old law does not allow retrospective claims from the date of care to the date of legal responsibility. Adoptive parents are not required to make an election to claim under the old law - this is an option that remains open to them while they remain eligible to claim the offset until their child turns five years of age. The Australian Taxation Office will be able to advise adoptive parents on making claims under the old and new laws.

Application and transitional provisions

10.17 The amendments apply from 1 July 2001.

10.18 The amendments are retrospective to ensure that adoptive parents receive the benefit of the amendments from the time the first child tax offset came into effect.

10.19 Taxpayers will not be adversely affected by the retrospective commencement of the amendments because of section 61-455 which allows claimants access to the old law if their entitlement would be for a lesser amount under these amendments.