FAMILY TAX BENEFIT (TIGHTER INCOME TEST) BILL 2014
OUTLINE
The purpose of the Bill is to reduce government spending, including administration costs, and to reduce compliance costs, while preserving Family Tax Benefit Part A payments for families with the least income.
The Bill will change the Family Tax Benefit Part A income test from 1 July 2015.
Under the current income test:
· a maximum rate of payment can be available to a family whose income does not exceed an ‘income free area’,
· the payment can be reduced by 20 per cent of any income in excess of the ‘income free area’, but
· this reduction in the payment is capped, so that, as a minimum, a base rate is provided to families in receipt of certain income support payments and to families whose income does not exceed a ‘higher income free area’.
As at November 2014, the maximum rate (including supplement) is up to $6,723.30 per child, the ‘income free area’ is $50,151, the base rate (including supplement) is $2,204.60 per child, and the ‘higher income free area’ for a family with one child is $94,316.
Under the Bill, there will be no change to the arrangements whereby:
· the maximum rate can be available where income does not exceed the ‘income free area’,
· the payment can be reduced by 20 per cent of any income in excess of the ‘income free area’, and
· the reduction in the payment is capped for families in receipt of certain income support payments, so that they receive at least the base rate.
However, the reduction in the payment will not be capped for other families. For them, the reduction in the payment by 20 per cent of any income in excess of the ‘income free area’ will continue until the payment reaches zero.
The Bill does not change arrangements whereby Family Tax Benefit Part A payments can be reduced because of receipt of child maintenance payments.
The Parliamentary Budget Office has estimated that, for the 1,651,500 families who currently receive Family Tax Benefit Part A, the Bill will have no impact on:
· the 768,500 families with incomes under $50,000, and
· 635,400 families with incomes over $50,000 — the majority of whom are families with incomes under $75,000.
The Bill will adversely affect:
· 5,530 families who have incomes between $50,000 and $65,000 and are in receipt of child maintenance payments, and
· 242,070 families with incomes over $65,000 — the majority of whom are families with incomes over $90,000.
Of the 247,600 adversely affected families, 89,700 will receive no Family Tax Benefit Part A payment. For many of these families, the financial loss they will incur will be slightly offset by a reduction in compliance costs.
The attached Parliamentary Budget Office costing outlines further details and assumptions.
Financial Impact
The Parliamentary Budget Office estimates that the Bill will increase the underlying cash balance by $831.5 million and increase the fiscal balance by $906.6 million over the 2014-15 Budget forward estimates period.
This impact is entirely due to a decrease in expenses.
$11.9 million of the decrease in expenses represents net savings in departmental costs, arising from fewer families being in receipt of Family Tax Benefit Part A.
These estimates:
· account for the passage of the Minerals Resource Rent Tax Repeal and Other Measures Act 2014 and the Social Services and Other Legislation Amendment (2014 Budget Measures No. 6) Act 2014;
· assume no passage of outstanding Budget proposals relating to Family Tax Benefit Part A;
· do not take into account revised Budget estimates that will become available when the 2014-15 Mid‑Year Economic and Fiscal Outlook is released.
The attached Parliamentary Budget Office costing outlines further details and assumptions.
NOTES ON CLAUSES
Clause 1: Short Title
1. This clause provides for the Act, when enacted, to be cited as the Family Tax Benefit (Tighter Income Test) Act 2014.
Clause 2: Commencement
2. This clause provides for a change to the income test for Family Tax Benefit Part A to commence on 1 July 2015.
· The income test for Family Tax Benefit Part A involves a ‘higher income free area’.
· Schedule 9 to the Social Services and Other Legislation Amendment (2014 Budget Measures No. 6) Act 2014 changes this ‘higher income free area’ so that it simply consists of a ‘basic amount’. This Schedule 9 commences on 1 July 2015.
· Schedule 1 of this Bill changes the value of this ‘basic amount’. This Schedule 1 commences immediately after the commencement of the aforementioned Schedule 9. As such, Schedule 1 commences on 1 July 2015.
· The remainder of this Bill commences on the day it receives the Royal Assent.
Clause 3 – Schedule
3. This clause provides that an Act that is specified in a Schedule is amended or repealed as set out in that Schedule, and any other item in a Schedule operates according to its terms.
Schedule 1—Amendments
A New Tax System (Family Assistance) Act 1999
Item 1 – Clause 2 of Schedule 1 (table item 1)
4. This item removes $73,000 and inserts $0 as the ‘basic amount’ of the ‘higher income free area’. This effectively means that, for families that are not in receipt of certain income support payments, the reduction in the payment of Family Tax Benefit Part A by 20 per cent of any income over the ‘income free area’ is not capped. Instead, the reduction will continue until the payment reaches zero.
· The ‘basic amount’ is subject to indexation arrangements, such that the $73,000 ‘basic amount’ translates to a ‘higher income free area’ of $94,316 as at November 2014. Changing the ‘basic amount’ to $0 will ensure that the ‘higher income free area’ will always be $0 (as indexing $0 results in $0).
· A $0 ‘higher income free area’ — and the continued operation of the A New Tax System (Family Assistance) Act 1999 Schedule 1, Part 1, clause 1 — will mean that ‘Method 1’ for calculating payments will be reserved for families with $0 income, and for families in receipt of a social security pension, a social security benefit, a service pension or income support supplement. These families will be unaffected by this Bill, and their minimum payment will continue to be the base rate.
· Payments for all other families will be calculated under ‘Method 2’. Under ‘Method 2’ the Family Tax Benefit Part A payment is the greater of a ‘provisional Part A rate’ and a ‘Method 2 income and maintenance tested rate’. A $0 ‘higher income free area’ will massively erode the ‘provisional Part A rate’. As a consequence, the payment will end up being the ‘Method 2 income and maintenance tested rate’, which is effectively the maximum rate, reduced by 20 per cent of any income over the ‘income free area’.
Item 2 – Application
5. This item applies the aforementioned change in the ‘basic amount’ to calculations of Family Tax Benefit Part A payments for days on and after 1 July 2015.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Family Tax Benefit (Tighter Income Test) Bill 2014
It could be argued that this Bill is incompatible with human rights as defined in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview of the Bill
The Bill reduces Family Tax Benefit payments by changing the income test. The purpose of the Bill is to reduce government spending, including administration costs, and to reduce compliance costs, while preserving Family Tax Benefit Part A payments for families with the least income.
Human rights implications
It could be argued that the Bill detracts from two human rights as defined in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Article 9 of the International Covenant on Economic, Social and Cultural Rights (the Covenant) refers to ‘the right of everyone to social security’. The Bill could be viewed as removing social security payments from some people.
Article 10 states that ‘the widest possible… assistance should be accorded to the family’. The Bill reduces financial assistance to families, other than those with the least income.
It could therefore be argued that the Bill is incompatible with Articles 9 and 10. Alternatively, it could be argued that, by reducing government spending, the Bill improves the sustainability of taxpayer-funded social security and family assistance.
The Bill does not appear to directly promote any other human right as defined in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. The Bill reduces government spending, which promotes lower taxation over the long term. But a right to low taxation does not appear to be a human right as defined in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
· Article 1 of the Covenant states that ‘all peoples have the right to self-determination’, to ‘freely pursue their economic… development’ and to ‘freely dispose of their natural wealth and resources’. However, it would be a stretch to suggest from this that Article 1 contains a right to low taxation.
Given this consideration of Articles 1, 9 and 10 of the Covenant, it could be argued that the Bill is incompatible with human rights, as defined in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
However, there would be no incompatibility with properly‑defined human rights. Human rights should not include a right to social security and assistance. That would imply a right to other people’s money.
Conclusion
It could be argued that the Bill is incompatible with human rights as defined in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. However any incompatibility arises from a flawed definition of human rights.
Senator David Leyonhjelm
COSTING – OUTSIDE THE CARETAKER PERIOD
Name of proposal to be costed: | Remove Method 2 for Calculating Family Tax Benefit Part A |
| Summary of proposal: | The proposal would abolish the Method 2 approach to calculating Family Tax Benefit Part A (FTB A). Under Method 1, child maintenance payments reduce FTB A payments to the base rate. This proposal would retain the base rate payment and no families with adjusted taxable incomes below the lower income free area will be worse off. This proposal would take effect from 1 July 2015. |
| Person/party requesting costing: | Senator David Leyonhjelm, Liberal Democratic Party |
| Date costing request received: | 18 November 2014 |
| Date costing completed: | 24 November 2014 |
| Did the applicant request the costing be confidential? | Yes |
| Additional information received (including date): | Mr Duncan Spender from your office advised on 21 November 2014 that the proposed amendments would remove all reference to the higher income free area. |
| Expiry date for the costing: | 2014-15 Mid-Year Economic and Fiscal Outlook (MYEFO) |
Costing overview
This proposal is expected to increase the underlying cash balance by $831.5 million and increase the fiscal balance by $906.6 million over the 2014-15 Budget forward estimates period. This impact is entirely due to a decrease in expenses.
This includes net savings of $11.9 million in departmental costs over the 2014-15 Budget forward estimates period for Department of Human Services (DHS). These net savings reflect implementation costs of $2.0 million in 2014-15 and savings of $13.9 million over three years (from 2015-16) reflecting lower processing costs for DHS as fewer families would be in receipt of FTB A.
A breakdown of the costing by agency is included at Attachment A. Further information on how many recipients are affected and to what extent they are affected is provided at Attachment B.
This proposal will have an ongoing impact that extends beyond the forward estimates period.
The underlying cash balance impact of this proposal differs from fiscal balance impact because some recipients make lump sum FTB A claims after the end of a financial year in which they were entitled to receive the payment. This results in the lump sum payment being received in a different period to that in which it was accrued.
This costing is considered to be of medium reliability. This costing has been based on income survey data. Estimates will be sensitive to any sampling error in the data and changes in population demographics.
This costing advice is valid until the release of the 2014-15 MYEFO when revised Budget estimates will become available.
Table 1: Financial implications (outturn prices)(a)
| Impact on | 2014-15 | 2015-16 | 2016-17 | 2017-18 | Total |
| Underlying cash balance ($m) | -2.0 | 271.8 | 290.9 | 270.8 | 831.5 |
| Fiscal balance ($m) | -2.0 | 356.1 | 278.9 | 273.6 | 906.6 |
(a) A negative number for the fiscal and underlying cash balances indicates an increase in expenses in accrual and cash terms respectively. A positive number for the fiscal and underlying cash balances indicates a decrease in expenses in accrual and cash terms respectively.
Key assumptions
· As specified in the costing request, this costing accounts for the passage of the mining tax repeal package (which includes the abolition of the Schoolkids Bonus from 31 December 2016) and the Social Services and Other Legislation Amendment (2014 Budget Measures No. 6) Bill 2014 and assumes that there will be no passage of outstanding Budget proposals relating to FTB A.
· Changes in cash payments to families will not result in changes to the labour force participation of parents in affected families.
· The only other material fiscal impact of the policy would be on the Medicare Safety Net based on the link between this program and FTB A.
Consistent with the costing request, the base rate of FTB A would be retained for the purposes of calculating the maintenance income ceiling.
Methodology
The FTB A component of the costing was estimated using data from the Australian Bureau of Statistics (ABS) household income surveys. Household characteristics from the survey data were used to estimate FTB A entitlements for individual families under the current policy and the proposed change. These estimates have then been weighted based on population projections and forecast FTB A recipient numbers to derive the aggregate impact on FTB A outlays.
The impact on the Medicare Safety Net was derived based on the modelling used in the 2013‑14 Budget to cost the extension of the FTB A Higher Income Free Area Indexation Pause.
The estimates for departmental costs in 2014-15 have based on funding for the 2014-15 Budget measures Family Payment Reform – better targeting of Family Tax Benefit Part B, Family Payment Reform – limit the Large Family Supplement to families with four or more children, and Family Payment Reform – maintain Family Tax Benefit payment rates for two years. Departmental savings from 2015-16 onwards were calculated using the DHS - Unit Price Funding Model based on the number of families who would no longer receive FTB A.
Data sources
· ABS, 2009-10 Household Expenditure Survey and Survey of Income and Housing, Confidentialised Unit Record file.
· ABS, 2007-08 Survey of Income and Housing, Confidentialised Unit Record file.
· STINMOD model of Australian personal income tax and cash transfer programs.
· Department of Health (Health) extension of the FTB A Higher Income Free Area Indexation Pause costing model.
· DHS - Unit Price Funding Model.
Attachment A: breakdown of the costing by agency
Table A1: Remove Method 2 for Calculating Family Tax Benefit Part A - Impact on underlying cash, outturn prices (a)(b)
| ($ million) | 2014-15 | 2015-16 | 2016-17 | 2017-18 | Total to |
| Department of Social Services (DSS) | - | 261.7 | 282.2 | 261.8 | 805.6 |
| DHS | -2.0 | 5.1 | 4.3 | 4.4 | 11.9 |
| Health | - | 5.0 | 4.4 | 4.6 | 14.0 |
| Total | -2.0 | 271.8 | 290.9 | 270.8 | 831.5 |
Table A2: Remove Method 2 for Calculating Family Tax Benefit Part A - Impact on fiscal balances, outturn prices (a)(b)
| ($ million) | 2014-15 | 2015-16 | 2016-17 | 2017-18 | Total to |
| DSS | - | 346.0 | 270.2 | 264.5 | 880.7 |
| DHS | -2.0 | 5.1 | 4.3 | 4.4 | 11.9 |
| Health | - | 5.0 | 4.4 | 4.6 | 14.0 |
| Total | -2.0 | 356.1 | 278.9 | 273.6 | 906.6 |
(a) A negative number for the fiscal and underlying cash balances indicates an increase in expenses in accrual and cash terms respectively. A positive number for the fiscal and underlying cash balances indicates a decrease in expenses in accrual and cash terms respectively.
(b) Differences in totals due to rounding.
Attachment B: Estimates of impacts on Affected recipients in 2015-16
The tables below present the estimated average impacts on families by adjusted taxable income.
In interpreting these tables please note that the rate of FTB A paid depends not only on family adjusted taxable income, but also on a number of other factors including the number and ages of children, whether parents receive any income support or child support payments and the housing tenure of the family.
Table B1: Distributional outcomes – Remove Method 2 for Calculating Family Tax Benefit Part A
| Family Adjusted Taxable Income | Total families receiving FTB A | Families that lose payment | Average annual loss | Families where payment decrease | Average annual decrease |
| (#) | (#) | ($) | (#) | ($) |
| less than $50,000 | 768,500 | - | - | - | - |
| $50,000 - $55,000 | 72,400 | - | - | 690 | -300 |
| $55,000 - $60,000 | 70,300 | - | - | 2,850 | -980 |
| $60,000 - $65,000 | 73,000 | 130 | -2,270 | 1,860 | -1,550 |
| $65,000 - $70,000 | 67,100 | 1,110 | -2,270 | 3,590 | -370 |
| $70,000 - $75,000 | 69,300 | 710 | -2,270 | 12,940 | -1,160 |
| $75,000 - $80,000 | 61,700 | 3,550 | -3,110 | 13,440 | -1,710 |
| $80,000 - $85,000 | 60,800 | 10,860 | -2,400 | 10,580 | -1,410 |
| $85,000 - $90,000 | 75,200 | 16,440 | -2,440 | 23,380 | -790 |
| $90,000 - $95,000 | 62,600 | 17,560 | -2,270 | 28,710 | -1,600 |
| $95,000 - $100,000 | 69,600 | 17,260 | -1,280 | 27,540 | -1,230 |
| $100,000 - $105,000 | 52,600 | 10,430 | -1,020 | 20,940 | -1,240 |
| $105,000 - $110,000 | 48,000 | 8,350 | -480 | 10,370 | -900 |
| $110,000 - $115,000 | 30,700 | 1,090 | -1,200 | 1,010 | -70 |
| $115,000 - $120,000 | 19,300 | 1,770 | -890 | - | - |
| $120,000 - $125,000 | 9,900 | 440 | -650 | - | - |
| $125,000 - $130,000 | 10,500 | - | - | - | - |
| $130,000 - $135,000 | 11,600 | - | - | - | - |
| $135,000 - $140,000 | 5,700 | - | - | - | - |
| $140,000 - $145,000 | 3,400 | - | - | - | - |
| $145,000 - $150,000 | 3,100 | - | - | - | - |
| $150,000 or more | 6,200 | - | - | - | - |
| | 1,651,500 | 89,700 | | 157,900 | |