Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 15 Fringe benefits

Outline of chapter

Schedule 15 to the Bill changes the way in which fringe benefits are treated under the income tests for family assistance and youth income support payments and for other related purposes. The changes are also relevant for a number of income tax provisions. The meaning of 'adjusted fringe benefits total' is modified so that the gross rather than adjusted net value of reportable fringe benefits is used, except in relation to fringe benefits received by individuals working for public benevolent institutions, health promotion charities and some hospitals and public ambulance services.

These changes commence on the first 1 January or 1 July 2017 after the day on which this Act receives the Royal Assent.

Background

Family Assistance

Schedule 17 to the Family Assistance Act defines adjusted taxable income (ATI). ATI has relevance for family tax benefit, stillborn baby payment and child care benefit.

Clause 2 of Schedule 17 lists the components of ATI, one of which is an individual's adjusted fringe benefits total. Clause 4 defines adjusted fringe benefits total by reference to a formula that draws on concepts in the Fringe Benefits Tax Act 1986 and the FBT Assessment Act. Under the formula:

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adjusted fringe benefits total = reportable fringe benefits total x (1-FBT rate).

A reportable fringe benefit total is the grossed up value of the fringe benefit (as worked in accordance with Part X1B of the FBT Assessment Act).

Under the current definition, the net value of fringe benefits used is 51% for 2016-17 (the FBT rate being 49% for the fringe benefit year ending 31 March 2017).

This Schedule modifies the calculation of adjusted fringe benefits total. There will be two methods for calculating the fringe benefits component of an individual's ATI, depending on the nature of the fringe benefit. The treatment of fringe benefits that are provided by an employer described in section 57A of the FBT Assessment Act (i.e., public benevolent institutions, health promotion charities and some hospitals and public ambulance services) will not change (although the language of the provision is changing to more closely align with relevant tax law). It is estimated that 65 per cent of individuals with reportable fringe benefits will have their benefits worked out under this method. Otherwise, the gross value of reportable fringe benefits would be used.

The family assistance definition of ATI is adopted in the income test provisions for parental leave pay and dad and partner pay under the Paid Parental Leave Act 2010 (see sections 37, 38 and 115CG of that Act). It follows that any change to the family assistance calculation of ATI would flow through to the Paid Parental Leave Act 2010 .

Taxation

The calculation of ATI in the Family Assistance Act is also relevant in working out whether an individual is entitled to a low income superannuation contribution payment, a net medical expenses offset, and the dependant (invalid and carer) tax offset. It may also affect the amount of offset for residents of isolated areas (Zone tax offset), members of defence forces serving overseas and certain persons serving with an armed force under the control of the United Nations serving overseas, with certain dependants.

Subsection 6(1) of the Income Tax Assessment Act 1936 defines the term adjusted fringe benefits total which is consistent with the family assistance definition. This term is used in the definition of rebate income for the purposes of the rebate provided for low income aged persons and pensioners.

This Schedule amends the definition of adjusted fringe benefits total in subsection 6(1) so that it remains consistent with the new family assistance definition.

Social Security

Point 1067G-F10 defines combined parental income for the purposes of the parental income test for youth allowance. This definition includes the parent's adjusted fringe benefit total for the relevant year. Subpoint 1067G-F11(2) then defines adjusted fringe benefits total , consistent with the family assistance definition.

The Bill amends this definition of adjusted fringe benefits total so that it remains consistent with the new family assistance definition.

ABSTUDY is an administrative scheme that adopts similar rules and concepts to those that apply in relation to youth allowance, including the parental income test. Any changes to the components of income which are relevant under the youth allowance parental income test will therefore also affect ABSTUDY. The intention is to change the ABSTUDY guidelines to maintain this consistency.

The Assistance for Isolated children Scheme is also an administrative scheme that provides payments in respect of children who cannot go to a state school because of geographical location, disability or special health needs. The additional boarding allowance component of this payment is subject to a similar parental income test to youth allowance (and ABSTUDY). The proposed change to the treatment of fringe benefits will also be reflected in the guidelines for this scheme.

Explanation of the changes

A New Tax System (Family Assistance) Act 1999

Clause 4 of Schedule 3 to the Family Assistance Act defines adjusted fringe benefit total. Item 1 repeals this definition and replaces it with a new definition.

New clause 4 provides that an individual's adjusted fringe benefits total is the sum of their section 57A employer fringe benefits total and other employer fringe benefits total.

The meaning of other employer fringe benefits total and section 57A employer fringe benefits total are then defined. Other employer fringe benefits total is the sum of each of the individual's reportable fringe benefits amounts for the income year under section 135P and section 135Q (to the extent that section relates to the individual's employment by an employer described by section 58) of the FBT Assessment Act Section 57A employer fringe benefits total is the sum of each of the individual's quasi-fringe benefits amounts received by an employer under section 135Q of the Fringe Benefits Tax Assessment Act 1986 to the extent that section relates to an employer described under section 57A of that Act.

Income Tax Assessment Act 1936

Item 2 repeals the definition of adjusted fringe benefits total in subsection 6(1) of the Income Tax Assessment Act 1936 and substitutes a new definition. The existing definition is aligned with the definition in the Family Assistance Act. To ensure ongoing consistency, the new definition of adjusted fringe benefits total in subsection 6(1) has the meaning given by clause 4 of Schedule 3 to the Family Assistance Act.

Item 3 makes a consequential change to repeal the definition of reportable fringe benefits total (which is not required for the new definition inserted by item 2).

Social Security Act 1991

Subpoint 1067G-F11(2) of the Social Security Act defines adjusted fringe benefits total , consistent with the family assistance definition.

Item 4 repeals this subpoint and substitutes a new definition, consistent with the new family assistance definition described above.

Application provisions

Item 5 provides for the application of the amendments made by Schedule 1 which redefined adjusted fringe benefit total.

Subitem 5(1) provides that the amendments apply in working out an individual's rate of family tax benefit for days on or after commencement.

Subitem 5(2) provides that the amendments apply in working out an individual's rate of child care benefit for days on or after the first Monday on or after commencement, to align with the child care benefit concept of 'week' which commences on a Monday.

Subitem 5(3) provides that the amendments apply in working out an individual's eligibility for stillborn baby payment for a child delivered on or after commencement.

Subitem 5(4) provides that the amendments apply in relation to a claim for parental leave pay or dad and partner pay for a child who is born or entrusted to care on or after commencement irrespective of when the claim is made.

Subitem 5(5) provides that the amendments apply in working out the rate of youth allowance for days on or after commencement.

Subitem 5(6) provides that the amendments do not apply in working out a person's qualification for a low income supplement. The low income supplement is an annual payment that is repealed from 1 July 2017.

Subitem 5(7) provides that the amendments do not apply in working out whether a low income superannuation contribution is payable for 2016-17 or earlier income years. The low income superannuation contribution is to be repealed from 1 July 2017.

Subitem 5(8) provides that the amendments apply in working out whether a taxpayer is entitled to a rebate for medical expenses, and the amount of the rebate, in respect of the income year beginning on or after commencement.

Subitem 5(9) provides that the amendments apply in working out whether a taxpayer is entitled to a rebate for low income aged persons and pensioners in respect of the income year beginning on or after commencement.

Subitem 5(10) provides that the amendments apply in working out whether a trustee is entitled to a rebate for low income aged persons and pensioners in respect of the income year beginning on or after commencement.

Subitem 5(11) provides that the amendments apply in working out whether an individual is entitled to a dependant (invalid and carer) tax offset, and the amount of the offset, for an income year beginning on or after commencement.

Subitem 5(12) provides that the amendment apply in working out the amount of an individual's dependant (non-student child under 21 or student) notional tax offset for an income year beginning on or after commencement. This may have an impact on the amount of a taxpayer's entitlement to a zone tax offset and overseas forces tax offset where they have certain dependants.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Fringe benefits

Overview

This Schedule amends the A New Tax System (Family Assistance) Act 1999 , Social Security Act 1999 and Income Tax Assessment Act 1936. This Schedule will change how reportable fringe benefits are treated when calculating adjusted taxable income (ATI) for the purposes of income testing family assistance, youth income support payments and certain tax offsets.

Under current rules, the net value of reportable fringe benefits (or 51 per cent) is used to calculate an individual's ATI. From the first 1 January or 1 July after the bill receives the Royal Assent, the gross rather than adjusted net value of reportable fringe benefits will be used to calculate an individual's ATI, except in relation to fringe benefits which are received by individual's working for certain not-for-profit organisations.

Fringe benefits received by an individual who is employed by a not for profit institution defined under section 57A of the Fringe Benefits Tax Assessment Act 1986 (public benevolent institutions, health promotion charities and some hospitals and public ambulance services) will continue to be assessed under current arrangements.

Affected payments include Family Tax Benefit (FTB) Part A and Part B, Child Care Benefit (CCB), Parental Leave Pay, Dad and Partner Pay, Stillborn Baby Payment, Youth Allowance, and payments under the ABSTUDY scheme and Assistance for Isolated Children scheme.

The new treatment of reportable fringe benefits will apply to certain tax offsets. These offsets include the Net Rebate for Medical Expenses, Rebate for Low Income Aged Persons and Pensioners, Dependant (Invalid and Carer) Tax Offset and Dependant (non-student child under 21 or student) Notional Tax Offset.

The Low Income Supplement and Low Income Superannuation Contribution Supplement both use ATI to calculate entitlement; however, both will cease from 1 July 2017 and are not affected by these amendments.

Human rights implications - family assistance and youth income support

Overview of family assistance and youth income support payments

The Australian Government supports families with the direct and indirect costs of raising dependent children through a number of payments which are subject to parental income testing to determine entitlement. These payments include FTB Part A, FTB Part B, CCB, Youth Allowance, ABSTUDY and Assistance for Isolated Children Additional Boarding Allowance, Parental Leave Pay, Dad and Partner Pay and Stillborn Baby Payment. These payments have the primary objective to ensure all children have access to an acceptable standard of living and/or have a workforce participation focus for eligible families. Stillborn Baby Payment provides some financial assistance to families who have delivered a stillborn baby.

The United Nations Committee on Economic, Cultural and Social Rights has stated that a social security scheme should be sustainable and that the conditions for benefits must be reasonable, proportionate and transparent. This measure will provide for more equitable treatment across the welfare / payment system of income from fringe benefits and achieve the objective of creating savings to ensure the ongoing sustainability of the significant package of assistance provided by the Australian Government to families with dependent children.

The right to social security and the right to an adequate standard of living:

Article 9 of the International Covenant on Economic, Social and Cultural Rights (ICESCR), recognises the right of everyone to benefit from social security. Article 26 of the Convention on the Rights of the Child (CRC) requires countries to recognise the right of the child to benefit from social security. Benefits should take into account the resources and the circumstances of the child and persons having responsibility for the maintenance of the child.

Article 11 of ICESCR recognises the right of everyone to an adequate standard of living for an individual and their family, including adequate food, clothing and housing, and the continuous improvement of living conditions. Article 27 of the CRC recognises that children have the right to a standard of living that is good enough to meet their physical and mental needs.

A family's ATI is calculated when income testing family payments and youth income support payments to ensure that individuals who receive a tax benefit or concession which lowers their taxable income do not receive a higher rate of payment than a family who has the same overall family income but who makes different investment decisions or receives a different type of income.

This measure will improve the consistency in how income testing rules treat fringe benefits. A fringe benefit is an extra benefit (such as a car, car parking or entertainment) which supplements an employee's salary. An employer is responsible for paying the tax liability associated with fringe benefits, not the employee.

Under current rules, where a family receives fringe benefits from an employer, the net value of the fringe benefit (51 per cent) is used to calculate their ATI. In practice this means that two families may have the same collective income but the family who receives more of their income in fringe benefits is treated beneficially and may receive a higher rate of government assistance than a family with the same level of income, but whose income is received more in salary.

For example, on 1 July 2016 a single income family with two children aged under 13 with taxable income of $55,000 and reportable fringe benefits of $5,000 would, under current rules, be eligible for $490 more of FTB Part A than a family with taxable income of $60,000. In addition to the higher rate of FTB Part A, the family with fringe benefits would pay $1,600 less in tax because they do not have a tax liability on their fringe benefits.

The gross value of reportable fringe benefits is currently used in a number of income tests including: child support obligations, Medicare Levy Surcharge, Superannuation Co-Contributions and Higher Education Loan Program and Financial Supplement repayments.

Individuals who work for not-for-profit institutions defined under section 57A of the Fringe Benefits Tax Assessment Act 1986 certain public benevolent institutions, health promotion charities and some hospital and ambulance services) will continue to have net fringe benefit amounts assessed. This will ensure the Bill does not impact on the ability of these organisations to attract and retain staff through fringe benefit concessions in lieu of higher salaries. It is estimated that around 65 per cent of affected individuals will continue to have net fringe benefits assessed.

For those individuals who are not eligible to have net fringe benefits assessed, the grossing up of fringe benefits may not impact their entitlement to a payment. Individuals who are eligible for income support are not income tested for the purposes of determining entitlement to FTB Part A, CCB or youth income support payments. Where a low income individual is subject to income testing but their grossed up income continues to be below the respective payment's income free area (the lower income free area for FTB Part A is $51,903, youth payments is $51,027 and $44,457 for CCB), they will continue to be eligible for the maximum rate of payment.

This measure will affect families where the gross fringe benefit amount increases their ATI and results in either a reduction in their entitlement (more income is subject to a taper), or they cease to be eligible for payment because their income exceeds the payment's income cut-out.

Table 1 provides examples of the income cut outs for different payments and shows that where a recipient ceased to be eligible for a payment under the new income testing rules, they have, in general, a high income and sufficient personal means to maintain an adequate standard of living for their family.

Table 1 - payment income cut-outs as at 1 July 2016

Right to maternity leave

The right to maternity leave is contained within Article 11(2)(b) of the Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW) and Article 10(2) of the ICESCR. Article 11(2)(b) of the CEDAW requires States Parties "to introduce maternity leave with pay or with comparable social benefits without loss of former employment, seniority or social allowances". Article 10(2) of the ICESCR states that, "Special protection should be accorded to mothers during a reasonable period before and after childbirth. During such a period working mothers should be accorded paid leave or leave with adequate social security benefits."

This measure will not affect the ability for parents to claim a minimum entitlement to paid maternity leave, equivalent to 18 weeks of payment at the rate of the national minimum wage, to support them to take time off work after the birth or adoption of their child. Eligible fathers or partners will continue to be eligible to receive two weeks of Dad and Partner Pay at the rate of the national minimum wage in addition to any employer-provided paid paternity leave. However these amendments will ensure that where individuals receiving fringe benefits who currently receive concessional treatment in the calculation of their ATI, have their eligibility for Paid Parental Leave is assessed equitably compared with other individuals whose ATI is derived from other sources.

Rights of parents and children

Article 18 of the CRC mandates that State Parties shall use their best efforts to ensure recognition of the principle that both parents have common responsibilities for the upbringing and development of the child, and to provide appropriate assistance, in particular to ensure that children of working parents have the right to benefit from child care services and facilities for which they are eligible.

Child Care Benefit and Child Care Rebate (CCR) are child care fee assistance payments provided by the Government to individuals with children enrolled in approved child care, to help meet the costs of child care and assist with maintaining an adequate standard of living for working families. This measure will not directly impact upon, nor limit the right of parents to child care fee assistance to help meet the costs of child care.

As an individual's ATI is taken into account in determining the amount of entitlement to CCB, to that extent, this measure may affect the amount of CCB calculated for individuals who receive gross fringe benefits. This measure will not affect an individual's entitlement to CCR as this payment is not income tested. The payment of CCR may offset the impact of any reduction to an individual's rate of CCB as CCR pays 50 per cent of an individual's out of pocket costs for child care up to $7,500 per child per year).

This measure will not affect individuals who are on income support as they are exempt from the CCB income test. Where an individual with low income is subject to income testing but their new ATI continues to be below the lower income threshold of $44,457, they will continue to be eligible for the maximum rate of CCB.

The impact of this measure will be limited to individuals where the inclusion of gross fringe benefits increases their ATI and results in either a reduction in their CCB entitlement, or they cease to be eligible for payment because their income exceeds the CCB income cut-out. As indicated in Table 1 above, the income threshold at which a recipient with one child under school age ceases to be eligible for CCB is currently $154,697. Individuals who may be affected by this measure due to a higher ATI would generally be higher income earners with sufficient personal means to meet the out of pocket costs of child care for their children, of which 50 per cent is offset through automatic entitlement to CCR (up to $7,500 per child per year).

Any reduction in assistance for individuals are reasonable and proportionate in that they are a consequence of the Government treating income from all sources consistently, and not treating fringe benefits beneficially (unless the fringe benefits is received by certain employers). The impacted population will continue to benefit from concessional tax treatment of their fringe benefits but will no longer be eligible for payment concessions related to this income. In addition, income testing does not apply to CCR so families will continue to be eligible for CCB and / or CCR to meet the costs of child care. This measure will encourage the long-term financial sustainability of the child care payments system.

Conclusion

To the extent that changing the treatment of fringe benefits received by a family limits the right to social security, the right to an adequate standard of living, the right to maternity care and access to child care services and facilities, these limitations are reasonable and proportionate.

Human rights implications - tax offsets and Low Income Supplement

Overview of relevant tax offsets and Low Income Supplement

The Low Income Supplement and Low Income Superannuation Contribution Supplement will both cease on 1 July 2017. The application provisions within this Schedule ensure this measure does not apply in working out an individual's qualification for the Low Income Supplement payment or Low Income Superannuation Contribution between 1 January 2017 and 30 June 2017.

The Dependent (Invalid and Carer) Tax Offset (DICTO) is a tax offset for an individual if they do not receive FTB Part B and contribute to the maintenance of their spouse, relative or spouse's relative, who is genuinely unable to work due to invalidity or carer obligations. The spouse or relative must receive a carer payment or carer allowance, or be wholly engaged in providing care to a relative who is eligible for a Disability Support Pension, Special Needs Disability Pension or an Invalidity Service Pension.

This measure may affect an individual's entitlement for DICTO if the new treatment of fringe benefits increases their ATI above $100,000, or increases the dependent's ATI to above $286. The rate of DICTO is subject to an income test which reduces the offset of $2,471 by 25 cents for every dollar the dependent earns above $286. The income cut-out is $10,634.

The Net Medical Expenses Tax Offset is available for individuals with out-of-pocket medical expenses relating to disability aids, attendant care or aged care expenses until 1 July 2019. This measure will affect individuals if the new treatment of fringe benefits increases their ATI to above $90,000 for singles or $180,000 for couples. Where ATI exceeds this income threshold, the individual will still be able to claim a reimbursement of ten per cent for eligible out of pocket expenses incurred in excess of $5,343. If their income stays below these thresholds, they will continue to be able to claim a reimbursement of 20 per cent for net medical expenses over $2,265.

The Low Income Aged Persons and Pensioners (Senior Australian and Pensioner Tax Offset (SAPTO)) is a tax offset that is available for age and service age pensioners, and self-funded retirees of Age Pension age. This measure may impact an individual depending on if the new treatment of fringe benefits increases their income above a relevant threshold. For 2015-16, single persons can receive the maximum rate offset of $2,230 if they have income less than $32,279 and will cease to be eligible if their income increases to above $50,119. For a partnered individual, the partner and their spouse may be eligible for the maximum rate of SAPTO ($1,602) if they each have income less than $28,974 and will cease to be eligible if they have income above $83,580 (or $41,790 each). The income thresholds and SAPTO rate for a couple increases slightly if they need to live apart due to illness or because a member of the couple lived in a nursing home.

A Dependent (non-student child under 21 or student) Notional Tax Offset provides a notional tax offset for an income year if an individual contributes to the maintenance of a non-student child or a student dependent. A Dependent (non-student child under 21 or student) Notional Tax Offset of $376 for the oldest non-student child under 21 dependant or student dependant, and $286 for any other younger dependants can only be taken into account in calculating an individual's eligibility for a Zone tax offset under section 79A of the Income Tax Assessment Act 1936, for certain persons serving with an armed force under the control of the United Nations under section 23AB of the Income Tax Assessment Act 1936 and members of the Defence Force serving overseas under section 79B of the Income Tax Assessment Act 1936 . The notional tax offset is reduced by 25 cents for every dollar the dependent earns above $286. The dependent income cut-out is $1,770 for the oldest dependent and $1,410 for a younger dependent.

The right to social security and the right to an adequate standard of living:

Tax offsets or rebates directly reduce the amount of tax payable on an individual's taxable income. The offsets can reduce an individual's tax payable to zero but on their own do not give a refund.

This measure may affect individuals who will be eligible for a lower amount of offset or cease to be entitled to that offset. Tax offsets are not provided to secure an individual's right to social security or to support an adequate standard of living but are available after a financial year to lower the amount of tax an individual is liable to pay in recognition that the individual may have incurred specific costs related to their circumstances.

This measure does not affect an individual's eligibility for (or rate of) the social security safety net of the Age Pension or Service Age Pension which are the primary payments made by the Government to ensure older people unable to fully support themselves can have an adequate standard of living.

This measure does not affect an individual's eligibility for (or rate of) the social security safety net of Carer Payment, Carer Allowance or Disability Support Pension or Invalidity Service Pension which are the primary payments made by the Government to ensure people unable to fully support themselves can have an adequate standard of living.

Conclusion

To the extent that these changes limit an individual's entitlement to certain tax offsets these limitations are reasonable and proportionate.