House of Representatives

Explanatory Memorandum

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

Chapter 20 - Family Allowance Income Credit For Person Paying Child Maintenance

Overview

20.1 Schedule 20 of the Bill will amend the Social Security Act 1991 (the Social Security Act) so that 50% of any child maintenance paid by a paying parent will be deducted from their Family Allowance income when calculating entitlement to Family Allowance.

Summary of the amendments

Purpose of the amendments

20.2 The purpose of the amendments is to address a current inequity in the Family Allowance system and to reduce the financial stress particularly suffered by low income families paying child maintenance.

20.3 Adoption of the amendments will provide a more accurate reflection of a paying parent's income at the disposal of their subsequent family for Family Allowance purposes.

Date of effect

20.4 On a day to be fixed by Proclamation, not more than 12 months after the day on which the Act receives Royal Assent.

Background to the legislation

20.5 Currently, any child support received by a parent in receipt of more than the minimum rate of Family Allowance is counted under the maintenance income test and may reduce their Family Allowance. However, any child maintenance paid by a Family Allowance recipient (or their partner) is not deducted from their income.

20.6 Where a paying parent forms a new family where there are dependent children, the household may be entitled to Family Allowance. However, any child maintenance paid by the paying parent is not taken into account when determining the family's entitlement.

20.7 Overall, this has led to a view that there is double counting by the Commonwealth:

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in respect of a paying parent - the paying parent's taxable income is used to assess their new family's eligibility for Family Allowance without regard to the fact that the child maintenance has been paid

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in respect of the person receiving the child maintenance (usually, the other parent of the child) - the child maintenance paid out is also assessed under the Family Allowance Income Test.

Explanation of the amendments

20.8 The proposed amendments go some way to meeting the Recommendation 141 of the Joint Committee that 100% of child maintenance paid be deducted from family income when calculating entitlement to Family Allowance.

20.9 Point 1069-H1 in Module H of the Family Allowance Rate Calculator in Part 3.7 of the Social Security Act provides that a person is subject to the Family Allowance Income Test set out in Submodule 3 of that module, unless the person, or the person's partner, is receiving a social security pension, a social security benefit, a youth training allowance or a service pension.

20.10 Point 1069-H23 sets out the method statement to be used in working out whether a person satisfies the Family Allowance Income Test.

20.11 Step 2 of Point 1069-H23 sets out how to calculate the person's "Family Allowance Income" for a tax year. Currently, it is the sum of specified classes of income in a person's "appropriate tax year".

20.12 The proposed amendment will repeal the existing step 2 and insert new steps 2, 2A and 2B so as that in future, the person's Family Allowance income will take account of any "deductible child maintenance expenditure". [Item 4 - repeal step 2 of the method statement and insert new steps]

20.13 The proposed amendments will provide in new point 1069-H34 that a person incurs "child maintenance expenditure" if:

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the person (the payer), or their partner makes payments or provides benefits to another person (not the payer or their partner)

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the payment or benefits are paid or provided for the maintenance of a natural or adopted child of the paying parent or the paying parent's partner. [Item 5 - insert point 1069-H34]

20.14 The amendments will also provide how to value the amount of a payment made or a benefit provided. [Item 5 - insert new points 1069-H35, 1069-H36, 1069-H37, 1069-H38]

20.15 The proposed amendments provide that if a person incurs an amount of child maintenance expenditure during the "appropriate child maintenance year", their "deductible child maintenance expenditure" will then be 50% of their "child maintenance expenditure". [Item 5 - inserts new points 1069-H33]

20.16 For Family Allowance purposes, the rate of payment made to a person in a calendar year is normally based on the person's taxable income for the financial year ended 30 June before the beginning of the calendar year (the "base tax year"). For example, the base tax year for the calendar year 1998 is the year ending 1997. In certain circumstances a person can have the rate of their Family Allowance payable in a calendar year calculated on an estimate of their taxable income in the current tax year. The tax year used is known as the person's "approximate tax year".

20.17 Similarly, for the purposes of calculating a person's "child maintenance expenditure", the proposed amendments provide that the "appropriate child maintenance expenditure year" for a Family Allowance payday will be the base tax year for that payday unless the person requests in writing that the Secretary use the tax year that is current at the time the person makes the request. Item 3 - insert new points 1069 - H22A, H22B, H22C and H22D

20.18 If the person makes a request to use the current tax year, a person's "child maintenance expenditure" will necessarily be an estimate rather than a verifiable amount at that time. The Secretary may only agree to the person using an estimate if the person agrees that their rate of Family Allowance is to be recalculated and the estimate they provide turns out to be more than 110% of the child maintenance expenditure that they actually incur. This will provide an inbuilt inhibiting factor against people trying to overinflate estimates of "child maintenance expenditure". [Item 2 - insert section 886A in new subdivision EA of Division 9 of Part 2.17]

20.19 The proposed amendments will modify the relevant debt recovery provisions of the Social Security Act (subparagraph 1223(3)(b)(iii) and paragraph 1223(3)(b)) to allow debt recovery where there has been an overestimate of child maintenance expenditure and as a result of the over estimation, a person's rate of Family Allowance has been recalculated. [Item 6 - amend subparagraph 1223(3)(b)(ii); Item 7 - insert subparagraph 1223(b)(iv) to refer to new section 886A]

20.20 The "appropriate child maintenance expenditure year" used by a person will not need to be the same as their "appropriate tax expenditure year". Section 860 of the Social Security Act provides that if the rate of Family Allowance payable to a person in a calendar year is worked out using the Family Allowance Rate Calculator, then the rate only has to be recalculated if certain events occur. An additional "event" will be created, namely, if the Secretary determines that the appropriate child maintenance expenditure year for the person is the current tax year. [Item 1 - amend paragraph 860(c)]