1996

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

INCOME TAX RATES AMENDMENT (FAMILY TAX INITIATIVE) BILL 1996

EXPLANATORY MEMORANDUM

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

78608   Cat. No. 96 4973 5   ISBN 0644 435348

General outline and financial impact	1
Chapter
1	Family tax assistance - in summary	3
2	What are FTA benefits?		7
3	Who is entitled to FTA benefits?	19
4	What if a person is a dependant of 2 or more people?	29
5	What if a child is a dependant for only part of a year?	35
6	What if a taxpayer receives family tax payments?	37
Glossary	39

The Family Tax Initiative is a scheme to give new benefits to families with dependent children.  It has 2 components - tax assistance, to be known as family tax assistance (FTA); and equivalent fortnightly cash payments, to be known as family tax payments (FTP).  
Family tax assistance will take the form of increases in the tax-free threshold for certain taxpayers with dependant children, with consequent reductions in tax liability.  Family tax payments will be fortnightly cash payments, equal in value to the tax savings from FTA, and available to certain low income earners as an alternative to FTA.  
Family tax payments will be administered by the Department of Social Security, under Part 2.17AA of the Social Security Act 1991, which will be introduced by the Family (Tax Initiative) Bill 1996.
This Bill, the Income Tax Rates Amendment (Family Tax Initiative) Bill 1996, will amend the Income Tax Rates Act 1986 to provide for family tax assistance.  
Date of effect:  1 January 1997.
Proposal announced:  The proposal was first announced by the Prime Minister on 18 February, 1996.  The implementation of the proposal was announced by the Treasurer as part of the 1996-97 Budget on 20 August 1996.  
Financial impact:  The cost to the revenue of the Family Tax Initiative will be just over $1 billion in a full year.  
Compliance cost impact:  To establish their FTA entitlement, many taxpayers will be required to understand rules, and do new calculations - for example, taxpayers with shared custody of children will have to do pro-rating calculations to determine the amount of benefit they can claim.  Many taxpayers will also be required to make agreements with their spouses, which will have to be recorded and preserved according to certain rules.  There will be additional material in Taxpack relating to the FTA.
Salary and wage earners will be able to claim FTA by way of reduced tax instalment deductions.  This will mean completing new employment declarations before 1 January 1997, and thereafter whenever a taxpayer's entitlements change.  Additional information will be required to be provided in employment declarations, to accomodate the FTA.  
Provisional taxpayers will be able to lodge provisional tax variations, if their FTA entitlements change during a year.  
FTA will also impact on employers, who will need to adjust their payroll systems to take account of employees who reduce their tax instalment deductions for FTA.  Employers will handle a greater number of employment declarations, as taxpayers vary their tax instalments, in line with their changing FTA entitlements. 

This explanatory memorandum is divided into six chapters.  The following guide to the later chapters forms a brief summary of the FTA:
Chapter 2 - What are FTA benefits?
	There are 2 kinds of FTA benefits:
	an increase in the tax-free threshold of up to $1,000 for each dependent child (referred to here as Part A benefits). 
	an increase in the tax-free threshold of up to $2,500 for taxpayers with dependent children under 5 (referred to here as Part B benefits). 
	for the 1996-97 year of income, the amounts are $500 for Part A and $1,250 for Part B.
	there are several exceptions to the normal threshold increase for FTA benefits.  In these cases the benefit is received in the form of a reduced rate of tax.
Chapter 3 - Who is entitled to FTA benefits?
Part A benefits will be available to a taxpayer who, during the year:
	was an Australian resident, with at least one dependant; and
	the taxpayer either did not have a spouse on the last day of the year, and had a taxable income of less than the "family income ceiling"; or 
	the taxpayer had a spouse on the last day of the year, and the sum of the taxable incomes of the taxpayer and spouse was less than the "family income ceiling".  
	"family income ceiling" will be $70,000 for one dependant, increased by $3,000 for each dependant after the first.
Part B benefits will be available to a taxpayer who during the year:
	was an Australian resident; and had at least one dependant under the age of 5 years;
	had a taxable income less than the taxpayer's income ceiling, i.e. $65,000 for one dependant, increased by $3,000 for each dependant after the first; and 
	if the taxpayer had a spouse on the last day of the year, the spouse's income did not exceed the "spouse income ceiling".
A person (a child) will be a dependant of another person if:
	the child was either under the age of 16, or was aged 16 or 17 and was receiving full-time secondary education; and
	the child was an Australian resident; and
	the child had an income less than the relevant dependant ceiling; and
	the other person contributed to the maintenance of the child.
A spouse of a taxpayer cannot be a dependant of the taxpayer. 
Chapter 4 - What if a person is a dependant of 2 or more people?
	if a child is a dependant of 2 or more people who do not all live together, the benefit is allocated according to the number of nights that each person has care of the child. 
	only persons who have care of the child for more than 30% of nights during a period are entitled to a benefit.
	if a child is a dependant of 2 or more people who live together:
	if only one of the people is entitled to a Part B benefit, the child will be a dependant of that person;
	in all other cases, the people can make an agreement as to who will get the benefit;
	if they do not make an agreement, they will not be entitled to FTA benefits, except if they have since separated, in which case the benefit will be apportioned evenly.
Chapter 5 - What if a child is a dependant for only part of a year?
	where a child is a dependant for only a part of the year of income, FTA benefits are pro-rated on the basis of the number of days that the child was a dependant.
Chapter 6 - What if a taxpayer receives family tax payments? 
	the amount of FTA benefit allowed to a taxpayer will be reduced by reference to the amount of FTP received.

2.1		This chapter covers:
	increases in tax-free thresholds;
	decreases in rates of tax where there is a special income component, a capital gains component or a notional income;
	calculations in the case of primary producers;
	decreases in the rate of complementary tax; and
	section 98 trustee assessments.
General overview
2.2		The primary benefit available under the FTA is a $1,000 increase in the tax-free threshold of a taxpayer for each dependent child. It is referred to in this Explanatory Memorandum as the Part A benefit. The further benefit available where a dependant of the taxpayer is under 5 years of age is a $2,500 increase in the tax-free threshold of the taxpayer. This benefit is referred to as the Part B benefit. Collectively, the benefits are referred to as FTA benefits.
2.3		The full amount of both Part A and Part B benefits are to be available only where the taxpayer qualifies for the whole of an income year and satisfies the various income tests. This means that where, for example, a dependent student turns 18 years of age during the year or is a dependant of more than one taxpayer, only a reduced amount is or may be available. 
2.4		For the 1996-97 year of income, the FTA benefits are half of the full amounts provided for a full year of income. This is because the Family Tax Initiative is to commence from 1 January 1997, that is half way through the 1996-97 year of income. This means that, for the 1996-97 year of income, the maximum Part A benefit for a child is $500, and the maximum Part B benefit is $1,250. The part of the 1996-97 year of income from 1 January 1997 is referred to in the Bill as the relevant part of the 1996-97 year of income.
2.5		An FTA benefit is generally an increase in the tax-free threshold of the taxpayer. The tax-free threshold is the level of taxable income at which a taxpayer becomes liable to the general rates of tax payable on taxable income. For resident taxpayers, the level of the tax-free threshold and the general rates of tax are contained in clause 1 of Part I of Schedule 7 of the Rates Act.
2.6		The tax-free threshold is currently $5,400. The rates of tax which apply to income above that level are:
Parts of ordinary taxable income of resident taxpayer	% rate
The part of the ordinary taxable income that:
exceeds $5,400 but does not exceed $20,700		20%
exceeds $20,700 but does not exceed $38,000		34%
exceeds $38,000 but does not exceed $50,000		43%
exceeds $50,000 						47%
Medicare levy payable is in addition to those rates.
2.7		Where a taxpayer's tax-free threshold would be increased above $20,700 because of FTA benefits, tax is payable at the rate of 14% (34% - 20%) on income above $20,700 up to the amount of the increased tax-free threshold. This matter is discussed further at paragraphs 2.13 - 2.16 below.
Specific benefits
Part A - primary FTA benefit
2.8		Section 20C provides for Part A benefits to be available to taxpayers. It does this by increasing the amount of $5,400 in clause 1 of Part I of Schedule 7 by $500 (for the 1996-97 year of income) for each resident dependent child of a taxpayer whose family income did not exceed the family income ceiling and who was a resident during the relevant part of the 1996-97 year of income (subsection 20C(1)). The amount is $1,000 for each resident dependent child during the 1997-98 or later years of income (subsection 20C(2)).
Example
	A taxpayer has sole responsibility for 5 dependent children.
	The Part A benefit entitlement for the 1996-97 year of income is $2,500 ($5,000 for subsequent years).
	The taxpayer's tax-free threshold for 1996-97 is now $7,900 ($5,400 + $2,500). (The figure will be $10,400 for 1997-98 and later years)
	The tax saving is $500 (20% of $2,500) ($1,000 for subsequent years).
Part B - further FTA benefit
2.9		The Part B benefit is provided for in section 20D. Entitlement to this benefit is subject to the taxpayer having at least one dependant under 5 years of age, in addition to residency and income level requirements being met. The new section provides for the $5,400 in clause 1 of Part I of Schedule 7 to be increased by $1,250 (1996-97 year of income - subsection 20D(1)) or $2,500 (1997-98 and later years of income - subsection 20D(2)) in addition to any amount to which the taxpayer is entitled as a Part A benefit.
Example 
	The taxpayer's tax-free threshold as increased under the example after paragraph 2.8 above is $7,900.
	Part B benefit entitlement is $1,250 ($2,500 for subsequent years).
	Tax-free threshold becomes $9,150 ($7,900 + $1,250). ($12,900 for subsequent years)
	The tax saving from the Part B benefit is $250 (20% of $1,250).
	The total tax saving for 1996-97 is $750 ($1500 for subsequent years).
Part-year workforce period and part-year residency period
2.10	If a taxpayer is a resident for only part of the year, or ceases full-time study for the first time during the year, the taxpayer's tax-free threshold is reduced.  The amount of the reduction is proportional to the number of months during which the taxpayer was either a non-resident, or was engaged in full-time study.  
2.11	If a taxpayer falls into one of these categories, the reduction in threshold, to take account of part-year residency or ceasing full-time study for the first time, will be worked out before any FTA benefits are calculated.  [Item 1, Schedule 1, new section 16A]
Exceptions to the normal increase of tax-free threshold
2.12	The increase in the tax-free threshold as outlined above will be applicable to most taxpayers. However, in a number of circumstances an increase in the threshold does not produce the level of benefit intended under the Family Tax Initiative. The circumstances are listed below and discussed in detail in the following paragraphs. The circumstances are where:
	the increased tax-free threshold exceeds $20,700 (paragraphs 2.13 to 2.16); 
	the taxable income includes a special income or capital gains component (paragraphs 2.17 to 2.22);
	a taxpayer is a primary producer who is entitled to a primary production rebate or liable to pay complementary tax (paragraphs 2.23 to 2.25);
	a taxpayer is liable to pay complementary tax and has insufficient ordinary tax payable to fully utilise entitlement to FTA benefits (paragraphs 2.26 to 2.32.); or
	a taxpayer has a notional income determined under section 59AB or 86 of the Assessment Act (paragraphs 2.33 to 2.35).
Increased tax-free threshold exceeds $20,700
2.13	For most taxpayers their increased tax-free threshold will be under $20,701 and therefore remain in the range that is taxed at the rate of 20%. However, FTA benefits available to some taxpayers - those with 13 or more children one of whom is under 5 years of age - will increase their tax-free thresholds over $20,700. Such a threshold is in the 34% tax rate range.
2.14	Section 20E deals specifically with this situation. It provides that Part A and Part B benefits otherwise available through sections 20C and 20D are not available and, instead, reference is to be made to the table contained in section 20E rather than the table contained in clause 1 of Part I of Schedule 7. [subsection 20E(1)]
2.15	The table in subsection 20E(2) operates in a similar fashion to the table in clause 1 of Part I of Schedule 7. Its effect is to free from tax the first $20,700 of taxable income and to tax at the rate of 14% that part of taxable income that exceeds $20,700 but does not exceed the adjusted tax-free threshold (see below). Taxable income subject to the 14% rate of tax would, apart from FTA benefits, have been taxed at the rate of 34%.
2.16	Adjusted tax-free threshold is defined as $5,400 as increased by the taxpayer's tax-free threshold increase. Effectively, tax-free threshold increase is defined to mean the sum of the amounts that the taxpayer would have been entitled to as Part A and Part B benefits had the taxpayer been entitled to those benefits but for the application of subsection 20E(1). [subsection 20E(3)]
Example
	Taxpayer has 14 children one of whom is under 5 years of age.
	The taxpayer is entitled to a Part A benefit of $14,000 and to a Part B benefit of $2,500. This increases the taxpayer's tax-free threshold to $21,900.
	The taxpayer will not pay tax on income up to $20,700.
	Tax will be payable at 14% on the amount of $1,200 ($21,900 - $20,700).
Taxable income includes a special income or capital gains component
2.17	Where a taxpayer's taxable income includes either a net capital gain or abnormal income (these are referred to as either a special income component or a capital gains component), the normal rates table in clause 1 of Part I of Schedule 7 does not apply because of the averaging rules which apply to those kinds of income. Instead, tax payable is determined by a rate calculated under formulae contained in clauses 2 and 3 of Part I of Schedule 7, clause 2 of Part I of Schedule 9, clause 3 of Part I of Schedule 11, and clause 3 of Part I of Schedule 12 of the Rates Act.
2.18	Each formula provides for the calculation of a rate of tax to be applied to every $1 of a taxpayer's taxable income (or share of net income in the case of a trustee). Basically, the formulae operate to add to the tax normally payable on taxable income apart from the special income or capital gains component, 5 times the incremental tax payable if 20% only of the special income or capital gains component were included in taxable income. The formulae in Schedules 11 and 12 also add in the special amount of Division 6AA tax payable on any part of a special income component that comes under that Division. In all cases, the resulting sum is divided by the amount of taxable income to produce the rate of tax payable by the particular taxpayer on every $1 of taxable income.
2.19	The method of calculation of the rate of tax payable by a taxpayer with a special income or capital gains component as set out in the clauses mentioned in paragraph 2.17 above does not provide for the correct amount of FTA benefits to be made available in the same manner as used for most taxpayers. In a number of situations a vastly different amount of benefit could result.
2.20	Section 20F deals with cases where a taxpayer is entitled to FTA benefits and has a special income or capital gains component included in taxable income. It does this by providing a different manner of making the FTA benefit available to the taxpayer. Instead of an increase in the tax-free threshold, the rate of tax determined under one of the formulae, without taking the FTA benefit into consideration, is to be reduced by an FTA benefit rate.
2.21	An FTA benefit rate is worked out using the formula:
tax-free threshold increase  x  lowest marginal rate of tax
		        taxable income
where tax-free threshold increase is defined to mean the amount of FTA benefits to which the taxpayer would have been entitled had the taxpayer otherwise been entitled to Part A or Part B benefits. Where the taxpayer is a trustee assessed under section 98 of the Assessment Act, 'taxable income' in the formula becomes 'share of net income'. [section 20F]
2.22	The method contained in section 20F provides full FTA benefit entitlements to all taxpayers with special income or capital gains components included in their taxable incomes.
Example
A taxpayer has a taxable income as follows:
Special income component			$16,000
Other taxable income				$  6,000
Taxable income					$22,000
	In addition, the taxpayer is entitled to a Part A benefit in respect of one child over 5 years (i.e. $1,000).
	The relevant formula in clause 2, Part I, Schedule 7 is:     A+B
	  							         C
where:	A is $120	(20% of $6,000 - $5,400) 
		B is $3,200	(5 x {tax on ($6,000 + 20% of $16,000) 			- tax on $6,000}) = 5 x ($760 - $120) = $3,200 
		C is $22,000 
	The rate of tax payable on each $1 of the taxpayer's taxable income (calculated without FTA benefits being taken into account) is:						     15.09%
This has been calculated by ($120 + $ 3,200)/$22,000.
	The FTA benefit rate applicable to the taxpayer is:	      0.91%
	This has been calculated by (20% x $1,000)/$22,000.
	The rate of tax payable by the taxpayer after taking FTA entitlements into account is (15.09% - 0.91%):	     14.18%
These rates are applied to taxable income as follows to produce tax payable:
(1)	Tax on taxable income where no FTA benefit 
	($22,000 x 15.09%)					$3,320 
(2)	Tax on taxable income with the FTA benefit 
	($22,000 x 14.18%)					$3,120 
	The difference between (1) and  (2) is the tax value of 
	the Part A benefit of $1,000 (ie; 20% of $1,000)	  $200 
Note:  Tax payable if FTA benefit applied to tax-free threshold = $2,800. Difference between (1) and (2) would be $520.
Taxpayer is a primary producer
2.23	A taxpayer who is a primary producer may be entitled to a rebate under subsection 156(4) or (5) of the Assessment Act or may be liable to pay complementary tax under subsection 156(4A) or (5A). In determining the amount of any rebate or complementary tax payable, it is necessary to ignore FTA benefits.  However, FTA benefits are fully delivered to primary producers in the calculation of the tax payable on their taxable income (see the example below) and in adjustments in certain circumstances to complementary tax payable (see paras. 2.24 to 2.32 below).
2.24	Items 3 to 6 of Schedule 1 of the Family (Tax Initiative) Bill 1996 provide for FTA benefits to be ignored when calculating the tax ordinarily payable by a taxpayer on the taxpayer's taxable income for section 156 purposes. This is achieved by the insertion of the words 'and Division 5 of Part II of the Income Tax Rates Act 1986' in the relevant places in the subsections mentioned in the previous paragraph.
2.25	Similarly, the Bill provides for FTA benefits to be ignored when making calculations of the notional rate of tax payable, as determined under Schedule 8 of the Rates Act, as used for section 156 purposes. This is achieved by the insertion of clause 3 into Division 1 of Part I of Schedule 8. That clause provides that the notional rate is to be calculated as if Division 5 of Part II had not been enacted. [items 3 and 4]
Example:
A taxpayer has a taxable income as follows:
	Primary production income				$  3,000
	Non-primary production income			$  7,000
	Taxable income					$10,000

	The taxpayer's average income is			$  8,000
	The taxpayer is entitled to FTA benefits in respect of 2 children over 5 years (ie; $2,000). This means that the taxpayer is entitled to a tax-free threshold of ($5,400 + $2,000):	     $  7,400
	The taxpayer's deemed taxable income from primary production is $ 6,000.  This is calculated as $3,000 + {$5,000 - ($7,000-$5,000)} -see definition in subsection 156(1) of the Assessment Act.
No FTA benefit taken into account in calculating the subsection 156(4) rebate. However, the FTA benefit is taken into account when calculating tax actually payable on taxable income (apart from the rebate):
	Notional rate of tax determined in accordance with 
	Schedule 8: (Calculated: tax on $8,000/8,000). 	      6.5%
(1)  Ordinary tax payable (20% x $10,000 - $5,400)	      $920
(2)	Notional tax rate applied to taxable income 
	(6.5% x $10,000)					      $650
	Excess of (1) over (2) 					      $270
Rebate provided by subsection 156(4) without FTA benefits     $162
This is calculated by ($270 x $6,000/$10,000).
N.B. Total tax payable = $520 - $162 rebate:		      $358
($520 is tax on $10,000 with FTA benefits of $2,000 
so FTA benefits fully provided.)
	If the FTA benefit of $2,000 was applied in calculating subsection 156(4) rebate, the taxpayer would obtain an additional $60 benefit, over and above the full FTA benefits:
	Notional rate of tax, calculated (tax on $8,000/$8,000):     1.5%
(3)	Ordinary tax payable (20% of $10,000 - $7,400)	     $520
(4)	Notional tax rate applied to taxable income 
	(1.5% x $10,000)					     $150
	Excess of (3) over (4)					     $370
	Rebate ($370 x $6,000/$10,000)			     $222

	Total tax payable = $520 - $222 rebate:		     $298
Adjustments to complementary tax 
2.26	A taxpayer who derives income from primary production may be liable to pay complementary tax. The circumstances for liability are set out in subsections 156(4A) and (5A) of the Assessment Act. Where payable, complementary tax is payable in addition to any income tax otherwise payable on taxable income.
2.27	Where the tax-free threshold as increased by an FTA benefit exceeds taxable income and complementary tax is payable, the full value of an FTA benefit would not be able to be offset against the total tax payable including complementary tax.
2.28	Section 20G deals with this situation. It applies only where a taxpayer is liable for complementary tax and the taxpayer's adjusted tax-free threshold exceeds taxable income. Adjusted tax-free threshold is defined as the normal tax-free threshold ($5,400) as increased by FTA benefits available under sections 20C and 20D.
2.29	Section 20G operates in a similar manner to that outlined above for special income and capital gains components; the rate of complementary tax otherwise payable (as calculated under subsection 12(3) or (4) and Schedule 8 of the Rates Act without FTA benefits being taken into account) is reduced by an FTA benefit rate. In the present circumstances, however, the amount of the FTA benefit relevant is only the amount of the "unused" FTA benefits. Two formula are necessary to calculate the amount of the reduction of the complementary tax.
2.30	The first formula is contained in subsection 20G(1) and applies where taxable income exceeds normal tax-free threshold (i.e. $5,400). The new section provides for the calculation of the 'unused' FTA benefit rate and for that rate to be deducted from the rate of complementary tax otherwise payable. The 'unused' FTA benefit rate where taxable income exceed $5,400 is contained in new subsection 20G(1) as follows:
  adjusted tax-free threshold - taxable income  x  lowest marginal tax rate
deemed taxable income from primary production
2.31	The second formula is contained in subsection 20G(2) and applies where adjusted tax-free threshold exceeds taxable income and taxable income is less than normal tax-free threshold (ie; $5,400). In this situation, a taxpayer's entire FTA entitlement would be 'unused'. However, the formula in subsection 20G(1), if used when taxable income is less than normal tax-free threshold, would be based on an amount greater than the FTA benefit to which a taxpayer was entitled (taxable income would be less than $5,400). The second formula ensures that this is not the case. It bases the 'unused' FTA benefit rate on the amount of the benefit. The formula is:
                 tax-free threshold increase               x   lowest marginal tax rate
deemed taxable income from primary production
2.32	Similar formulae, contained in subsections 20G(3) and (4), apply in relation to a share of the net income of a trust estate assessed under section 98 of the Assessment Act. 
Example
A taxpayer has a taxable income as follows:
	Primary production income				$  3,000
		Non-primary production income			$  7,000
		Taxable income					$10,000
	The taxpayer's average income is			$20,000
	The taxpayer is entitled to FTA benefits in respect of 6 children over 5 years (i.e. $6,000). This means that the taxpayer is entitled to a tax-free threshold of ($5,400 + $6,000):	     $11,400
	The taxpayer's deemed taxable income from primary production is							      $ 6,000
	(This is calculated as $3,000 + {$5,000 - ($7,000-$5,000)} -see definition in subsection 156(1) of the Assessment Act).
	The taxpayer's notional rate of tax determined in accordance with Schedule 8 and without FTA benefits is (tax on $20,000/20,000)	 				      14.6%
	The ordinary tax payable by the taxpayer before FTA benefit are taken into account is calculated at 
	20% x $10,000 - $5,400:				       $  920
	The tax payable on taxable income at notional rates and without FTA benefits is calculated at 14.6% x $10,000	     $ 1,460
	The excess of tax at notional rates over tax at ordinary 
	rates is 							       $  540
	This produces a complementary tax rate of 		        5.4%
This is calculated by $540/$10,000.
	Complementary tax is therefore ($6,000 x 5.4%)	       $  324
(1)  The total tax payable by the taxpayer without FTA benefits being taken into account is: ($920 + $324)		      $ 1,244
	The rate of unused FTA benefit provided by the formula in section 20G is calculated to be ($11,400-$10,000/$6,000 x 20%):							      4.66%
	The rate of complementary tax rate as reduced by the rate of "unused" FTA benefits is (5.4%-4.66%):		      0.74%
(2)  	Tax payable after allowance of full FTA benefits ($6,000 x 0.74%)							        $   44
	Note:  no ordinary tax payable as increased tax-free threshold exceeds taxable income	
	The difference between (1) and (2) is the tax value of the
	FTA benefits to which the taxpayer is entitled (ie; 20% of $6,000)							    $ 1,200 
	Note:  Tax payable if FTA benefit applied to tax-free threshold = $516.  Difference would be $728	
Taxpayers with rates of tax determined by reference to a notional income
2.33	Schedule 9 of the Rates Act provides for the calculation of a rate of tax to be applied to every $1 of ordinary taxable income of a taxpayer who has a notional income determined under section 59AB (balancing charge on depreciated property) or section 86 (premium on lease) of the Assessment Act.  The provision of FTA benefits through increases to tax-free thresholds does not produce the level of benefit intended in all these cases. To achieve the correct result, it is necessary to ignore the direct application of FTA benefits and, instead, to adjust the rate otherwise applicable in a manner similar to that outlined above in respect of taxpayers whose taxable incomes include special income or capital gains components (see paragraphs 2.17 to 2.22 above).
2.34	Section 20H provides for the rate of tax otherwise payable by a taxpayer to whom Schedule 9 applies to be reduced on account of FTA benefits. It does this by providing that the relevant taxpayer is not entitled to the benefits provided by sections 20C and 20D and, instead, for the calculation of an FTA benefit rate to be used to reduce the rate of tax otherwise applicable to the taxpayer.
2.35	The formula for calculating the FTA benefit rate is set out in section 20H as follows:
	tax-free threshold increase  x  lowest marginal rate of tax
	ordinary taxable income
Ordinary taxable income is used because the rate of tax determined under Schedule 9 of the Rates Act is applied to ordinary taxable income.
Example
A taxpayer has a taxable income that includes the following features:
	Taxable income					$22,000
Abnormal income					$  9,000
	Notional income ($22,000 - $6,000)			$16,000
	Note:  notional income = taxable income less 2/3rds of abnormal income - subsection 59AB(5))   
	In addition, the taxpayer is entitled to FTA benefits in respect of 3 children over 5 years (ie; $3,000).
	These features produce the following figures that are calculated without FTA benefits being taken into account:
-	  Tax on notional income ($16,000-$5,400 x 20%)	      $ 2,120
-	  Rate of tax on notional income ($2,120/$16,000) 	     13.25%
	The rate of FTA benefit is calculated using the formula in section 20H to be ($3,000/$22,000 x 20%)		       2.73%
	The rate of tax to be applied to ordinary taxable income after taking FTA benefits into account is (13.25% - 2.73%)    10.52%
These rates are applied to ordinary taxable income as follows to produce tax payable:
(1) .......Tax where no FTA benefit ($22,000x13.25%)	     $  2,915
(2) .......Tax with FTA benefit ($22,000 x 10.52%)	     $  2,315
	The difference between (1) and (2) is the tax value of the 
	FTA benefits to which the taxpayer is entitled i.e.
	(20% of $3,000)   					       $   600
	Note:  Tax payable if FTA applied to tax-free threshold = $2,090. Difference between (1) and (2) would be $825.
Trustee assessment where beneficiary would be entitled to FTA benefits
2.36	Schedules 10 and 12 of the Rates Act apply where a trustee is assessed under section 98 or 99 of the Assessment Act. The Schedules operate to provide that the rate of tax to be applied to a beneficiary's share of the net income assessed under section 98 is the rate that would be applicable were one individual to be assessed and liable to pay tax on a taxable income equivalent to the share of net income.
2.37	Section 20J operates to ensure that, in the application of Schedules 10 and 12 to a beneficiary who is entitled to an FTA benefit, that the FTA benefit is taken into account when calculating the tax payable by the trustee for the beneficiary.

3.1		This chapter covers:
	who is eligible for Part A benefits;
	who is eligible for Part B benefits;
	definition of dependant;
	family income ceiling;
	taxpayer income ceiling; and 
	spouse income ceiling. 
Which taxpayers will be eligible for Part A benefits?
3.2		A taxpayer will be eligible for a Part A benefit for the 1996-97 year of income, or a later year if:
	the taxpayer was an Australian resident during the year ("resident" is defined in subsection 6(1) of the Assessment Act); and 
	the taxpayer had at least one dependant during the year ("dependant" will be defined in section 20K - see para. 3.16)  [paras. 20C(1)(a) and 20C(2)(a)]; and 
	either:
	the taxpayer did not have a spouse on the last day of the year of income, and the taxable income of the taxpayer for the year was less than the "family income ceiling"; or 
	the taxpayer did have a spouse on the last day of the year, and the sum of the taxable incomes of the taxpayer and his or her spouse for that year was less than the "family income ceiling".  [paras. 20C(1)(b) and 20C(2)(b)]
3.3		Spouse is defined in subsection 6(1) of the Assessment Act to include a de-facto spouse, as well as a person who is legally married.  For the purposes of FTA, a spouse does not include a person to whom the taxpayer is legally married, if they are living separately and apart on a permanent basis.  [definition of spouse in section 20B]
Family income ceiling
3.4		The "family income ceiling" will be $70,000 for a taxpayer, or taxpayer and spouse, with one dependant.  This amount will be increased by $3,000 for each dependant (as defined under section 20K) after the first, with the number of dependants being the maximum number of dependants that the taxpayer had at any one time.  [section 20Q]
Number of dependants	Family income ceiling
	
1	$70,000	
2	$73,000	
3	$76,000	
4	$79,000	
5 	$82,000	
more than 5 dependants	$70,000 + ($3,000 x {number of dependants - 1})	

Example
At the beginning of the year, Vladimir and Sasha had 2 dependent children.  On 1 January, one left home, and was no longer dependant.  On 1 June, Sasha's 2 dependent nieces came to live with them.  The total number of persons who were Vladimir's and Sasha's dependants during the course of the year was 4, but the maximum number of dependants at any one time was 3.  The family income ceiling is therefore $76,000.
Taxpayer did not have a spouse on the last day of the year of income
3.5		If a taxpayer did not have a spouse on the last day of the year, the taxpayer will be eligible for Part A benefits if the taxpayer's taxable income is less than the family income ceiling.  A taxpayer who had a spouse earlier in the year, but not on the last day of the year, will not have to include any of the former spouse's taxable income in the calculation.  
Example
Vincent and Theresa were married, but they separated on 1 April, and were living separately and apart on a permanent basis on the last day of the year.  They have 3 dependent children, and Vincent's taxable income for the year was $75,000.  Theresa's taxable income was $37,000, of which $30,000 was derived before 1 April.  Vincent did not have a spouse on the last day of the year.  
To work out if Vincent is below the family income ceiling, he only has to consider his own taxable income.  None of the income derived by Theresa is relevant.  Vincent is therefore below the ceiling, which is $76,000 for a taxpayer with 3 dependants.  
Taxpayer had a spouse on the last day of the year of inome
3.6		If the taxpayer had a spouse on the last day of the year of income, then the taxpayer will be eligible for Part A benefits if the sum of the taxable incomes for the year of the taxpayer and the spouse is less than the taxpayer's family income ceiling.  
3.7		In this case, the whole of the spouse's taxable income for the year is included in the calculation, even if the taxpayer and the spouse were not together for the whole year.  
Example
Jack had 3 dependent children, and a taxable income for the year of $37,000.  On 1 June, Jack married Amy, and they were still married on the last day of the year.  Amy's taxable income for the year was also $37,000, of which $2,000 was derived after they were married.  
With 3 dependent children, Jack's family income ceiling will be $76,000.  Family income will be the sum of Jack's taxable income ($37,000) and Amy's taxable income ($37,000) for the year.  The result is $74,000, which is below the family income ceiling.  
Which taxpayers will be eligible for Part B benefits?
3.8		A taxpayer will be eligible for Part B benefits, for the 1996-97 year of income, or a later year, if:
	the taxpayer was an Australian resident during the year ("resident" is defined in subsection 6(1) of the Assessment Act); and 
	the taxpayer had at least one dependant during the year under the age of 5 years ("dependant" will be defined in section 20K - see para. 3.16)  [paras. 20D(1)(a) and 20D(2)(a)]; and 
	the taxable income of the taxpayer for the year did not exceed the taxpayer's income ceiling (see para. 3.9);  [paras. 20D(1)(b) and 20D(2)(b)] and 
	if the taxpayer had a spouse on the last day of the year, the spouse's taxable income (excluding certain government payments, allowances and benefits) did not exceed the "spouse income ceiling" (see para 3.11).  [paras. 20D(1)(c) and 20D(2)(c)]
Taxpayer's income ceiling
3.9		The taxpayer's income ceiling is $65,000 with one dependant, increased by $3,000 for each dependant after the first, with the number of dependants being the maximum number of dependants that the taxpayer had at any one time.  For the purposes of working out the taxpayer's income ceiling for a taxpayer, all dependants as defined by section 20F are taken into account, not only those under 5 years.  [section 20R]
Number of dependants	Taxpayer's income ceiling
	
1	$65,000	
2	$68,000	
3	$71,000	
4	$74,000	
5 	$77,000	
more than 5 dependants	$65,000 + ($3,000 x {number of dependants - 1})	

Example
Alison had 3 dependent children.  In 1997-98, her children are aged 2, 4 and 8.  Alison, a sole parent for the year, had a taxable income for the year of $70,000.  
Alison has 3 dependent children for the purposes of the taxpayer's income ceiling, even though only 2 of them are under 5 years of age.  Her taxpayer's income ceiling is therefore $71,000, and her taxable income is below the ceiling.  
In 1998-99, her children are aged 3, 5 and 9.  Although only one child is now under 5, Alison still has 3 dependent children for the purposes of the income ceiling.  If Alison's taxable income remains unchanged, she will still be below the taxpayer's income ceiling.
Spouse income ceiling
3.10	A taxpayer with a spouse on the last day of the year of income will only be eligible for Part B benefits if the taxable income of his or her spouse (excluding certain Commonwealth government payments) is below the spouse income ceiling.  
3.11	The spouse income ceiling will be calculated by multiplying by 26 the "income ceiling of the breadwinner's partner" which applied on 21 March in the year of income.  The "income ceiling of the breadwinner's partner" will be the amount calculated under the method statement in Table E of point 1070-E5 in Part 3.8 of the SSA91.  [subsection 20D(4)]
3.12	The starting point in the calculation of the "income ceiling of breadwinner's partner" will be the "current maximum basic component of parenting allowance" in section 1068A-B6 of the SSA91, as indexed under that Act.  The indexing takes place on 20 March and 20 September, in line with CPI increases.  
3.13	In broad terms, the reference to the "income ceiling of the breadwinner's partner" will have the effect that spouse income ceiling for FTA is approximately equivalent to the spouse income test for family tax payments.  
Spouse income ceiling for 1996-97
3.14	The spouse income ceiling for 1996-97 will not be known until March 1997, following the relevant indexing.  As an indication, if the spouse income ceiling was calculated using the relevant figures as at 21 March 1996, the ceiling would be $4,535.  
Exclusions from spouse's income
3.15	For the purpose of the spouse income ceiling, spouse's income will be the taxable income of the spouse, excluding certain Commonwealth pensions, benefits or allowances:
	amounts paid under the Social Security Act;
	drought relief payments under the Farm Household Support Act 1992;
	Textile, Clothing and Footwear Special Allowance;
	amounts paid under the Veterans' Entitlements Act 1986 (other than Part VII);
	payments by the Commonwealth to participants, or to other persons on behalf of the participants, in labour market programs, where the recipient is not employed by an employer who receives a subsidy for that employment.  Labour market programs will be defined to include programs under which people are helped to find work, or remain in work; and 
	payments by the Commonwealth to students, or to other people on behalf of students, under a scheme of assistance to students, where the recipient is not an employee of a person who receives a subsidy for that employment.  The payments will not include scholarships and bursaries, or payments made on the condition that the student render services to the Commonwealth if required.  Examples of the types of payments included are AUSTUDY and ABSTUDY. [subsection 20D(5)]
Dependants
3.16	A child will be a dependant of another person for a period if:
	the child:
	was under the age of 16; [subpara. 20K(1)(a)(i)] or
	was aged 16 or 17, and was receiving full-time secondary education; [subpara. 20K(1)(a)(ii)] and
	the child was an Australian resident; [para. 20K(1)(b)] and 
	the person contributed to the maintenance of the child; [para. 20K(1)(c)]and 
	the child was not a spouse of a person; [subsection 20K(2)]and
	the child's income does not exceed the dependant (under 16) ceiling, or the dependant (over 16) ceiling, as the case may be.  [subsections 20K(4) and (5)]
3.17	These rules take effect subject to the rules about the allocation of dependants.  [subsection 20K(7)]
Contributing to the maintenance of a dependant
3.18	For a child to be a dependant of a person, the person must contribute to the maintenance of the child.  This is consistent with the existing definitions of dependants in the tax law in relation to dependant rebates and the Medicare levy.  If a taxpayer is living with a child during a period when the dependant is deriving income, the taxpayer will usually be regarded as contributing to the maintenance of the child, unless the Commissioner is satisfied that this is not the case.  [subsection 20K(2)]
3.19	Accordingly, a taxpayer cannot generally claim a child as a dependant for part of a year by excluding the period during which the child derived income and was living with the taxpayer.  That income generally would be taken into account in determining whether the child qualified as a dependant during all of the time the taxpayer and the child lived together (see further 'Dependant ceilings' below).
Dependant ceilings
3.20	A child will not be a dependant for a year of income if the child has a taxable income in excess of the relevant dependant ceiling.  There will be 2 basic dependant ceilings - the dependant (under 16) ceiling, and the dependant (over 16) ceiling.  
3.21	Dependant ceilings will be different from the other income tests, in that they will be apportioned on the basis of the period during which the income was derived.  This will ensure, for example, that where a child begins full-time work part of the way through the year, and so ceases to be a dependant, the income earned after the child ceases to be a dependant does not affect the child's status as a dependant before that time.  
3.22	Dependant (under 16) ceiling:  The dependant (under 16) ceiling will apply in respect of a dependant who did not turn 16 during the year of income (i.e. who was 15 or younger for the whole year) and did not receive full-time education.  
3.23	1997-98 year of income and later years - the dependant (under 16) ceiling for the full year will be calculated by multiplying by 52 the "weekly young person ceiling" which applied on 2 January in the year of income.  The "weekly young person ceiling" is the amount in section 5(3)(c) of the SSA91, as indexed under that Act.  

3.24	If a child was a dependant during a part only of the year, the dependant (under 16) ceiling calculated as above will be multiplied by the following fraction: 
                 number of days in period
                              365
The reduced ceiling which results will apply to the period when the child was a dependant.  
3.25	1996-97 year of income - the dependant (under 16) ceiling for the year will be the amount calculated by multiplying by 26 the "weekly young person ceiling" which applied on 2 January 1997.  
3.26	If a child was a dependant for a part only of the year, the dependant (under 16) ceiling calculated as above will be multiplied by the following fraction: 
                 number of days in period
                              181
The reduced ceiling which results will apply to the period when the child was a dependant.  
3.27	Dependant (over 16) ceiling:  The dependant (over 16) ceiling will apply in respect of a dependant who turned 16 during the year of income, or who was 16 or 17 during the year.  The ceiling applies whether or not the dependant receives full-time education during the year.
3.28	1997-98 year of income and later years - the dependant (over 16) ceiling for the full year will be the "annual young person ceiling" which applied on 2 January in the year of income.  The "annual young person ceiling" is the amount in section 5(4)(b) of the SSA91, as indexed under that Act.  
3.29	If a child was a dependent during a part only of the year, the dependant (over 16) ceiling calculated as above will be multiplied by the following fraction: 
                 number of days in period
                              365
The reduced ceiling which results will apply to the period when the child was a dependant.  
3.30	1996-97 year of income - the dependant (over 16) ceiling for the year will be the amount calculated by dividing by 2 the "annual young person ceiling" which applied on 2 January 1997.  
3.31	If the dependant was a dependant for part only of the year, the dependant (over 16) ceiling for the 1996-97 year will be multiplied by the following fraction: 
                 number of days in period
                              181
The reduced ceiling which results will apply to the period when the child was a dependant.  
Dependant ceilings for 1996-97 
3.32	The dependant ceilings for 1996-97 will not be known until 2 January 1997, following the relevant indexing.  As an indication, if the dependant (under 16) ceiling was calculated using the relevant figures as at 2 January 1996, the ceiling would be $3,219, and if the dependant (over 16) ceiling was similarly calculated, it would be $3,346.  
Dependant income
3.33	For the purpose of the dependant ceilings, a child's taxable income will not include certain Commonwealth payments.  These will be payments which are made under a scheme of assistance to students administered by the Commonwealth, except for:
	payments in the form of scholarships or bursaries; 
	payments in return for which the Commonwealth may require the students to render services.  [subsection 20K(6)]
3.34	If a child will not be a dependant for a full year of income, and a reduced ceiling will apply to that child, then the income of the child which is measured against the income ceiling is also apportioned.  The method of apportionment is to calculate the income for that period, using the same rules which apply to the calculation of taxable income, but applied as though the period of dependency was a year of income.  
Example 1
Elsa had a dependent child, Rosie, who turned 16 years of age on 31 May 1998.  Rosie left school on 30 April 1998, and received no income until commencing part-time work on 17 May 1998. Her gross salary from that date was $150 per week.  
As she turned 16 years of age during the 1997-98 year of income the dependant (over 16) ceiling is relevant.  Assuming "annual young person ceiling" remains unchanged from its present level of $6,691, the dependant (over 16) ceiling for the period that Rosie was dependent on the taxpayer is calculated as follows:
		$6,691 x 335  = $6,141
		               365
where 335 days is the number of days in the period from 1 July 1997 to 31 May 1998, when Rosie turned 16 and ceased to be a dependant.
As Rosie had earned only $300 for the period to 31 May, which is under the dependant (over 16) ceiling of $6,141 for the period, she qualifies as a dependant of the taxpayer for the period 1 July 1997 to 31 May 1998.
Example 2
Richard had a dependant daughter, Amanda, who was less than 16 years of age for the entire 1997-98 year of income.  She left school for good in December 1997, and began work in January 1998, earning $150 per week for the year.  She remained living at home.  
Because Amanda was under 16 years of age, and received full-time education for the first half of the year, the dependant ceilings do not apply to her.  Assuming that he meets the other eligibility criteria, Richard would be entitled to Part A benefits for the whole year in respect of Amanda. 
Example 3
Gordet was 16 at the beginning of the 1997-98 financial year.  He was earning $100 a week at a part-time job until 31 December 1997, and had a taxable income for whole the year of $8,000.  He finished school on 10 December 1997 and started full time work on 2 January 1998.  On that date he also left home, and the taxpayer, Kim, ceased to contribute to his maintenance.  
The dependant (over 16) ceiling applies to Gordet, because he was 16 or over during the year of income.  
After 2 January 1998, Gordet was not a dependant of Kim.  The dependant ceiling should therefore be reduced, in proportion to the period of time when Gordet was a dependant.  Assuming once again that the ceiling for a full year is $6,691, the reduced ceiling is calculated as follows:
		$6,691 x 183  = $3,355
		               365
when 183 is the number of days for which Gordet was a dependant.
Since Gordet earned $2,600 for the period before 2 January, and had no expenses, and this amount is below the reduced dependant ceiling, Gordet will be a dependant of James up until 2 January.

4.1		This chapter covers:
	the allocation of dependants between 2 or more people.
Allocation of dependants
4.2		FTA benefits are intended, in the majority of cases, to be available to one person in respect of a child that is a dependant of two or more people during the same period.  Since a child will frequently be a dependant of at least two people - his or her mother and father - the Bill contains rules for determining which person is able to claim the FTA benefits.
4.3		There are two broad categories of cases considered by the Bill.  They are:
	where a child is a dependant of two or more people who do not reside together [section 20 L]; and
	where a child is a dependant of two or more people who reside together [sections 20M, 20N and 20P].	
4.4		In the majority of cases, the relevant people will be able to make an agreement that a child be treated as the dependant of one of them, under section 20N (see paras 14 to 18 below).
Child a dependant of two or more people who do not all reside together
4.5		Where a child would otherwise be a dependant during a period of two or more people who do not all reside together, the child is allocated according to the number of nights that each person had the care of the child.  As a minimum, a person must have the care of the child for 30% of the nights in the period.  Where only one of the relevant persons has the care of the child for more than 30% of nights during the period, the child is treated as being a dependant of that person for the whole period [subsections 20L(1) to (4)].
4.6		Persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together for the purposes of this rule [subsection 20L(5)].  For example, if one member of a couple temporarily is required to live in another location to fulfil employment obligations, section 20GA would not apply.
	Example 1
	Jan and Gary are separated, but share the care of their son James, who is 8 years old.  During the year, James spent 35% of nights with Jan, and the remainder with Gary.  James is treated as a dependant of Jan for 35 % of the days in the year and of Gary for 65% of the days in the year.
	Example 2
	As per example 1, but James spends only 15% of nights during the year with Jan.
	James would be treated as a dependant of Gary for the whole year, and not a dependant of Jan.
Child or dependant of two or more people who reside together
4.7	There are three allocation rules which may apply in these circumstances.
(i) Where one person only entitled under new section 20D
4.8		Where a child would otherwise be a dependant during a period of 2 or more people who reside together, and one only of those people is entitled to a Part B benefit, the child is treated as being a dependant only of the person with the Part B entitlement, and not a dependant of any other person, for that period [subsections 20M(1) and (2)].
4.9		Importantly, this rule only applies where the period or periods during which the relevant persons resided together includes the last day of the income year [seection 20M(1)].  This is because Part B entitlement is determined by reference to the income of the spouse of a taxpayer (if the taxpayer has one) on the last day of the income year.  If 2 people who resided together during part of a year no longer reside together at the end of the year, it would be unfair to allocate a dependant they had during the period they resided together according to their new circumstances at the end of the year.  For example, after separation, one of the persons may (because of the income of a new partner) be entitled to a Part B benefit, but the other person may not.  For the rule which applies where people separate during a year, see paras 19 to 25 below.
4.10	In determining whether a period includes the last day of the year, the fact that a child has ceased to be a dependant during the year is disregarded [subsection 20M(5)].  This ensures that the rule in section 20M applies to people who continue to reside together, but whose children cease to be dependants because they turn 16 or 18, or leave secondary school, or for some other reason.
4.11	Where subsections 20M(1) and (2) apply to a child, any other child who would otherwise be a dependant of the same two or more people while they resided together during the relevant income year is also treated as being a dependant of the person with the Part B entitlement and not of any other person [subsection 20M(3)].  In this way, all of the children are treated as dependants of the one person.
4.12	It may be noted that subsection 20M(1) applies in respect of a period during which a child would be a dependant apart from section 20L.  In a case where both sections apply (for example, where a couple have separated with shared care of their child, and have subsequently married new partners), the person to whom section 20M allocates a child may only have the child as a dependant for a part of the allocation period because of the rule in section 20L.
4.13	As with section 20L, persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together for the purposes of this rule [subsection 20M(4)].
	Example 1.
	Jim and Sharon have three children whose ages at 30 June are 6 years, 3 years and 6 mths.  Jim's taxable income for the relevant year is $60,000.  Sharon has a part-time job which provides her with a taxable income of $3,000.  Jim and Sharon reside together for the whole year.
	As Jim has an entitlement under section 20D to a Part B benefit, and Sharon does not, the children are treated as dependants of Jim only for FTA purposes.
	Example 2.
	Jim and Sharon's eldest child, Cathy, is from a previous relationship Sharon had with Rob.  Rob has the care of Cathy for 40% of nights during the year.
	As between Jim and Sharon, section 20M allocates the children to Jim for FTA purposes for the whole of the year.  However, under section 20L, Cathy is a dependant of Jim's for only 60% of the year.

(ii)	Agreements
4.14	In every case other than that covered by paras 8 to 13 above, the persons who reside together may make an agreement that a child will be treated as a dependant of one only of them for the period they resided together [subsections 20N(1) and (3)].  The agreement must cover every child who would otherwise be a dependant of each of the persons while they resided together, nominating the same person as the person of whom the children are taken to be the dependants [subsection 20N(4)].
4.15	Family agreements must generally be made before the first of the persons lodges his/her tax return, although the Commissioner has a discretion to allow a further time for agreements to be made [subsection 20N(2)].
4.16	Agreements must be kept for five years from the time they are made.  Failure to keep an agreement will mean the persons will be treated as if no agreement had been made [subsection 20N(5)].  If an agreement is lost or destroyed a copy of the agreement may suffice, if the Commissioner is satisfied the copy properly records all the matters set out in the agreement and was in existence when the agreement was lost or destroyed [subsection 20N(6)].  Alternatively, if there is no adequate copy of the agreement and the Commissioner is satisfied the agreement was lost or destroyed in circumstances beyond the control of the relevant people, the people will still be treated as having made an agreement [new subsection 20N(7)].
4.17	As with new sections 20L and 20M, persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together [subsection 20N(9)].
4.18	Again, it may be noted that subsection 20N(1) applies in respect of a period during which a child would be a dependant apart from section 20L.  In a case where both sections apply (for example, where a couple have separated with shared care of their child, and have subsequently married new partners), the person to whom an agreement made under section 20N allocates a child may only have the child as a dependant for a part of the allocation period because of the rule in section 20L.
	Example 1.
	Ric and Kay have 2 children, whose ages on 30 June are 9 years and 7 years.  Ric and Kay's family income is below the family income threshold, with Kay being the main breadwinner.  Ric and Kay reside together for the whole year.
	As neither Ric nor Kay have an entitlement to a Part B benefit under section 20D, they may agree that their children be treated as dependants of one of them, and not the other, for FTA purposes for the relevant year.
	Example 2.
	Greg and Mary separated on 15 January.  They have a child Jordon who is 4 yrs old at 30 June.
	For the period to 15 January, Greg and Mary may agree which one of them will be able to claim Jordan as a dependant for FTA purposes.  Section 20M does not apply because they did not reside together on the last day of the year.
	(Note:
	if they cannot agree, see paras 19 to 25 below;
	for the period after they have separated, if Jordan is still a dependant of each of them, see paras 5 and 6 above).
(iii) Where agreement not made  people no longer residing together
4.19	Subject to the exceptions below, where people to whom section 20N applies (see para 14 above) do not make an agreement, the child is taken, or the children are taken, not to be a dependant or dependants of those people [subsections 20P(1) and (2)].
4.20	The first exception relates to people who resided together during a part of a year of income, but who no longer reside together.  The Bill recognises that these people may not be able to reach an agreement on the allocation of a child who was a dependant of each of them while they resided together.
4.21	In these circumstances the child is allocated evenly between those people for the period they resided together [paragraph 20P(3)(a)].
4.22	The second exception relates to people who resided together at the end of the year of income, but who cannot reach an agreement.  In these circumstances the child may also be allocated evenly between those people for the period they resided together, provided section 20M does not apply and the Commissioner is satisfied that the reason why they cannot agree is because they no longer reside together [paragraph 20P(3)(b)].
4.23	In determining whether a period includes the last day of the year, the fact that a child has ceased to be a dependant during the year is disregarded [subsection 20P(6)].  This ensures that the first exception mentioned above is only available to people who do not reside together at the end of the year, and not to people who did still reside together at the end of the year but whose children ceased to be dependants during the year.  For these latter people it is appropriate that either section 20M applies or they make an agreement under section 20N, with the second exception mentioned above available as a last resort.
4.24	It may be noted that subsection 20P(1) applies in respect of a period during which a child would be a dependant apart from new section 20L.  In cases where both new sections 20L and 20P apply to a child, the period allocated by new section 20P is the number of days a child would be a dependant of the people who reside together after the application of new section 20L [subsection 20P(4)].
4.25	Again, for this rule, persons who ordinarily reside together, but who are temporarily residing apart, are treated as residing together [subsection 20P(5)].
	Example 1.
	Mike and Laura separated on 14 March.  They have a child, Ben who is 3 years old at the end of the year.
	Mike and Laura have the option of agreeing for the period to 14 March which one of them will be allocated Ben for FTA purposes.
	If they do not agree, Ben will be allocated to each of them for half the period between 1 July and 14 March.
	Example 2.
	Mike and Laura separated on 12 July, before they had completed their returns for the year ended on the previous 30 June.  Mike and Laura both work, with taxable incomes of $30,000 each, so that neither of them has an entitlement under section 20D to a Part B benefit for the year ended 30 June.  They are unable to reach an agreement about the allocation of Ben for the year ended 30 June.
	If the Commissioner is satisfied that the reason they cannot agree is because they no longer reside together, then Ben will be allocated to each of them for half of the year ended on the previous 30 June.

5.1		This chapter covers:
	the determination of FTA benefits where a taxpayer has a dependant for only part of the year.
Part year dependancy
5.2		A child may be a dependant of a person for only a part of a year of income.  The usual examples where this would be the case are:
	the child is born during the year;
	for a child at school, the child leaves school or turns 18 during the year;
	for a child not at school, the child turns 16 during the year;
	the child is subject to shared care arrangements and section 20L applies.
5.3		Where a child is a dependant of a person for only part of a year of income, FTA benefits are pro-rated according to the proportion of the number of days that the child was a dependant to the number of days in the relevant period [sections 20S and 20T].  The number of days in the relevant period is 365, except for the 1996-97 income year, in which case the number of days in the relevant period is 181 (that is, from 1 January 1997 to 30 June 1997).
5.4		Where an amount worked out under the pro-rating is an amount of dollars and cents, the amount is rounded up to the next whole dollar [subsections 20S(4) and 20T(4)]
	Example 1
	Joe and Irene's first child is born on 28 March.  Because Irene was not working before the birth, Joe qualifies for a Part B benefit under section 20D, as well as a Part A benefit under section 20D.  The FTA benefits would be pro-rated as follows:
	Part A benefit	 95  x  $1000 = $260.27, rounded up to $261
				365
	Part B benefit	 95  x  $2500 = $650.68, rounded up to $651
				365
	(95 days is the period from 28 March to 30 June inclusive)
	Total FTA benefit is $912.
	Example 2
	As per example 1, except Joe and Irene also have a child who is not at school who turns 16 on 8 November.  Accordingly, Joe also has a Part A benefit for the year.  The FTA benefits would be allocated as follows:
	Part A benefit	225  x  $1000 = $616.43, rounded up to $617
				365
	(225 days is the sum of the periods 1 July to 7 November and 28 March to 30 June inclusive)
	Part B benefit	 95  x  $2500 = $650.68, rounded up to $651
				365
	Total FTA benefit is $1268.

6.1		This chapter covers:
	the reduction in FTA benefits of a taxpayer where the taxpayer, or the taxpayer's spouse or certain other people, receive family tax payments.
Receipt of family tax payments
6.2		A taxpayer's entitlement to FTA benefits is reduced by the grossed-up amount of any FTP received during a year of income by:
	the taxpayer or his or her spouse; or
	another person in respect of a child at a time when the taxpayer and the other person resided together and the child was a dependant of each of them.
[section 20U]
6.3		Before netting off FTP against FTA benefits, the FTP is grossed-up by reference to the lowest marginal tax rate [subsections 20U(3) and (4)].  The grossing-up is needed because FTP is a cash benefit, whereas FTA benefits are increases in the tax-free threshold.  The grossing-up effectively converts FTP to an equivalent amount of an increase in the tax-free threshold.
6.4		The amount worked out under the grossing-up formula is rounded up to the next whole dollar before being offset against FTA benefits [subsection 20U(5)].
6.5		FTP is paid at two rates, the Part A rate and the Part B rate, in broadly equivalent circumstances to where Part A and Part B benefits are available.  After grossing-up, Part A FTP is netted off against Part A benefits, and Part B FTP is netted off against Part B benefits.  The FTA benefits cannot be reduced below nil. [subsections 20U(3) and (4)]
6.6		Where sections 20C and 20D do not apply because, instead, a rate is reduced under sections 20F or 20H,or section 20E applies, section 20P operates to reduce the amount that would be the tax-free threshold increases under sections 20C and 20D if they did apply.  This is because the definitions of section 20C tax-free threshold increase and 20D tax-free threshold increase each refer to both actual increases under those sections, and increases if those sections had applied [subsection 20U(1)].
6.7		Accordingly, the rates that would be reduced under sections 20F and 20H would be reduced by less, and the adjusted tax-free threshold under section 20E would be lower, because of the operation of section 20U.  The adjustments to complementary tax under section 20G would also be affected by section 20U.
Example 
Ted and Alice have a child who qualifies them for a Part A benefit for the whole year.  They agree that Ted should claim the Part A benefit in his return.  For three months during the year Alice receives Part A FTP, totalling $53.90.
Ted's Part A benefit is reduced by the following amount:
$53.90  x  100  =  $269.50, rounded to $270
	      20
Ted is entitled to a Part A benefit for the year of $730 ($1000 less $270).

Assessment Act 	Income Tax Assessment Act 1936
	
Rates Act	Income Tax Rates Act 1986
	
SSA91	Social Security Act 1991
	
FTA 	Family Tax Assistance 
	
FTA benefit	the increase in tax-free threshold or reduction in tax rate as a result of the application of the FTA
	
Part A benefit	the $1,000 increase in the tax-free threshold for certain taxpayers for each dependant child
	
Part B benefit	the $2,500 increase in the tax-free threshold for certain taxpayers with a dependant child under 5
	
FTP 	Family Tax Payments under Part 2.17AA of the Social Security Act 1991
	
References to sections in the EM are references to sections in the proposed new Division 5 of Part II of the Rates Act, unless otherwise indicated.