House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Family and Community Services, Senator the Hon Jocelyn Newman)

Chapter 1 - Child Support Adjusted Formula Income Amounts

Overview

1.1 Schedule 1 of the Bill will amend the Child Support (Assessment) Act 1989 (the Assessment Act) to modify the child support administrative formula by:

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increasing the paying parent's exempted income amount by 10%

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including an allowance for a shared care child in the exempted income amount

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lowering the payee's disregarded income amount, halving the effect where the payee's income exceeds that amount, and removing the automatic inclusion for formal child care costs.

Summary of the amendments

Purpose of the amendments

1.2 The purpose of the amendments is to address community concerns regarding the operation of the child support administrative formula by:

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increasing the paying parent's exempted income amount by 10%

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increasing the exempted income amount of parents with a shared care child

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reducing the level at which the carer's income affects the amount of child support payable

•

halving the rate at which the carer's excess income reduces the child support payable

•

removing the automatic inclusion of a child care component in the carer's disregarded income and instead including high child care costs as a ground for departure from assessment.

Date of effect

1.3 On the day on which the Act receives Royal Assent and will not apply in relation to the part of the 1998-99 child support year that occurs before the 1998-99 commencing date.

Background to the legislation

Paying parent's exempted income amount

1.4 Child support is assessed according to a formula and is based on each parent's income from two years prior to the child support year. An amount of the paying parent's income is exempted from the calculation of child support payable and is referred to as the exempted income amount. The basic exempted income amount is the unpartnered rate of social security pension. A paying parent who has care for another of his or her children has an exempted income amount of twice the partnered rate of social security pension plus an allowance for each child. This only applies to children who are in the care of the paying parent for 60 per cent or more of the year.

Allowance for a shared care child in the exempted income amount

1.5 Where care of the children is shared between the parents, the child support that would be payable by each parent to the other is offset. The difference is payable by the parent with the higher liability. In this situation, neither parent receives an allowance for a "shared care child" as shared care is less than 60 per cent of the year.

1.6 Where a carer has sole care of a child his or her income may affect the amount of child support payable if that income exceeds the disregarded income amount. The disregarded income amount is currently based on the average weekly earnings of full time adults. An additional allowance representing child care costs is included for each child less than twelve years of age at the start of the child support year.

1.7 Where the carer's income exceeds the disregarded amount the excess reduces the adjusted income amount of the paying parent. This results in a decrease in the rate of child support payable by the paying parent. At present, the full amount of the carer's excess income is deducted from the paying parent's adjusted income amount.

Explanation of the amendments

1.8 The proposed amendments address recommendations of the Joint Select Committee on Certain Family Law Issues (the Joint Committee) but not to the extent recommended.

1.9 The Joint Committee carried out an examination of the operation and effectiveness of the Child Support Scheme. The Joint Committee highlighted a number of community concerns in the Report dated November 1994, including some concerns regarding the operation of the administrative formula and made a number of recommendations:

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Recommendation 118 proposed that the carer's disregarded income be lowered to the pension cut out point

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Recommendation 119 proposed that the effect of the carer's income above the disregarded income level be changed from the current dollar for dollar reduction of the paying parent's income upon which child support is calculated to a 50 cents in the dollar reduction

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Recommendation 120 proposed that the additional amounts for child care costs in the disregarded income amount be abolished

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Recommendation 123 proposed that the paying parent's exempt income component of the basic formula be increased by 20%

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Recommendation 140 proposed that parents sharing care of a child have the same exempt income level as liable parents with a relevant dependent child.

Increasing the paying parent's exempted income amount by 10%

1.10 The proposed amendments will increase the exempted income amount of a paying parent by 10% by providing that the exempted amount be 110% of the annual amount of unpartnered rate of social security pension. [Item 2 - amend paragraph 39(1)(a)]

EXAMPLE

1997/98 Assessment prior to proposed changes

Payer's exempted income

Peter has no children in his care. He is liable to pay Francine for 3 children aged 10, 13 and 17. Peter's 1995/96 taxable income was $42,000. Francine's 1995/96 taxable income was $14,000 and is too low to affect the assessment.

(*1 Rate for 3 children)

1998/99 Assessment after proposed changes

Paying parent's exempted income amount has increased by 10%

Peter has no children in his care. He is liable to pay Francine for 3 children aged 10, 13 and 17. Peter's 1996/97 taxable income was $42,000. Francine's 1996/97 taxable income was $14,000 and is too low to affect the assessment.

(*1 Rate for 3 children)

1.11 The proposed amendments will increase the exempted income amount of a paying parent who is caring for another of his or her children by 10% by providing that the exempted amount be 220% of the annual amount of partnered rate of social security pension. [Item 3 - amend subparagraph 39(1)(b)(i)]

Including an allowance for a shared care child in the exempted income amount

1.12 Currently, two parents may share in the care of a child or children. In this situation both parents are treated as paying parents but neither parent receives an additional allowance for that child in their exempted income amount.

1.13 The proposed amendment will provide that an additional amount be included in the exempted income amount of each parent for the shared care child. [Item 6 - repeal subsection 48(d) and insert new subsection 48(d)]

1.14 The shared care child will be taken to be a child who is in the care of each parent, for the calculation of the additional amount to be included in the exempted income amount. This will mean the paying parents will be entitled to the 10% increase in the exempted income which is pegged to the social security pension as well as an additional amount for each shared care child. [Item7 - insert new subsection 48(2)]

EXAMPLE

1997/98 Assessment prior to proposed changes

No allowance for a shared care child

Peter and Francine share the care of one child aged 13. Peter is liable to pay Francine for 2 other children aged 10 and 17. Peter's 1995/96 taxable income was $42,000. Francine's 1995/96 taxable income was $14,000 and is too low to affect the assessment because it is below the exempted income amount that applies to a parent with a child in their care.

(*1 Rate for 2.5 children)

1998/99 Assessment after proposed changes

An allowance for a shared care child

Peter and Francine share the care of one child aged 13. Peter is liable to pay Francine for 2 other children aged 10 and 17. Peter's 1996/97 taxable income was $42,000. Francine's 1996/97 taxable income was $14,000 and is too low to affect the assessment because it is below the exempted income amount that applies to a parent with a child in their care.

(*1 Rate for 2.5 children)

Changing the amount and effect of the disregarded amount and removing the automatic inclusion of the child care component

Reducing the carer's disregarded income amount

1.15 Currently, a carer's disregarded income amount is equal to the latest estimate of the full time average weekly total earnings (AWE) for persons in Australia (published by the Australian Statistician before 1January immediately before the child support year) plus an amount representing child care costs for each child under 12 years of age.

1.16 The proposed amendments reduce the carer's disregarded income amount to a level which protects the living standards of children without creating employment disincentives for the carer.

1.17 The carer's disregarded income amount will be based on the yearly equivalent of the estimated average weekly earnings for all employees (EAWE) for persons in Australia (published by the Australian Statistician before 1 January immediately before the child support year). [Item 12 - amend subsection 154]

1.18 The term EAWE will be defined. [Item 1 - insert new definition of "EAWE amount" in section 5]

1.19 The EAWE amount will be included in the figures the Registrar publishes in the Gazette each year. [Item 13 - amend subsection 155(a)]

Halving the effect of the carer's excess income on that part of the paying parent's income used in the formula

1.20 Currently, the excess of the carer's child support income amount over the disregarded income amount is deducted dollar for dollar from the paying parent's adjusted income amount.

1.21 The proposed amendments will result in the excess of the carer's child support income amount reducing the paying parent's adjusted income amount at the rate of 50 cents for every dollar. [Item 4 - amend subsection 44(1)]

EXAMPLE

1997/98 Assessment prior to proposed changes.

Payer's adjusted income is reduced by the carer's excess income dollar for dollar

Peter has no children in his care. He is liable to pay Francine for 3 children aged 10, 13 and 17. Peter's 1995/96 taxable income was $42,000. Francine's 1995/96 taxable income was $48,000.

(*1 Rate for 3 children)

Peter's adjusted income amount ($34,884) minus 100% of Francine's excess income amount ($10,865) $22,148. Peter has to pay Francine $7,686 being $24,019 by 32%.

1998/99 Assessment after proposed changes

Payer's adjusted income is reduced by the carer's excess income by 50 cents in the dollar

Peter has no children in his care. He is liable to pay Francine for 3 children aged 10, 13 and 17. Peter's 1996/97 taxable income was $42,000. Francine's 1996/97 taxable income was $48,000.

(*1 Rate for 3 children)

Peter's adjusted income amount ($33,733) minus 50% of Francine's excess income amount ($9,787)= $23,946. Peter has to pay Francine $7,663 being $23,946 by 32%

Removing the automatic inclusion of a child care component in the carer's disregarded income

1.22 The proposed amendments will remove from the carer's disregarded income amount automatic allowances for child care costs for children under twelve years of age. [Item5 - repeal section 46 and insert new section 46]

EXAMPLE

1997/98 Assessment prior to proposed changes

Carer's disregarded income including child care components

Peter has no children in his care. He is liable to pay Francine for 3 children aged 2, 8 and 10. Peter's 1995/96 taxable income was $42,000. Francine's 1995/96 taxable income was $35,000.

(*1 Rate for 3 children)

Peter's adjusted income amount ($34,884) minus 100% of Francine's excess income amount ($0)=$34,884. Peter has to pay Francine $11,163 being $34,884 by 32%.

1998/99 Assessment after proposed changes

Carer's disregarded income excluding child care components

Peter has no children in his care. He is liable to pay Francine for 3 children aged 2, 8 and 10. Peter's 1996/97 taxable income was $42,000. Francine's 1996/97 taxable income was $35,000.

(*1 Rate for 3 children)

Peter's adjusted income amount ($33,733) minus 50% of Francine's excess income amount ($3,027) = $30,706. Peter has to pay Francine $9,826 being $30,706 by 32%

Including high child care costs as a ground for departure from the assessment

1.23 The proposed amendments will provide for high child care costs to be a ground for departure from the administrative formula. [Items9 and 10 - amend subsection 98C(2) to insert an additional ground of departure in item 117(2)(b)(i)]

1.24 A carer will be able to apply for a departure under this ground if that carer has incurred high child care costs. To qualify:

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the child care costs must be related to a child younger than 12

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the paying parent cannot be an eligible carer of any of the children in the care of the carer

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the total of the costs must be more than 5% of the carer's child support income for the child support year. [Item 11 - insert new subsections 117(3A) and (3B)]

Examples

1.25 The proposed amendments to the administrative formula require consequential amendments to update the examples in subsection 54(2). [Item 8 - repeal the examples in subsection 54(2) and insert new examples]