House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Family and Community Services, Senator the Hon Kay Patterson)

Schedule 1 - Method of calculating Part B rate for those who return to paid work after the birth of a child etc.

Summary

The amendments made by this Schedule set out a new method of calculating FTB Part B for certain secondary earners who return to work after the birth of a child etc. These amendments give effect to the measure announced by the Government on 11 May 2004 as part of the More Help for Families package.

Background

FTB Part B is intended to assist families with one main income. In the case of couples, Part B is paid on the basis of the secondary (or lower) income earner provided that their income is under certain thresholds.

Under the current legislation, the income of a secondary earner who is a member of a couple who commences paid work for the first time or returns to paid work part-way during a particular income year is taken into account under the Part B income test for that income year. This can result in an overpayment on reconciliation and may act as a disincentive for those wanting to return to the work force.

The new method of calculating Part B is intended to ensure that the secondary earner receives the maximum rate of Part B for a day or days within a period that commences on a day worked out under new clause 29C and ending immediately before the day the secondary earner 'returns to paid work'.

The new method will be available to a secondary earner who is the natural parent or stepparent of the child. In addition, it will be available to adoptive parents and other secondary earners who are carers. For example, grandparents who have the care of a grandchild, as long as the natural parent or other carer has not previously benefited from the new method of calculating the Part B rate in respect of that child.

The amendments made by this Schedule apply in respect of the 2005-06 income year and later income years.

Explanation of changes

Amendments of the A New Tax System (Family Assistance) Act 1999

Item 1 inserts a new definition of 'paid work' into subsection 3(1) of the Family Assistance Act. This definition refers the reader to section 3B, which contains the detailed definition (see item 5). The definition does not apply to paragraph 15(1)(a) of the Family Assistance Act which uses the undefined phrase 'paid work' as this paragraph is relevant to child care benefit.

Item 2 inserts a new definition of 'passive employment income' into subsection 3(1) of the Family Assistance Act. 'Passive employment income' means:

(a)

Paid leave (such as paid maternity leave).

(b)

A payment of compensation or a payment of insurance in respect of the individual's inability to earn, derive or receive income from paid work during the period.

(c)

If the individual stops paid work as a self employed individual - income that is derived by the individual in respect of the period from an interest, or from investments, held in connection with the individual's previous self employment.

The definition of 'passive employment income' is intended to identify other forms of work related income that may be received by an individual despite the individual having stopped 'paid work' ('paid work' is defined to mean any work for financial gain or any other reward that involves a substantial degree of personal exertion on the part of the individual concerned - see item 5).

Paragraph (c) of the definition of 'passive employment income' is intended to cover passive income derived from the individual's continued right to receive income (such as a share of the profits) from the individual's previous self-employment (involving a substantial degree of exertion) in a business, partnership or other entity. This part of the definition would not apply to income from investments such as rental income on an investment property or income from shares that are unconnected with the individual's previous self-employment.

Item 3 inserts a new definition of 'returns to paid work' into subsection 3(1) of the Family Assistance Act. This definition refers the reader to section 3B, which contains the detailed definition (see item 5).

Item 4 inserts a new definition of 'secondary earner' into subsection 3(1) of the Family Assistance Act. Normally, the secondary earner will be the person worked out in accordance with subclause 3(2) of Schedule 3 to the Family Assistance Act and will be the member of the couple with the lower adjusted taxable income (ATI) worked out following reconciliation. If both members of the couple have the same adjusted taxable income, the secondary earner will be the member of the couple who returns to paid work first during the year.

Paragraph (b) of the definition of 'secondary earner' is intended to ensure that a primary (or 'equal') earner (based on actual income) who was during the year believed to be the secondary earner (based on the original estimated income of the person and his or her partner) will still be regarded as the secondary earner and hence be able to access this new measure. Subclause 3(2) of Schedule 3 is disregarded in determining whether paragraph (b) of the definition applies to a particular couple.

Item 5 adds new section 3B at the end of Division 1 of Part 2 of the Family Assistance Act.

New subsection 3B(1) contains a definition of 'paid work' which is intended to be used in conjunction with the definition of 'returns to paid work'.

The definition embraces all kinds of work including work undertaken as an employee in an employer/employee relationship and all forms of self-employment. Paid work means any work for financial gain or any other reward that involves a substantial degree of personal exertion on the part of the individual concerned. This definition does not include other forms of work related income that may be received by an individual included in the definition of 'passive employment income' (see item 2).

New subsection 3B(2) provides that an individual returns to paid work if the individual is neither engaging in paid work, nor receiving passive employment income during that year and the individual later engages in paid work for an average of at least 10 hours per week for 4 consecutive weeks that start during the income year.

New subsection 3B(3) applies in circumstances where the individual is neither engaging in paid work, nor receiving passive employment income during that income year and later engages in paid work but not for an average of at least 10 hours per week for 4 consecutive weeks. In these circumstances, there is an option of notifying the Secretary in writing that the individual has returned to paid work. The notification must be in accordance with new subsection 3B(4).

New subsection 3B(4) clarifies who is required to notify the Secretary for the purposes of paragraph 3B(3)(c) as there are some cases where both members of a couple can be eligible for family tax benefit for the same period or for different periods during a particular income year. Subsection 3B(4) applies if the individual is a member of a couple at any time during the income year before the individual engages in paid work.

Paragraph 3B(4)(a) is intended to apply to situations where both members of a couple are eligible for family tax benefit for the same period or different periods during an income year, before the individual engages in paid work and the individual is a member of the same couple at the time of the notification. In these circumstances, both members of the couple must notify the Secretary in writing. Paragraph 3B(4)(a) applies in the following situations:

•

Cases where a determination under section 28 of the Family Assistance Act is in place. Section 28 applies to blended families and covers members of a couple (person A and B) where A has at least one child from a previous relationship, and at least one of the other children is a child of the relationship between A and B or a child of a previous relationship of B. In this scenario, where A and B would both be eligible for FTB for the children but for section 26, then the Secretary has a discretion to determine that both A and B are to be eligible for FTB for the children and the percentage of each individual's FTB for the children.

•

Cases where a determination under section 29 of the Family Assistance Act is in place. Section 29 deals with the situation where two individuals (A and B) who are not members of a couple claim FTB for a past period during which A and B were members of the same couple with an FTB child or children. In this scenario, where A and B would both be eligible for FTB for the children but for section 26, then the Secretary has a discretion to determine that both A and B are to be eligible for FTB for the child or children and the percentage of each individual's FTB for the child or children.

•

Cases where members of a couple have agreed to swap who claims FTB and both receive payment of FTB at different times during an income year.

Paragraph 3B(4)(b) applies in similar circumstances to paragraph 3B(4)(a) except that the individual is no longer a member of the same couple at the time of notification. In these circumstances, the individual who returns to work (ie, engages in paid work) must notify the Secretary in writing. If both individuals return to work, the secondary earner must notify the Secretary.

Paragraph 3B(4)(c) applies in circumstances where only one member of a couple is eligible for FTB at all times during that income year. In these circumstances, the member of the couple who is eligible for FTB must notify the Secretary in writing.

As the new method for the Part B rate can only apply if the individual is a member of a couple at some time during the period before returning to work, new subsection 3B(4) does not refer to the situation where the individual is not a member of a couple at all times during the period before returning to work.

Currently Division 1 of Part 4 of Schedule 1 to the Family Assistance Act contains the overall rate calculation process applicable to Part B. These amendments split Division 1 into two separate Subdivisions. Item 6 inserts a new heading for Subdivision A that will contain the existing provisions in the Family Assistance Act relating to the general method of calculating the Part B rate.

Item 7 adds a note at the end of subclause 29(2) of Schedule 1 that advises the reader that an individual who is a member of a couple works out his or her Part B rate under Subdivision B if the secondary earner of the couple returns to paid work after the birth of a child etc. The heading to clause 29 of Schedule 1 is also amended by omitting 'Method' and substituting 'General method'.

Item 8 inserts a new Subdivision B after Subdivision A that contains the new provisions applying the method of calculating the Part B rate for those who return to paid work after the birth of a child etc. This item contains the substantive clauses that apply to the new method of calculating the Part B rate, new clauses 29A, 29B and 29C.

New clause 29A contains the method of calculating the Part B rate for those who return to paid work after the birth of a child etc.

New subclause 29A(1) sets out the basic eligibility criteria for the new method. An individual's Part B rate for a day in an income year will be worked out under subclause 29A(2) if:

•

the individual is a member of a couple (sole parents receive the maximum amount of Part B under subclause 29(1) of Schedule 1 to the Family Assistance Act); and

•

the conditions in subclauses (3) to (7) of clause 29A are met; and

•

the conditions in new clause 29C are met in respect of the day.

Subclause 29A(2) sets out the new method of calculating the Part B rate. This subclause enables Part B to be provided to the individual concerned at the maximum rate for the day or days within the period provided that all criteria for accessing the new method are met. If the person receives a period of paid leave or other type of work related income (see the definition of 'passive employment income' in item 2) for a day or days during the period, the general method of calculating the Part B rate would apply for the day or days in question.

Subclauses 29A(3) to (7) set out further conditions for the new method of calculating the Part B rate for those who return to paid work.

Subclause 29A(3) provides that during a period during the income year in which the day occurs, the secondary earner must not be engaging in paid work and must not be receiving 'passive employment income' in respect of that period. The intention is that the secondary earner will not receive Part B at the maximum rate for the day or days that he or she is working, on paid leave or other types of work related income. Again, if the person receives a period of paid leave or other type of work related income for a day or days during the period, the general method of calculating the Part B rate would apply for the day or days in question.

Subclause 29A(4) provides that one of the conditions is that the secondary earner returns to paid work for the first time since a child became a FTB child of the secondary earner.

Subclause 29A(5) provides that the conditions in new clause 29B must also be satisfied in respect of the child.

Subclause 29A(6) provides that the individual mentioned in subclause (1) (this could either be the secondary earner or his or her partner depending upon who has actually claimed FTB) must have satisfied the FTB reconciliation conditions under section 32B of the Family Assistance Administration Act for all of the same-rate benefit periods in that income year.

Another requirement is that either or both of the conditions set out in paragraphs 29A(7)(a) or (b) apply.

Paragraph 29A(7)(a) is intended to cover the case where the Secretary has been notified of the return to work by the individual.

Paragraph 29A(7)(b) would apply where the Secretary becomes aware of the return to work by some other means. For example, the individual's partner notifies the Secretary.

New clause 29B sets out the conditions to be met in respect of an FTB child.

Subclause 29B(1) provides that for the purpose of subclause 29A(5), the conditions in this clause are met if subclauses (2) and (3) are met in respect of the child on any single day that meets the conditions in clause 29C.

Subclause 29B(2) clarifies that the new measure applies to the child that most recently became an FTB child of the secondary earner. If all of the children became FTB children of the secondary earner at the same time the relevant child is the youngest FTB child of the secondary earner.

Provided the above criteria are met in relation to the child, the new measure would potentially be available where the secondary earner is the natural parent or stepparent of the child in question. It will also potentially be available to adoptive parents and carers such as grandparents who care for a grandchild.

Subclause 29B(3) is intended to clarify that the new method of calculating the Part B rate can only be accessed once in respect of any particular child. Subclauses 29B(4) and (5) provide for two exceptions to this general rule.

Subclause 29B(4) is intended to ensure that if both parties to a former relationship fulfill the criteria in relation to a particular child because they are in shared care arrangements with respect to that child, that both can access the new method of calculating Part B.

Subclause 29B(5) is intended to apply to cases where both individuals are eligible for family tax benefit for the same period or for different periods within the same income year. This subclause ensures that both individuals can access the new method of calculating Part B provided that they satisfy all the criteria in subsection 29B(5) and all other criteria for the new method of calculating Part B.

Subsection 29B(5) is firstly intended to apply to cases covered by a determination under section 28 or 29 of the Family Assistance Act. Section 28 allows the Secretary to make a determination that both members of a couple in a blended family are eligible for family tax benefit for the children for the same period. Section 29 allows the Secretary to make a similar determination in respect of separated members of a couple for the period before separation. Finally, subclause 29B(5) is also intended to apply to cases where members of a couple have agreed to swap who claims FTB with the result that both receive payment of FTB at different times during an income year.

New clause 29C sets out the conditions that need to be met for a particular day or days for an individual to receive Part B at the maximum rate.

Paragraph 29C(1)(a) defines the relevant period within which an individual can receive Part B at the maximum rate. The relevant period starts on the latest of the following days:

•

1 July of the income year;

•

the day after the secondary earner stops paid work;

•

the day after the secondary earner stops receiving passive employment income in respect of a period;

and ends immediately before the day on which the secondary earner returns to paid work.

However, the period defined in paragraph 29C(1)(a) may have to be adjusted if paragraph 29C(1)(b) applies. If the secondary earner is receiving passive employment income (such as paid leave or other work related income for the day) then the new method would not apply for that day or the days in question and the general method of calculating the rate of Part B would apply.

Subclause 29C(2) sets out the rules for determining the day on which the individual returns to work.

If an individual returns to work because of subsection 3B(2) (the definition of 'returns to paid work'), the day on which the individual returns to paid work is the first day of the 4 week period on which the individual is working.

If an individual has not worked an average of at least 10 hours per week for 4 consecutive weeks and elects to access the new method and returns to paid work because of subsection 3B(3), the day on which the individual returns to work is the first day in the income year that the individual was working.

Subclause 29C(3) is intended to clarify that the first and last days of the period mentioned in paragraph 29C(1)(a) fall in that period.

Item 9 makes a technical amendment to subclauses 31A(1) and (3) of Schedule 1. This amendment enables the relevant amount of the Part B supplement to be included for the day (or days) within the period the individual is able to access the new method of calculating Part B.

Amendment of the A New Tax System (Family Assistance) (Administration) Act 1999

Items 10 and 11 make amendments to the A New Tax System (Family Assistance) (Administration) Act 1999 (the Family Assistance Administration Act). Both amendments are technical amendments to ensure that any access to the Part B supplement associated with this measure (see new paragraph 29A(2)(b) of Schedule 1 to the Family Assistance Act) is dependent upon the individual satisfying the FTB reconciliation conditions.

Item 10 amends subsection 32A(2) of the Family Assistance Administration Act by adding a new paragraph (bba) that refers to paragraph 29A(2)(b) of Schedule 1 to the Family Assistance Act.

Item 11 amends paragraph 105A(2)(a) of the Family Assistance Administration Act by adding a new subparagraph (iiba) that refers to paragraph 29A(2)(b) of Schedule 1 to the Family Assistance Act.

Application of amendments

Item 12 provides that the amendments made by this Schedule apply in respect of the 2005-06 income year and later income years.