House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Families, Community Services and Indigenous Affairs, the Hon Mal Brough MP)

Schedule 5 - Maintenance income credit balances

Summary

A maintenance income credit (MIC) is introduced from 1 July 2006 to enable parents to access their unused maintenance income free area from previous years to offset late child support payments.

An individual who is entitled to maintenance income that is registered for collection by the Child Support Agency (CSA) and who does not receive the correct amount of maintenance when it is due, may be able to accrue a MIC balance. The individual must be eligible for FTB, or the partner of an individual who is eligible for FTB, for an accrual to occur. Accruals to a MIC balance represent the unused amount of the maintenance income free area (MIFA) under the maintenance income test for FTB Part A. When arrears of maintenance income are subsequently received, the MIC balance would be drawn upon to reduce the amount of arrears counted under the maintenance income test.

The measure commences on 1 July 2006. The MIC will first become available to FTB customers during the end of year reconciliation or lump sum payment of FTB for the 2006-07 income year, starting from July 2007. This would occur if the customer has a MIC balance at the end of 2005-06 and arrears are received during 2006-07.

The earliest date for accrual of a MIC balance is the later of 1 July 2000 or the day the individual or partner became eligible for FTB.

Background

Under the maintenance income test for FTB Part A, any child support received in the relevant income year above the MIFA reduces the customer's FTB Part A by 50 cents in the dollar until the 'base rate' for the individual is reached.

Under the current rules, any unused MIFA is not carried forward from one year to the next. This can disadvantage families who receive child support payments late (for example, as an arrears payment in the next income year) because these families cannot benefit from the MIFA that would have applied if they had received child support in the year when it was due. The introduction of a MIC addresses this issue.

Explanation of the changes

Part 1 - Amendments

Section 3 of the Family Assistance Act contains some general definitions for terms and concepts used in the family assistance law.

Item 1 introduces the concept of a 'maintenance income credit balance', which is defined in subsection 3(1) as having the meaning given by new clause 24A of Schedule 1 to the Family Assistance Act. This concept is relevant for the purposes of the new MIC provisions in Schedule 1.

Item 2 introduces the concept of a 'registered entitlement', which is defined in subsection 3(1) as an individual's entitlement to receive maintenance income from a particular payer, provided the payer's liability is an enforceable maintenance liability within the meaning of the Child Support (Registration and Collection) Act 1988 , that is, a maintenance liability that is registered with the CSA and is enforceable.

While the maintenance income test applies to a maintenance liability that is privately collected, an individual who chooses private collection instead of CSA collection must privately collect 100 per cent of the liability to satisfy the reasonable maintenance action requirement. If the individual is unable to privately collect 100 per cent, the individual is required to swap to CSA collection. Therefore, the situation of underpayment should result in transferring to CSA collection, and the CSA is able to collect a period of unpaid private arrears. This would normally be limited to 3 months' arrears, but may be 9 months in special circumstances.

Item 3 inserts a new subdivision heading before clause 19A of Schedule 1. The effect is to divide Division 5 of Schedule 1 into two Subdivisions - one dealing with the maintenance income test and the other with maintenance income credit balances.

The maintenance income test is relevant in working out an individual's Part A rate of FTB in certain circumstances. The calculation process is set out in the method statement in clause 3 of Schedule 1 to the Family Assistance Act. The maintenance income test is the second means test that potentially applies to reduce an individual's maximum rate of FTB Part A.

The rules relating to the maintenance income test are detailed in Division 5 of Part 2 of Schedule 1 to the Family Assistance Act. An individual's reduction for maintenance income is worked out using the method statement in clause 20 of Schedule 1. The first step is to annualise the amount of maintenance income received by the individual in the relevant income year. The next step is to work out the individual's maintenance income free area (MIFA) using the table in clause 22 - the amount of the MIFA will depend on the individual's family situation and number of FTB children. The difference between the individual's annualised maintenance income and MIFA is the individual's maintenance income excess. The individual's income tested maximum rate is then reduced by half of the maintenance income excess (the 50% taper).

Item 6 amends step 1 of the method statement in clause 20 to ensure that, in working out an individual's annualised maintenance income, any arrears of maintenance income offset against an individual's MIC balance (and partner's balance if relevant) would be disregarded for the purposes of the maintenance income test.

Item 7 inserts a new subclause 20(2) into Schedule 1. This new provision ensures that arrears of maintenance payments can only be disregarded for the purposes of the maintenance income test under new paragraph (c) of step 1 when the individual satisfies the relevant FTB reconciliation conditions in section 32B of the Family Assistance Administration Act for each same-rate benefit period in the relevant income year. This means that any arrears of maintenance received during an income year would continue to be counted in determining the rate of FTB before the FTB reconciliation conditions are satisfied.

If the relevant reconciliation conditions are not satisfied in relation to a particular income year because, for example, tax returns are lodged more than 2 years after the end of the relevant income year, then an individual will not be able to access their MIC balance for that year. A similar condition must be satisfied before an amount can accrue to a MIC balance (under new subclause 24B(3) of Schedule 1).

Item 8 inserts a series of new provisions that set out the conditions for accrual to a MIC balance, the amount of the accrual and the circumstances in which a MIC balance is depleted. These new provisions are in new Subdivision B - Maintenance income credit balances.

New clause 24A - Maintenance income credit balances

New clause 24A defines the concept of a MIC balance and sets out some general rules relating to that concept.

As a general rule, a MIC balance may exist for each registered entitlement of an individual. It will therefore be possible for there to be more than one MIC balance in relation to an individual who is eligible for FTB. This may occur if the individual is partnered and both members of the couple are entitled to maintenance income. In that case, each member of the couple may have a MIC balance. It may also occur if an individual is entitled to maintenance income from more than one payer. In that case, the individual may have a MIC balance in relation to each payer.

A MIC balance, at any given time, would be the balance of accruals under clause 24B and depletions under clause 24E in relation to a particular registered entitlement (new subclause 24A(1) refers).

New subclause 24A(2) ensures that the MIC balance for a registered entitlement cannot exceed the total arrears owing from that registered entitlement for all income years during which the registered entitlement has existed. This is consistent with the rules for depleting a MIC balance under which the MIC balance would be depleted whenever arrears are received, even if the total maintenance income received is less than the MIFA. It will not be possible for a payee to have a MIC balance greater than the arrears owed (including where there are no longer any arrears owed).

Accrual to a MIC balance can only occur after the relevant FTB reconciliation conditions have been satisfied - the rules in new clause 24B make that clear. It is possible that an individual may satisfy the FTB reconciliation conditions for a particular income year at a time when they have not yet satisfied the FTB reconciliation conditions for an earlier year, and where the earlier year could result in an accrual for that year. This can occur where the tax returns are not lodged in sequence.

New subclause 24A(3) deals with this scenario and clarifies that the MIC balance can be recalculated taking into account any relevant accrual for the earlier income year before an accrual or depletion in respect of a later income year.

In this scenario, reconciliation for the particular year in relation to the MIC for 2006-07 or later would proceed on the following basis.

If arrears were received in the earlier income year, the arrears would deplete the MIC balance. If the amount of maintenance income received in the earlier income year is less than the ongoing amount that was due in that income year, and the amount received was less than the MIFA, there is a 'potential MIC accrual' that may arise if the reconciliation conditions are met.

If the earlier income year is 2005-06 or later, the time limit for the 'potential MIC accrual' to occur would be the normal two year limit in which to lodge tax returns (that is reflected in the FTB reconciliation conditions). For example, for 2005-06, the time limit to lodge a tax return is 30 June 2008. Therefore, reconciliation for 2006-07 may occur before the time limit expires for 2005-06. If so, the potential MIC accrual for the earlier year (2005-06) would not be taken into account at that stage.

For example, in October 2007, the reconciliation conditions for 2006-07 are satisfied, and 2004-05 is the last income year that has been reconciled. The MIC balance is $2,000 at the end of 2004-05. It is known that there is a potential MIC accrual of $1,500 for 2005-06. Also, arrears have been received in 2006-07. Therefore, reconciliation for 2006-07 would proceed on the basis that the MIC balance before depletion for 2006-07 is $2,000 (not $3,500). Subsequently, in December 2007, the reconciliation conditions for 2005-06 are satisfied. Therefore, an additional accrual of $1,500 occurs for 2005-06, giving a MIC balance of $3,500 instead of $2,000 at the end of 2005-06.

Therefore, the reconciliation calculation for 2006-07 based on the original MIC balance of $2,000 would be revisited, substituting a MIC balance before depletion for 2006-07 of $3,500.

New subclause 24A(4) ensures the ongoing application of the rules relating to MIC balances, whether or not the individual or individual's partner continues to be eligible for FTB.

An individual who ceases to be eligible for FTB may have a MIC balance at that time. During the subsequent period of ineligibility for FTB, no MIC accrual can occur. However, MIC depletion can still occur due to receipt of maintenance arrears. If the individual later becomes eligible for FTB, the MIC balance at that time would take into account both the previous MIC balance, and any depletion that occurred while ineligible.

New clause 24B - Accruals to a maintenance income credit balance

New clause 24B sets out the conditions that need to be satisfied for there to be an accrual to a MIC balance for a registered entitlement of an individual for a day in an income year.

The relevant conditions are as follows.

First, the individual, the individual's partner or both must be eligible for FTB for the day. Members of a couple can both be eligible for FTB in a blended family situation or for a past period before a separation. Otherwise, only one member of a couple is generally eligible for FTB.

Second, the eligible person must have satisfied the relevant FTB reconciliation conditions in section 32B of the Family Assistance Administration Act for all the same-rate benefit periods that are included in the relevant income year.

Third, the eligible person's annualised amount of maintenance income for the day must be less than the person's MIFA for the day.

Finally, the maintenance income that the individual received in the relevant income year from the registered entitlement is less than the amount due in that year.

New clause 24C - Amount of accrual to a maintenance income credit balance

If all of the conditions above are met, then the individual can accrue an amount to their MIC balance in respect of the day for the registered entitlement. The amount of the accrual is worked out in accordance with the rules in new clause 24C.

In broad terms, the accrual amount will equal the amount of the MIFA that would have been used if the 'correct' amount of maintenance income had been received when it was due.

New clause 24C incorporates two method statements. The method statement at the end of subclause 24C(1) sets out the process for working out the amount of accrual for a day in an income year to a MIC balance for a registered entitlement of an individual who is an eligible person or the partner of an eligible person. This method statement applies in the more straightforward cases where the individual has the one registered entitlement (and therefore only one MIC balance) and the individual's partner, if any, does not have a registered entitlement.

The first step in the process of determining the accrual amount to the MIC balance for a registered entitlement of an individual is to work out the eligible person's global maintenance entitlement for the day.

The concept of 'global maintenance entitlement' is defined in new clause 24D. Under the new definition, an eligible person's global maintenance entitlement for a day is the sum of four specified components.

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The first component is the annualised amount of maintenance income due from each registered entitlement of the eligible person and each registered entitlement of their partner (if any) for the day. The formula in new subclause 24D(2) is used to arrive at an annualised amount of maintenance due from each registered entitlement.

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The second is any amount worked out under new subclause 24D(3), as described below.

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The third component is the annualised amount of any capitalised maintenance income of the eligible person and partner (if any) for the day. This amount is worked out using the existing rules in clause 24 of Schedule 1 to the Family Assistance Act.

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The fourth component is the annualised amount of maintenance income that is not maintenance income from a registered entitlement and is not capitalised maintenance income (that is, it is privately collected maintenance income).

New subclause 24D(3) is the annualised amount of arrears of maintenance income from a registered entitlement that is not disregarded under the maintenance income test due to a depletion from the MIC balance (that is, it is not disregarded under paragraph (c) of step 1 of the method statement in clause 20).

The second step in the process of determining the accrual amount is to identify the lower of the global maintenance entitlement and the MIFA that applied to the eligible person for the relevant day.

The annualised amount of maintenance income of the eligible person for the day is then subtracted from the lower amount identified in step 2 (step 3).

Step 4 requires the result to be divided by 365 (which effectively converts an annual amount into a daily one).

Where the second method statement does not apply, the amount worked out under step 4 will be the amount of accrual to the MIC balance of the individual for the day.

The following examples illustrate the accrual amount where the individual's MIFA was $1,182.60 throughout the relevant income year (say, 2005-06) and the individual had one registered liability for the entire income year:

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if the individual was entitled to receive child support of $3,000 in 2005-06 but received nil, the MIC accrual for 2005-06 would be $1,182.60;

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if the individual was entitled to receive child support of $3,000 in 2005-06 but received $500, the MIC accrual for 2005-06 would be $682.60;

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if the individual was entitled to receive child support of $3,000 in 2005-06 but received $2,000, the MIC accrual for 2005-06 would be nil;

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if the individual was entitled to receive child support of $1,000 in 2005-06 but received nil, the MIC accrual for 2005-06 would be $1,000;

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if the individual was entitled to receive child support of $1,000 in 2005-06 but received $500, the MIC accrual for 2005-06 would be $500.

As an individual's circumstances can change throughout an income year, an individual's MIFA can vary throughout the year. Therefore, the accrual of a MIC amount would be on a daily basis. For example, if in 2005-06, an individual has one FTB child for the first 100 days and 2 FTB children for the remaining 265 days, the MIFA would initially be $1,182.60, and then increase to $1,576.80. If the individual was entitled to receive child support of $3,000 in 2005-06 but received nil, the MIC daily accrual would be $3.24 ($1,182.60/365) for 100 days, and $4.32 ($1,576.80/365) for 265 days. This would be a total accrual of $1,468.80 for 2005-06.

An individual may accrue to a MIC balance for only part of an income year. This would occur, for example, where the individual is only eligible for FTB, or entitled to receive child support, for part of the year. Another example is where the amount of maintenance income received is less than the MIFA for only part of the year.

In working out an accrual amount, any capitalised maintenance income would affect the size of the 'unused MIFA'. Capitalised maintenance income relates to non-periodic amounts or benefits that exceed $1,500, such as a lump sum payment or a transfer of property. The capitalised maintenance income amount is apportioned and taken into account under the maintenance income test for the whole period in respect of which it is received. For example, a transfer of assets valued at $20,000 and intended as maintenance for 5 years for one child would be apportioned as $4,000 a year over that period. As this exceeds the MIFA for one child, there would be no accrual amount. The relevance of capitalised maintenance income is reflected in the concept of global maintenance entitlement (as defined in new clause 24D) and used in the method statement at the end of new subclause 24C(1).

In the more complex cases, where there are multiple registered entitlements that satisfy the requirement in new subclause 24B(5) (and therefore multiple MIC balances) for an individual and/or their partner, there are additional steps, set out in the second method statement at the end of new subclause 24C(2), that apply in working out the amount of an accrual to a relevant MIC balance. In these situations, the accrual amount worked out under the first method statement will be apportioned between the relevant balances on an equal basis. However, the apportioned amount for a particular maintenance liability cannot exceed the difference between the ongoing amount due and the amount received for the liability (the daily cap referred to in the second method statement). Any excess would be available for apportioning to the other relevant underpaid liabilities.

This apportionment regime is detailed in the second method statement.

The first step is to work out the daily cap for each relevant balance. The daily cap is the excess of the amount due in an income year for the registered entitlement over the amount received in the income year from the registered entitlement divided by 365 to get a daily amount.

The second step involves equally distributing the accrual amount in the first method statement (under step 4) between each relevant MIC balance, up to the daily cap. Any remaining amount is then distributed in a similar manner among the remaining MIC balances, again up to the daily cap for the relevant balance (in accordance with step 3). The process continues until either there is no remaining accrual amount or the daily cap for each balance is reached (step 4). The amount accrued to the relevant MIC balance then becomes the sum of the distributions made under the preceding steps of the second method statement.

New subclause 24C(3) clarifies that new clauses 24B and 24C only apply once for a day in relation to a relevant MIC balance.

New clause 24D - Global maintenance entitlement of an eligible person

This new clause is discussed in the context of new clause 24C where it is used.

New clause 24E - Depletions from a maintenance income credit balance

New subclause 24E(1) sets out when a depletion from a MIC balance for a registered entitlement occurs. This happens after the relevant income year has ended and provided the individual has received arrears of maintenance income in that year. An individual has received arrears of maintenance income in an income year for a particular registered entitlement if the amount received in the income year from the entitlement exceeds the ongoing amount that is due in that income year from that entitlement.

For example, the amount due from a registered entitlement in 2006-07 is $4,000, and there is an unpaid liability for amounts due in a previous income year(s) of $2,000. If the payee receives $5,000 in 2006-07, the individual has received arrears, and the arrears amount for MIC purposes in 2006-07 is $1,000.

The MIC balance for a liability would be depleted when arrears are received. This is reflected in new subclause 24E(2), which states that the amount of the depletion from the MIC balance for a particular registered entitlement is the lower of:

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the excess of the maintenance income that the individual received in the income year from the registered entitlement over the amount due in that year from the entitlement (that is, the arrears amount); and

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the amount of the MIC balance.

For example, if the MIC balance at the end of 2005-06 is $2,500, and arrears of $1,500 are received in 2006-07, the MIC balance at the end of 2006-07 would be $1,000, and nil arrears would be counted in working out an individual's annualised maintenance income under the maintenance income test when payment of FTB is reconciled for the 2006-07 income year. If arrears of $1,500 are received in 2007-08, the MIC balance at the end of 2007-08 would be nil, and only $500 arrears would be counted under the maintenance income test when payment of FTB is reconciled for 2007-08.

In working out the maintenance income received or due in an income year for the purposes of determining whether there is to be a depletion from a MIC balance and the amount of the depletion, new subclause 24E(3) ensures that any maintenance income for a child whose FTB child rate (before any sharing of FTB) does not exceed the base FTB child rate is disregarded. For example, the FTB child rate for an FTB child aged 16 to 24 does not exceed the base FTB child rate.

This is consistent with the calculation of annualised maintenance income for FTB purposes more generally.

Therefore, if an individual has two children aged 12 and 16, and receives maintenance for both children, only the amount for the child aged 12 will be counted in calculating maintenance income for FTB purposes. For example, if the individual receives $3,000 for the two children, only $1,500 would be counted.

In relation to depletion from a MIC balance due to receiving arrears in an income year, the amount of the depletion will also exclude any arrears that are not counted in calculating maintenance income for FTB purposes.

For example, a total of $5,000, including arrears of $2,000, for two children aged 12 and 16 is received in 2006-07. As the amount for the child aged 16 is disregarded, the amount for the child aged 12 would be $2,500, including arrears of $1,000. Therefore, if the MIC balance at the end of 2005-06 is $1,800, the MIC balance at the end of 2006-07 would be $800 ($1,800 - $1,000), and nil arrears would be counted under the maintenance income test during the reconciled determination of FTB for 2006-07.

Example of the application of the MIC rules to a sole parent receiving child support from one payer for children aged under 16

At 1 July 2006, Sally is a sole parent FTB instalment customer on income support with two children aged 10 and 13 years, and she is eligible for maximum rent assistance. Her FTB commenced on 1 July 2000 for the two children, and she separated during 2001-02. At 1 July 2006, Sally's FTB has been reconciled for each year up to and including 2004-05. Her child support assessment commenced in 2001-02 at $3,000 per annum, and has continued at that amount throughout. Sally has been on CSA collection the whole time. Her former partner, Peter, was initially making payments on time, but stopped making any payment from March 2003.

For Sally, 2002-03 is the first year that might involve a MIC accrual, as this was the first year that she did not receive the correct amount. She was due $3,000 in 2002-03, but received $2,000. Her MIFA was $1,460 throughout 2002-03. The MIC daily accrual for all of 2002-03 is nil, as the maintenance income she received was not less than her MIFA for any day in 2002-03.

In 2003-04, Sally was due $3,000, but received nil. Her MIFA was $1,503.80 throughout 2003-04. The MIC daily accrual would be $4.12 ($1,503.80/365) for 366 days. This would be a total accrual of $1,507.92 for 2003-04.

In 2004-05, Sally was due $3,000, but received nil. Her MIFA was $1,533 throughout 2004-05. The MIC daily accrual would be $4.20 ($1,533/365) for 365 days. This would be a total accrual of $1,533 for 2004-05. Therefore, at 1 July 2006, Sally's MIC balance is $3,040.92, based on accrual to the end of 2004-05.

In October 2006, Sally's FTB for 2005-06 is reconciled. In 2005-06, Sally was due $3,000, but received nil. Her MIFA was $1,576.80 throughout 2005-06. The MIC daily accrual would be $4.32 ($1,576.80/365) for 365 days. This would be a total accrual of $1,576.80 for 2005-06. Therefore, after the reconciliation in October 2006, Sally's MIC balance is $4,617.72, based on accrual to the end of 2005-06.

In 2006-07, Sally receives a total of $6,000 child support, including $3,000 arrears from previous financial years paid in December 2006. The arrears received during the year are counted in determining her rate of FTB for the remainder of the year, before reconciliation.

In November 2007, Sally's FTB for 2006-07 is reconciled. As the MIC balance at the end of 2005-06 was $4,617.72, and arrears of $3,000 was received in 2006-07, the MIC balance at the end of 2006-07 becomes $1,617.72 due to depletion for 2006-07 of $3,000. Also, nil arrears would be counted under the MIT during the reconciled determination of FTB for 2006-07.

In 2007-08, Sally again receives a total of $6,000 child support, including $3,000 arrears from previous financial years paid in December 2007. The arrears received during the year are counted in determining her rate of FTB for the remainder of the year, before reconciliation.

In November 2008, Sally's FTB for 2007-08 is reconciled. As the MIC balance at the end of 2006-07 was $1,617.72, and arrears of $3,000 was received in 2007-08, the MIC balance at the end of 2007-08 becomes nil due to depletion for 2007-08 of $3,000. Also, only $1,382.28 arrears (not $3,000 arrears) would be counted under the MIT during the reconciled determination of FTB for 2007-08.

Part 2 - Application and transitional provisions

The amendments commence on 1 July 2006 in accordance with the table in clause 2 of this Bill.

Item 9 sets out the application rules for the MIC amendments.

Paragraph (c) of step 1 of the method statement in subclause 20(1) of Schedule 1 to the Family Assistance Act applies to FTB for the 2006-07 income year and later income years ( subitem 9(1) refers). This application rule, combined with new subclause 20(2) of Schedule 1 (as inserted by item 7) , ensures that arrears of maintenance income are disregarded under the maintenance income test for FTB Part A in relation to the 2006-2007 income year and later income years after reconciliation for the relevant year occurs. This means that families will first benefit from the MIC from July 2007 for the 2006-07 income year.

The rules relating to accruals to, and depletions from, a MIC balance (which are set out in Subdivision B of Division 5 of Part 2 of Schedule 1 to the Family Assistance Act) apply to the 2000-01 income year and later income years. This backdating has a beneficial effect. It will enable an individual to have a MIC balance greater than zero at the end of 2005-06, rather than having a nil MIC balance at the start of 2006-07.

Item 10 sets out some relevant transitional rules.

One of the conditions for accruing to a MIC balance is that an eligible person satisfies the FTB reconciliation conditions in relation to the relevant income year (new subclause 24B(3) as inserted by item 8 refers). The FTB reconciliation conditions were first made explicit in the family assistance law for the 2003-04 income year, with the start of the FTB Part A supplement. Subitem 10(1) ensures that, for the earlier income years 2000-01, 2001-02 or 2002-03, a similar result is achieved by providing that accrual of an amount to a MIC balance would be subject to the person not having a 'non-lodger debt' for the particular year as at 1 July 2006. The concept of a non-lodger debt is then defined in subitem 10(2) by reference to relevant provisions in sections 28 and 71 of the Family Assistance Administration Act. A 'non-lodger debt' arises where the customer or the customer's partner is required to lodge a tax return for the particular year but has not done so by the end of the next income year.