Payments for children and Effective marginal tax rates
These notes concern Family Tax Benefit A and B, the Child Care Benefit and the Child Care Cash
Rebate.
Objectives
Family Payments have several objectives, which are not always consistent and therefore require
balancing, within the important considerations of simplicity and transparency. These objectives are:
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Adequacy: protecting families with children (and no other income) from poverty
Horizontal equity: providing assistance to those with higher costs associated with children
Vertical equity: targeting assistance to those with lower resources
Work incentives: enabling/encouraging labour force participation, education and training
De-commodification: allowing parents to reduce their labour force activity to care for
children.
These objectives are all important in providing security and equity for families, and providing public
investment in the current wellbeing and future productivity of children.
Background
FTB A (higher rate) is intended to prevent poverty among low to moderate income families with
children (vertical equity). FTB A (base rate) provides some assistance to most families with children
to recognise the costs of children (horizontal equity).
FTB B was introduced in 2000 and incorporated Guardian Allowance, the Sole Parent Rebate and the
Dependent Spouse Rebate. Assistance to sole parents addresses the additional costs of a child as the
second member of a family, according to equivalence scale findings (horizontal equity). FTB B is also
intended to assist single earner/dependant spouse families with children, hence restricting it when
the second partner enters the workforce.
Child Care Benefit is paid for up to 24 hours of approved care for families that do not meet the work
test (investment in children), and up to 50 hours a week where a sole parent or both parents do
meet the work test for a combined total of 30 hours a week (work incentives). Child Care Benefit is
provided for registered care if parents have work related commitments for some time during the
week. The maximum rate payable is $3.75 per hour for approved care for children under school age
and $3.12 per hour for children of school age. The corresponding rates for registered care are $0.63
per hour and $0.55 per hour. The income test affects families with a combined income of $38,763 a
year.
Child Care Rebate was introduced as a non-income tested payment, responding to calls for tax
deductibility for child care expenses for working parents. It provides a 50 per cent rebate for out of
pocket expenses, net of child care benefit, up to $7,940 a year.
Family Tax Benefit and Child Care Benefit are income tested on annual family income in the financial
year, in which they are received. The annual entitlement is reconciled when taxable income is
assessed after the end of that year. Where income exceeded the estimate this meant a
retrospective adjustment and raising a debt against the family. The financial difficulty this caused
many families led to the introduction of the FTB supplements to provide some cushion against postreconciliation reductions.
Issues
A partnered woman encounters costs when she enters paid work, or increases her hours. These
include the costs of child care, (plus transport, clothing etc) and the loss of the value of her time in
unpaid domestic work. This can mean, for example, loss of child caring time, food production, and
housework leading to purchase of more prepared foods or outsourcing cleaning, laundry etc (see
various time-use studies). Alternatively it could lead to a greater sharing of unpaid domestic work
between partners.
In addition to the costs of work are the high marginal tax rates caused by the combined effect of the
joint income test on FTB A and Child Care Benefit and the second earner income test on FTB B, in
addition to the ordinary individual tax rates.
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FTB B: Family loses 20 cents per dollar of 2nd earner income between $4891 and $21,912
(youngest child aged under 5) or $19,381 (child aged 5-18).
FTB A: Family loses a further 20 cents per dollar of 2nd earner income if the 1st earner’s (or
family’s combined) income is over $46,355 (up to, say $75,555, for a family with two
children under 12).
CCB: Family loses 10 to 35 cents per dollar of 2nd earner income if the 1st earner’s (or
family’s combined) income is over $39,785 (up to, say, $143,095 for 2 children in care).
Thus a second earner whose income is in the FTB B withdrawal range, and whose partner’s income is
in the range over which FTB A and CCB are both withdrawn can cause the family to lose 50 to 75
cents of benefits per extra dollar she earns. Under the present income tax scales she would also be
paying 15 cents tax, EMTRs of 65 to 90 per cent, keeping only 10 to 35 cents per dollar.
Added to the costs of working, it is easy to see cases where the family has no net financial gain for
the second earners extra effort.
A Sole Parent entering the labour force does not face the low income test on FTB B, but does face
the income test on Parenting Payment Single, or Newstart Allowance if the youngest child is aged 8
or more. The income test for Parenting Payment Single reduces assistance by 40 cents for each
dollar earned between $4,592 and $45,223 a year1. Newstart Allowance is withdrawn at 50 cents in
the dollar between $1,612 and $6,500 and 60 cents in the dollar of income between $6,500 and
$24,691 (see footnote 1). A sole parent receiving Parenting Payment Single can also qualify for a
pensioner tax offset of $2,230 a year if his or her assessed income is less than $30,685. It is reduced
at 12.5 per cent of income above that level.
Entitlement for Family Tax Benefit A and B and Child Care Benefit involves annual adjusted taxable
income. This has long been problematic because of the difficulty in estimating and because it is not
very responsive to changes during the year, such as income changes, parents changing their
1
These figures are shown here in annual terms (fortnightly amount x 26) but are in reality calculated on
fortnightly income.
employment patterns, birth of a child, death of a parent or child, separation or other changes in
family structure.
Ideas for reform
The announced increase in the tax free threshold is a very helpful reform in removing the high
EMTRs for very low income earners.
The Henry Review recommended combining FTB A and B with a single income test. This would
remove the stacking of income tests and the particularly onerous income test for the second earner
in a couple.
In addition we suggest that the income test be split between the parents with each parent having an
income threshold of $23,178. The payment would be withdrawn at 10 cents in the dollar of either
parent’s income above this amount. Each parent’s income could reduce the payment to half the
maximum rate. Sole parents would continue to have the existing threshold of $46,355 and a taper
of 20 cents in the dollar. Alternatively, sole parents could have a threshold of $23,178 and a taper of
10 per cent.
This trades off the existing high effective marginal tax rates for reduced adequacy for some families.
Sole parents with incomes above the threshold would be losers as they would not have the almost
unlimited FTB B component. Single income families with family income below $46,355 would also
be losers.
The number of losers would be reduced if the FTB B portion were combined with the base rate, and
income tested at a higher income level.
The Henry review also recommended combining Child Care Benefit and the Child Care Rebate, into a
two tier payment. The Review’s proposals would increase the assistance to low income families but
reduce assistance to high income families. The income tests for Child Care and Family Payment
would still stack under this proposal.
The differences in the work tests between CCB for approved care, CCB for registered care and CCR
are overly complex. CCB alone is clearly inadequate to protect low income families from poverty,
meeting about one-third of costs. The differences in rates between approved and registered care
and between pre-school and school-aged children are hard to justify. The Henry Review proposals
would be an improvement in simplification and equity.
It is worth considering splitting the income test for the proposed combined child care payment, as
proposed for the combined family payment.
In terms of reducing the effect of stacked income tests, it might be worth deducting the net out- ofpocket child care expenses from income as assessed for the Family Payment income test.
We have not calculated the expenditure implications of these proposals nor have we analysed in
detail the winners and losers.
These proposals preference the work incentive objectives over the de-commodification objectives.
That is, they remove support for single income couples, while reducing the effective marginal tax
rates for parents (particularly mothers) who participate in the work force.
We also believe that moving to a current income basis for Family Payments and Child Care Benefit
would be desirable to make the system more immediately responsive to changes in circumstances.
The current income basis would be as for pensions, with entitlement altering when family
circumstances alter, and would not involve fortnightly reporting.
This would enable the Supplements to be abolished and used to increase the periodical rates during
the year, if the parents choose that payment option. It would increase equity and adequacy in times
of need.
Author: Julia Perry, National Foundation for Australian Women
August 2011