Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)REGULATION IMPACT STATEMENT
The Government, in its tax reform package Tax Reform: not a new tax, a new tax system (ANTS) of 13 August 1998, stated its intention to reform the income tax and social security systems from 1 July 2000. As part of this reform, extra assistance will be provided to families, work incentives will be improved and the structure and delivery of family assistance will be simplified as twelve forms of family assistance, currently available under the tax and social security systems, are reduced to three.
The three new family payments which will be available to families under the new A New Tax System (Family Assistance) Bill 1999 are family tax benefit part A, family tax benefit part B and child care benefit.
Tax delivery for family assistance
The sole parent rebate, dependant spouse rebate (with child) and family tax assistance, which are benefits currently provided to families under the taxation system, are being replaced under the restructure of family assistance. Taxpayers may anticipate their entitlement to a sole parent rebate and/or family tax assistance by reducing their tax instalments taken from their salary or wages under the Pay-As-You-Earn (PAYE) system.
To anticipate the sole parent rebate and family tax assistance through reduced tax instalment deductions (TIDs) employees must first complete an employment declaration and give it to their employer. The employer must then give the employment declaration to the Commissioner. The employment declaration remains in force until the employee ceases employment or another employment declaration is lodged with the employer. The Commissioner may, by a notice published in the Gazette, determine that all or part of the employment declaration ceases to have effect from a certain date.
Delivery for assistance with child care
Child care assistance is paid for child care services provided by approved child care organisations, and is claimed by and paid to the service provider, who then reduces the fees paid by families.
Identification of implementation options
Delivery of family tax benefit Parts A and B
Taxpayers who choose to claim family tax benefit parts A and/or B through the taxation system by reducing their TIDs will need to lodge a new declaration under the proposed new withholding system for individuals which is also proposed to commence on 1 July 2000. The withholding component of the new system, known as Pay-As-You-Go (PAYG), will incorporate tax deductions from salary or wages, as well as deductions from a range of other payments. The PAYG arrangements will be broader that existing PAYE arrangements and will cover payers other than employers who pay salary or wages.
A number of options were considered for ceasing the current reduction of TIDs from salary or wages of individual taxpayers for sole parent rebate and family tax assistance after 30 June 2000. It is considered that the most appropriate option, in terms of administrative and compliance impacts, is to publish in the Gazette a notice stating that all claims in an employment declaration for a rebate and, or, family tax assistance will cease to have effect after 30 June 2000.
This option will impact on all individuals who have claimed a reduction in TIDs for rebates, including rebates not directly affected by the family assistance reform. This impact stems from the fact that it is not always possible for employers to distinguish the type of the rebate being claimed from employment declarations. Therefore all rebate claims through reduced TIDs will have to cease.
Delivery of child care benefit
Under the new child care benefit system, the person whose child is in care will generally make claims. When care is provided by approved child care services, payment of child care benefit will be made to the child care service. When a family accesses informal care, child care benefit will be paid to the family direct by the Family Assistance Office (FAO) on presentation of receipts. For families to access child care benefit for informal care, the carer must be registered with the FAO.
Assessment of impacts (costs and benefits) of the implementation
The proposal will affect the following groups:
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- individuals;
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- payers;
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- Australian Taxation Office (ATO); and
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- child care service providers.
Delivery of family tax benefit Parts A and B
Compliance costs - Individuals
It is expected that a majority of the 2 million claimants of family tax benefit will choose the benefit as direct payments, as they already receive direct payments of family allowance from Centrelink under the existing system. Claimants choosing delivery through the tax system by way of reduced TIDs may incur additional costs in learning about the new changes and completing declarations. However it is assumed that most individuals will complete their declarations at work and therefore the cost will be borne by the payer.
From 1 July 2000, individual taxpayers who previously claimed their entitlement to rebates and, or, family tax assistance through reduced TIDs will have TIDs deducted at the normal marginal rates of tax until a new declaration is lodged under the new withholding arrangements. Therefore, individuals wishing to claim the zone rebate, spouse rebate (without child), housekeeper, child housekeeper, invalid relative and parent rebates through reduced TIDs after 30 June 2000, will have to lodge new declarations with their payers. It is not possible to reliably estimate how many of these individuals will be claiming their entitlements through reduced TIDs under the new withholding arrangements.
As in the case of those seeking to receive family tax benefit Parts A and/or B through reduced TIDs, the cost of preparing a new declaration will tend to fall on payers assuming that these declarations are completed during working hours.
New employees will not be affected by the change.
Payers will bear most of the compliance costs associated with the measure. They will have to learn about the changes, receive declarations from those individuals affected by the changes, work out the new rates of TIDs and remit the deductions to the ATO.
It is not possible to accurately estimate the number of individuals affected by the proposed measure. But it is likely that all group employers will be affected. The ATO estimates that by 1 July 2000 there will be 760,000 employers. The average cost to payers is estimated to be $10 per payee that lodges a new declaration.
Compliance Costs - Delivery of child care benefit
Under the new system, there will be minimal alteration in the way that funding is made available for formal child care service providers. A familys child care benefit will be paid direct to their nominated service/s to enable them to reduce the fee which the family is required to pay.
As families will now have the choice of receiving their child care benefit as an end of year lump sum payment, service providers will be required to keep records on, and provide information in respect of, all the children in their care; currently this is only required in respect of children for whom child care assistance is paid. Additionally, the new method of calculating the rate of child care benefit will require providers to train staff in the new arrangements.
The ATO will need to design, print and distribute new declaration forms and instructional materials. It is expected that families identified as being affected by the new family assistance reforms will be written to and advised of the new arrangements. The changes will also need to be publicised so that payers and individuals understand the new changes and know what is required of them.
The ATO, Health Insurance Commission and Centrelink, operating jointly as the FAO, will answer inquiries about the changed arrangements and will provide assistance to taxpayers in determining their TID reductions for family tax benefit.
The changes to declarations will have a minimal effect on the ATOs recurrent costs.
The total cost to revenue of the family package is $2.4 billion in 2000-01, $2.5 billion in 2001-02, and $2.6 billion in 2002-03.
Individuals who wish to anticipate family tax benefit through the tax system will be able to choose whether they receive the benefit during the year by way of a reduction in their TIDs or whether they wish to wait for a lump sum at the end of the year.
To reduce their TIDs, a person will have to lodge an appropriate declaration with their employer or other payer. Existing employment declarations serve more than one purpose. First, they allow for the tax free threshold to be taken into account in working out TIDs. People who dont lodge an employment declaration have tax deducted at a higher rate. Secondly, people can use an employment declaration to reduce their TIDs in anticipation of certain rebates. Individuals who currently anticipate the sole parent rebate and family tax assistance through reduction in TIDs will have to make new declarations in order to receive family tax benefits through reduced TIDs. However, the part of an employment declaration that allows the tax free threshold to be taken into account in working out the amount of a persons TIDs, will continue to remain in force until a declaration under the new withholding arrangements is lodged with their payer. Payers will therefore be able to continue to deduct TIDs from affected individuals payments at the applicable marginal rates of tax rather than the higher rates that would otherwise apply if the whole declaration was negated.
Consultation was undertaken with various interest groups including professional and business associations and other taxpayer bodies. For example, the ATO consulted with the Australian Society of Certified Practicing Accountants, the Institute of Chartered Accountants in Australia, National Institute of Accountants, H & R Block and the Council of Small Business Organisations of Australia. These bodies expressed concern over the extra burden the TID option would place on payers.
Consultations with families and child care providers revealed widespread support from both the child care sector and families for a continuation of payments to service providers. The availability of a lump sum payment would provide a possible option for those families with lower entitlements and those who choose to access informal care only. There was also widespread support for simplifying the eligibility process and improving electronic commerce between the Government and providers.
Allowing primary carers to receive direct payments of family tax benefit Parts A and/or B, to claim them as a lump sum payment at the end of the financial year and to access them via a reduction in their TIDs allows families more choice than the existing family assistance system. This flexibility enables individuals to minimise the costs of applying for and receiving family assistance, albeit at some cost to payers (notably, employers) and employees eligible for other rebates who utilise existing TID arrangements.
The proposed option for implementing child care benefit should minimise compliance costs, and ensure that those eligible for child care benefit are not discouraged from applying for, and receiving, it.
The ATO and Treasury will monitor this measure, as part of the whole taxation system, on a continuing basis.