House of Representatives

Explanatory Memorandum

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

Chapter 6 What if a family receives family tax payments?

6.1 This chapter covers:

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the reduction in FTA benefits of a taxpayer where the taxpayer, or the taxpayer's spouse or certain other people, receive family tax payments.

Receipt of family tax payments

6.2 A taxpayer's entitlement to FTA benefits is reduced by the grossed-up amount of any FTP received during a year of income by:

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the taxpayer or his or her spouse; or

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another person in respect of a child at a time when the taxpayer and the other person resided together and the child was a dependant of each of them.

[section 20U]

6.3 Before netting off FTP against FTA benefits, the FTP is grossed-up by reference to the lowest marginal tax rate [subsections 20U(3) and (4)] . The grossing-up is needed because FTP is a cash benefit, whereas FTA benefits are increases in the tax-free threshold. The grossing-up effectively converts FTP to an equivalent amount of an increase in the tax-free threshold.

6.4 The amount worked out under the grossing-up formula is rounded up to the next whole dollar before being offset against FTA benefits [subsection 20U(5)] .

6.5 FTP is paid at two rates, the Part A rate and the Part B rate, in broadly equivalent circumstances to where Part A and Part B benefits are available. After grossing-up, Part A FTP is netted off against Part A benefits, and Part B FTP is netted off against Part B benefits. The FTA benefits cannot be reduced below nil. [subsections 20U(3) and (4)]

6.6 Where sections 20C and 20D do not apply because, instead, a rate is reduced under sections 20F or 20H ,or section 20E applies, section 20P operates to reduce the amount that would be the tax-free threshold increases under sections 20C and 20D if they did apply. This is because the definitions of section 20C tax-free threshold increase and 20D tax-free threshold increase each refer to both actual increases under those sections, and increases if those sections had applied [subsection 20U(1)] .

6.7 Accordingly, the rates that would be reduced under sections 20F and 20H would be reduced by less, and the adjusted tax-free threshold under section 20E would be lower, because of the operation of section 20U . The adjustments to complementary tax under section 20G would also be affected by section 20U .

EXAMPLE

Ted and Alice have a child who qualifies them for a Part A benefit for the whole year. They agree that Ted should claim the Part A benefit in his return. For three months during the year Alice receives Part A FTP, totalling $53.90.

Ted's Part A benefit is reduced by the following amount:

$53.90 * (100/20) = $269.50, rounded to $270


Ted is entitled to a Part A benefit for the year of $730 ($1000 less $270).