House of Representatives

Explanatory Memorandum

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

Chapter 3 Who is entitled to FTA benefits

3.1 This chapter covers:

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who is eligible for Part A benefits;

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who is eligible for Part B benefits;

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definition of dependant;

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family income ceiling;

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taxpayer income ceiling; and

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spouse income ceiling.

Which taxpayers will be eligible for Part A benefits?

3.2 A taxpayer will be eligible for a Part A benefit for the 1996-97 year of income, or a later year if:

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the taxpayer was an Australian resident during the year ("resident" is defined in subsection 6(1) of the Assessment Act); and

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the taxpayer had at least one dependant during the year ("dependant" will be defined in section 20K - see para. 3.16) [paras. 20C(1)(a) and 20C(2)(a)] ; and

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either:

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the taxpayer did not have a spouse on the last day of the year of income, and the taxable income of the taxpayer for the year was less than the "family income ceiling"; or

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the taxpayer did have a spouse on the last day of the year, and the sum of the taxable incomes of the taxpayer and his or her spouse for that year was less than the "family income ceiling". [paras. 20C(1)(b) and 20C(2)(b)]

3.3 Spouse is defined in subsection 6(1) of the Assessment Act to include a de-facto spouse, as well as a person who is legally married. For the purposes of FTA, a spouse does not include a person to whom the taxpayer is legally married, if they are living separately and apart on a permanent basis. [definition of spouse in section 20B]

Family income ceiling

3.4 The "family income ceiling" will be $70,000 for a taxpayer, or taxpayer and spouse, with one dependant. This amount will be increased by $3,000 for each dependant (as defined under section 20K) after the first, with the number of dependants being the maximum number of dependants that the taxpayer had at any one time. [section 20Q]

EXAMPLE

At the beginning of the year, Vladimir and Sasha had 2 dependent children. On 1 January, one left home, and was no longer dependant. On 1 June, Sasha's 2 dependent nieces came to live with them. The total number of persons who were Vladimir's and Sasha's dependants during the course of the year was 4, but the maximum number of dependants at any one time was 3. The family income ceiling is therefore $76,000.

Taxpayer did not have a spouse on the last day of the year of income

3.5 If a taxpayer did not have a spouse on the last day of the year, the taxpayer will be eligible for Part A benefits if the taxpayer's taxable income is less than the family income ceiling. A taxpayer who had a spouse earlier in the year, but not on the last day of the year, will not have to include any of the former spouse's taxable income in the calculation.

EXAMPLE

Vincent and Theresa were married, but they separated on 1 April, and were living separately and apart on a permanent basis on the last day of the year. They have 3 dependent children, and Vincent's taxable income for the year was $75,000. Theresa's taxable income was $37,000, of which $30,000 was derived before 1 April. Vincent did not have a spouse on the last day of the year.

To work out if Vincent is below the family income ceiling, he only has to consider his own taxable income. None of the income derived by Theresa is relevant. Vincent is therefore below the ceiling, which is $76,000 for a taxpayer with 3 dependants.

Taxpayer had a spouse on the last day of the year of income

3.6 If the taxpayer had a spouse on the last day of the year of income, then the taxpayer will be eligible for Part A benefits if the sum of the taxable incomes for the year of the taxpayer and the spouse is less than the taxpayer's family income ceiling.

3.7 In this case, the whole of the spouse's taxable income for the year is included in the calculation, even if the taxpayer and the spouse were not together for the whole year.

EXAMPLE

Jack had 3 dependent children, and a taxable income for the year of $37,000. On 1 June, Jack married Amy, and they were still married on the last day of the year. Amy's taxable income for the year was also $37,000, of which $2,000 was derived after they were married.

With 3 dependent children, Jack's family income ceiling will be $76,000. Family income will be the sum of Jack's taxable income ($37,000) and Amy's taxable income ($37,000) for the year. The result is $74,000, which is below the family income ceiling.

Which taxpayers will be eligible for Part B benefits?

3.8 A taxpayer will be eligible for Part B benefits, for the 1996-97 year of income, or a later year, if:

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the taxpayer was an Australian resident during the year ("resident" is defined in subsection 6(1) of the Assessment Act); and

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the taxpayer had at least one dependant during the year under the age of 5 years ("dependant" will be defined in section 20K - see para. 3.16) [paras. 20D(1)(a) and 20D(2)(a)] ; and

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the taxable income of the taxpayer for the year did not exceed the taxpayer's income ceiling (see para. 3.9); [paras. 20D(1)(b) and 20D(2)(b)] and

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if the taxpayer had a spouse on the last day of the year, the spouse's taxable income (excluding certain government payments, allowances and benefits) did not exceed the "spouse income ceiling" (see para 3.11). [paras. 20D(1)(c) and 20D(2)(c)]

Taxpayer's income ceiling

3.9 The taxpayer's income ceiling is $65,000 with one dependant, increased by $3,000 for each dependant after the first, with the number of dependants being the maximum number of dependants that the taxpayer had at any one time. For the purposes of working out the taxpayer's income ceiling for a taxpayer, all dependants as defined by section 20F are taken into account, not only those under 5 years. [section 20R]

EXAMPLE

Alison had 3 dependent children. In 1997-98, her children are aged 2, 4 and 8. Alison, a sole parent for the year, had a taxable income for the year of $70,000.

Alison has 3 dependent children for the purposes of the taxpayer's income ceiling, even though only 2 of them are under 5 years of age. Her taxpayer's income ceiling is therefore $71,000, and her taxable income is below the ceiling.

In 1998-99, her children are aged 3, 5 and 9. Although only one child is now under 5, Alison still has 3 dependent children for the purposes of the income ceiling. If Alison's taxable income remains unchanged, she will still be below the taxpayer's income ceiling.

Spouse income ceiling

3.10 A taxpayer with a spouse on the last day of the year of income will only be eligible for Part B benefits if the taxable income of his or her spouse (excluding certain Commonwealth government payments) is below the spouse income ceiling.

3.11 The spouse income ceiling will be calculated by multiplying by 26 the "income ceiling of the breadwinner's partner" which applied on 21 March in the year of income. The "income ceiling of the breadwinner's partner" will be the amount calculated under the method statement in Table E of point 1070-E5 in Part 3.8 of the SSA91. [subsection 20D(4)]

3.12 The starting point in the calculation of the "income ceiling of breadwinner's partner" will be the "current maximum basic component of parenting allowance" in section 1068A-B6 of the SSA91, as indexed under that Act. The indexing takes place on 20 March and 20 September, in line with CPI increases.

3.13 In broad terms, the reference to the "income ceiling of the breadwinner's partner" will have the effect that spouse income ceiling for FTA is approximately equivalent to the spouse income test for family tax payments.

Spouse income ceiling for 1996-97

3.14 The spouse income ceiling for 1996-97 will not be known until March 1997, following the relevant indexing. As an indication, if the spouse income ceiling was calculated using the relevant figures as at 21 March 1996, the ceiling would be $4,535.

Exclusions from spouse's income

3.15 For the purpose of the spouse income ceiling, spouse's income will be the taxable income of the spouse, excluding certain Commonwealth pensions, benefits or allowances:

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amounts paid under the Social Security Act;

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drought relief payments under the Farm Household Support Act 1992 ;

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Textile, Clothing and Footwear Special Allowance;

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amounts paid under the Veterans' Entitlements Act 1986 (other than Part VII);

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payments by the Commonwealth to participants, or to other persons on behalf of the participants, in labour market programs, where the recipient is not employed by an employer who receives a subsidy for that employment. Labour market programs will be defined to include programs under which people are helped to find work, or remain in work; and

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payments by the Commonwealth to students, or to other people on behalf of students, under a scheme of assistance to students, where the recipient is not an employee of a person who receives a subsidy for that employment. The payments will not include scholarships and bursaries, or payments made on the condition that the student render services to the Commonwealth if required. Examples of the types of payments included are AUSTUDY and ABSTUDY. [subsection 20D(5)]

Dependants

3.16 A child will be a dependant of another person for a period if:

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the child:

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was under the age of 16; [subpara. 20K(1)(a)(i)] or

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was aged 16 or 17, and was receiving full-time secondary education; [subpara. 20K(1)(a)(ii)] and

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the child was an Australian resident; [para. 20K(1)(b)] and

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the person contributed to the maintenance of the child; [para. 20K(1)(c)] and

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the child was not a spouse of a person; [subsection 20K(2)] and

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the child's income does not exceed the dependant (under 16) ceiling, or the dependant (over 16) ceiling, as the case may be. [subsections 20K(4) and (5)]

3.17 These rules take effect subject to the rules about the allocation of dependants. [subsection 20K(7)]

Contributing to the maintenance of a dependant

3.18 For a child to be a dependant of a person, the person must contribute to the maintenance of the child. This is consistent with the existing definitions of dependants in the tax law in relation to dependant rebates and the Medicare levy. If a taxpayer is living with a child during a period when the dependant is deriving income, the taxpayer will usually be regarded as contributing to the maintenance of the child, unless the Commissioner is satisfied that this is not the case. [subsection 20K(2)]

3.19 Accordingly, a taxpayer cannot generally claim a child as a dependant for part of a year by excluding the period during which the child derived income and was living with the taxpayer. That income generally would be taken into account in determining whether the child qualified as a dependant during all of the time the taxpayer and the child lived together (see further 'Dependant ceilings' below).

Dependant ceilings

3.20 A child will not be a dependant for a year of income if the child has a taxable income in excess of the relevant dependant ceiling. There will be 2 basic dependant ceilings - the dependant (under 16) ceiling, and the dependant (over 16) ceiling.

3.21 Dependant ceilings will be different from the other income tests, in that they will be apportioned on the basis of the period during which the income was derived. This will ensure, for example, that where a child begins full-time work part of the way through the year, and so ceases to be a dependant, the income earned after the child ceases to be a dependant does not affect the child's status as a dependant before that time.

3.22 Dependant (under 16) ceiling: The dependant (under 16) ceiling will apply in respect of a dependant who did not turn 16 during the year of income (i.e. who was 15 or younger for the whole year) and did not receive full-time education.

3.23 1997-98 year of income and later years - the dependant (under 16) ceiling for the full year will be calculated by multiplying by 52 the "weekly young person ceiling" which applied on 2 January in the year of income. The "weekly young person ceiling" is the amount in section 5(3)(c) of the SSA91, as indexed under that Act.

3.24 If a child was a dependant during a part only of the year, the dependant (under 16) ceiling calculated as above will be multiplied by the following fraction:

number of days in period / 365


The reduced ceiling which results will apply to the period when the child was a dependant.

3.25 1996-97 year of income - the dependant (under 16) ceiling for the year will be the amount calculated by multiplying by 26 the "weekly young person ceiling" which applied on 2 January 1997.

3.26 If a child was a dependant for a part only of the year, the dependant (under 16) ceiling calculated as above will be multiplied by the following fraction:

number of days in period / 181


The reduced ceiling which results will apply to the period when the child was a dependant.

3.27 Dependant (over 16) ceiling: The dependant (over 16) ceiling will apply in respect of a dependant who turned 16 during the year of income, or who was 16 or 17 during the year. The ceiling applies whether or not the dependant receives full-time education during the year.

3.28 1997-98 year of income and later years - the dependant (over 16) ceiling for the full year will be the "annual young person ceiling" which applied on 2 January in the year of income. The "annual young person ceiling" is the amount in section 5(4)(b) of the SSA91, as indexed under that Act.

3.29 If a child was a dependent during a part only of the year, the dependant (over 16) ceiling calculated as above will be multiplied by the following fraction:

number of days in period / 365


The reduced ceiling which results will apply to the period when the child was a dependant.

3.30 1996-97 year of income - the dependant (over 16) ceiling for the year will be the amount calculated by dividing by 2 the "annual young person ceiling" which applied on 2 January 1997.

3.31 If the dependant was a dependant for part only of the year, the dependant (over 16) ceiling for the 1996-97 year will be multiplied by the following fraction:

number of days in period / 181


The reduced ceiling which results will apply to the period when the child was a dependant.

Dependant ceilings for 1996-97

3.32 The dependant ceilings for 1996-97 will not be known until 2 January 1997, following the relevant indexing. As an indication, if the dependant (under 16) ceiling was calculated using the relevant figures as at 2 January 1996, the ceiling would be $3,219, and if the dependant (over 16) ceiling was similarly calculated, it would be $3,346.

Dependant income

3.33 For the purpose of the dependant ceilings, a child's taxable income will not include certain Commonwealth payments. These will be payments which are made under a scheme of assistance to students administered by the Commonwealth, except for:

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payments in the form of scholarships or bursaries;

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payments in return for which the Commonwealth may require the students to render services. [subsection 20K(6)]

3.34 If a child will not be a dependant for a full year of income, and a reduced ceiling will apply to that child, then the income of the child which is measured against the income ceiling is also apportioned. The method of apportionment is to calculate the income for that period, using the same rules which apply to the calculation of taxable income, but applied as though the period of dependency was a year of income.

EXAMPLE 1

Elsa had a dependent child, Rosie, who turned 16 years of age on 31 May 1998. Rosie left school on 30 April 1998, and received no income until commencing part-time work on 17 May 1998. Her gross salary from that date was $150 per week.

As she turned 16 years of age during the 1997-98 year of income the dependant (over 16) ceiling is relevant. Assuming "annual young person ceiling" remains unchanged from its present level of $6,691, the dependant (over 16) ceiling for the period that Rosie was dependent on the taxpayer is calculated as follows:

$6,691 * (335/365) = $6,141


where 335 days is the number of days in the period from 1 July 1997 to 31 May 1998, when Rosie turned 16 and ceased to be a dependant.

As Rosie had earned only $300 for the period to 31 May, which is under the dependant (over 16) ceilingof $6,141 for the period, she qualifies as a dependant of the taxpayer for the period 1 July 1997 to 31 May 1998.

EXAMPLE 2

Richard had a dependant daughter, Amanda, who was less than 16 years of age for the entire 1997-98 year of income. She left school for good in December 1997, and began work in January 1998, earning $150 per week for the year. She remained living at home.

Because Amanda was under 16 years of age, and received full-time education for the first half of the year, the dependant ceilings do not apply to her. Assuming that he meets the other eligibility criteria, Richard would be entitled to Part A benefits for the whole year in respect of Amanda.

EXAMPLE 3

Gordet was 16 at the beginning of the 1997-98 financial year. He was earning $100 a week at a part-time job until 31 December 1997, and had a taxable income for whole the year of $8,000. He finished school on 10 December 1997 and started full time work on 2 January 1998. On that date he also left home, and the taxpayer, Kim, ceased to contribute to his maintenance.

The dependant (over 16) ceiling applies to Gordet, because he was 16 or over during the year of income.

After 2 January 1998, Gordet was not a dependant of Kim. The dependant ceiling should therefore be reduced, in proportion to the period of time when Gordet was a dependant. Assuming once again that the ceiling for a full year is $6,691, the reduced ceiling is calculated as follows:

$6,691 * (183/365) = $3,355


when 183 is the number of days for which Gordet was a dependant.

Since Gordet earned $2,600 for the period before 2 January, and had no expenses, and this amount is below the reduced dependant ceiling, Gordet will be a dependant of James up until 2 January.