House of Representatives

Explanatory Memorandum

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

Chapter 3 - Child care tax offset

Outline of chapter

3.1 Schedule 3 to this Bill amends Subdivision 61-IA of the Income Tax Assessment Act 1997 (ITAA 1997) to ensure eligibility for the child care tax offset is consistent with the work/training/study requirements prior to the Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005 receiving Royal Assent.

3.2 The Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005 introduces a 15 hours per week activity requirement (or 30 hours over 2 weeks) to meet the child care benefit work/training/study test. This requirement will not affect eligibility for the child care tax offset.

3.3 All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

3.4 Eligibility for the offset is dependent on the taxpayer's entitlement to child care benefit for approved care. Taxpayers need to have been entitled to child care benefit provided in a week in which either a limit of 50 hours, or more than 50 hours, or a 24 hour care limit applies.

3.5 Prior to the Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005, to be entitled to child care benefit for up to 50 hours per week, the taxpayer and their partner needed to meet the child care benefit work/training/study test at some time in the week, or have an exemption from meeting the test, or be covered under other provisions where there is no requirement to meet the test.

3.6 The Government has introduced changes to the child care benefit work/training/study test as part of the Welfare to Work package. These changes will take effect from the first week commencing after 1 July 2006 and are contained in the Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005.

3.7 From the first week commencing after 1 July 2006, to satisfy the child care benefit work/training/study test, the taxpayer and the taxpayer's partner will each need to demonstrate they have ongoing work, or work-related commitments of 15 hours per week (or 30 hours over a 2 week period) to qualify for up to 50 hours of child care benefit for approved care.

3.8 Eligibility for the offset will not depend on taxpayers meeting the additional hourly requirements of the child care benefit work/training/study test.

3.9 Taxpayers who meet the new 50 hours, or more than 50 hours, limit in that week or a 24 hour care limit under the Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005 will still be eligible for the offset.

3.10 Under the Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005 families will be eligible for up to 24 hours of child care benefit per child per week without having to meet the child care benefit work/training/study test. This is different to the 24 hour care limit which allows families in exceptional circumstances to access child care benefits for 24 hour care sessions.

Summary of new law

3.11 Taxpayers will continue to be eligible for the offset if they work, train or study at some time during the week and would have met the child care benefit 50 hours limit except for the 15 hours per week activity requirement (or 30 hours over a 2 week period).

3.12 This amendment will ensure eligibility for the offset is consistent with the work/training/study requirements prior to the Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005 receiving Royal Assent.

3.13 This will apply in relation to assessments for income years that start on or after 1 July 2007, that is, for child care fees incurred in the child care base year (2006-07), and claimed in the income tax return for the child care offset year (2007-08).

Comparison of key features of new law and current law

Detailed explanation of new law

3.14 Schedule 3 to this Bill amends paragraph 61-470(2)(c) by inserting subsection 61-470(4). This provides the offset for taxpayers who would have had a 50 hours limit except for paragraph 17A(1)(b) of the Family Assistance Act 1999 . That is, they have undertaken work, study or training at some time in the week.

Example 3.1

Sharon and Barry have a child Daryl in approved care for three days per week in 2005-06. Each session runs for 10 hours per day, a total of 30 hours a week. Sharon only works for one day per week (eight hours) and does not study or train. Barry works full-time.

In 2005-06, Sharon receives child care benefit for Daryl through fee reduction from her child care service. Sharon is entitled to child care benefit up to a limit of 50 hours a week and is therefore eligible for the child care tax offset.

Sharon has the same circumstances in 2006-07 but will not be entitled to child care benefit up to a limit of 50 hours a week because she does not meet the new work/training/study test for approved care. However, Sharon is eligible for a maximum of 24 hours of child care benefit per week, despite having Daryl in care for 30 hours per week, because she does not engage in work, training or studying for 15 hours a week (or 30 hours over 2 weeks) and therefore does not meet the child care benefit work/training/study test.

However, because of this amendment Sharon continues to be entitled to the child care tax offset for the out-of-pocket costs of the 30 hours of approved child care she pays each week up to a maximum of $4,000 per year. This is because she would have met the 50 hours child care benefit limit but for the 15 hours per week requirements (or 30 hours over 2 weeks).

Application and transitional provisions

3.15 These amendments made by Schedule 3 apply in relation to assessments for income years that start on or after 1 July 2007, that is, for child care fees incurred in the child care base year (2006-07), and claimed in the income tax return for the child care offset year (2007-08).