Purpose of the Bill

The purpose of the Early Childhood Education and Care (Three Day Guarantee) Bill 2025 (the Bill) is to amend the A New Tax System (Family Assistance) Act 1999 (the FA Act) and the A New Tax System (Family Assistance) (Administration) Act 1999 to modify the Child Care Subsidy (CCS) activity test so that:

• families can access a minimum of 72 hours of subsidised care a fortnight regardless of their time spent in recognised activities—a ‘3 Day Guarantee’
• those with more than 48 hours or more recognised activities per fortnight can access 100 hours of subsidised care
• families caring for Aboriginal and Torres Strait Islander children will be able to access 100 hours of subsidised care a fortnight regardless of their activity level—up from a minimum of 36 hours of subsidised care a fortnight.

The changes are intended to commence from 1 January 2026.

The 3-Day Guarantee policy was announced on 11 December 2024 together with measures aimed at increasing the number of child care places.

Background

The Child Care Subsidy activity test

The Child Care Subsidy (CCS) was introduced in July 2018 and replaced 2 payments: Child Care Benefit (CCB) and Child Care Rebate (CCR).

Child Care Benefit (CCB) was targeted at low- and middle-income families and was subject to an income test and an activity test (pp. 11–12). Child Care Rebate (CCR) was not means tested and had minimal activity requirements—it subsidised 50% of a family’s out-of-pocket costs after any CCB payments, up to an annual limit (p. 13).

CCS is both income and activity tested. The income test determines the rate of payment: a percentage of the child care service’s fee or government-set hourly rate cap (whichever is lower). The activity test determines the number of hours a family can access CCS-subsidised care.

The CCS activity test was one of the more controversial elements of the 2018 changes as it reduced the minimum entitlement to subsidised care, and removed it altogether for some families (p. 41). CCB provided up to 24 hours of subsidised care a week for those with fewer than 15 hours a week of recognised work, training or study activities. CCS only provides 12 hours per week (24 hours per fortnight) for families with fewer than 8 hours of activity a fortnight and those with a family income over the lower income test threshold (currently $83,280) are not entitled to any hours of subsidised care (Table 1). Since July 2023, Aboriginal and Torres Strait Islander children have been entitled to a minimum of 36 hours of subsidised care, regardless of their parents’ or carers’ activity test result.

At the time the CCS was legislated, most ECEC peak bodies called for a minimum of 24 hours a week (48 hours a fortnight) of subsidised care regardless of activity, particularly for low-income families (pp. 26–28).

Professor Deborah Brennan and Dr Elizabeth Adamson from the Social Policy Research Centre at the University of New South Wales submitted to a Senate committee inquiry in 2016 that the proposed activity test was a ‘poor fit with the needs of the contemporary labour force’ which requires flexibility, rotating shifts and irregular and unpredictable hours (p. 1). They also argued that using the activity test to exclude children with a parent or parents not in the labour force is ‘out of touch with international best practice, which has seen many countries expand universal provision for preschool aged children’ (p. 1). Professor Brennan was a commissioner on the Productivity Commission’s 2023–24 inquiry into a universal ECEC system.

Table 1  Comparison of activity tests for different child care payments

Note: Different conditions apply for Special Child Care Benefit (pre-2018) and Additional Child Care Subsidy (from 2018).

Additional Child Care Subsidy (ACCS), which is aimed at different cohorts requiring further assistance with ECEC costs—such as those looking for work, children at risk of abuse or neglect, and grandparent carers—is not income tested and has different conditions relating to hours of subsidised care.

Recognised activities

Only time spent in recognised activities counts towards the CCS activity test. These include:

• paid work (including being self-employed)
• paid or unpaid leave including parental and maternity leave
• unpaid work for a family business or for work experience or an internship 
• setting up a business
• doing an approved course of study
• doing training to improve employment prospects
• looking for work and
• volunteering.

Some activities can only be recognised for a certain amount of time. For example, if an individual’s only activity is volunteering or looking for work then a maximum of 16 hours of activity can be recognised.

Time spent in activities is self-reported, including by providing estimates of future work hours, and can be subject to review or investigation. The Productivity Commission’s 2024 report stated that based on discussions with the Department of Education ‘the Commission understands that families’ activity levels are not actively audited’ (p. 371).

Activity test results

Table 2 sets out families’ entitlement to CCS-subsidised hours under the activity test, by service type, as at the March quarter 2024. The data indicates that around 925,000 (92%) families using approved child care in 2024 had an entitlement to 72 hours or more per fortnight. Close to 40,000 families (4%) of families had an entitlement of 0–36 hours per fortnight. Data was missing for a further 37,000 families.

Table 2  Families CCS hours under the activity test, March quarter 2024

Notes:

1. This analysis uses the latest non-missing record of a family's allowed hours in the quarter. In the case when a family's records of allowed hours are all missing in the quarter, this is represented as missing.

2. As families may use more than one service care type in the quarter, and due to rounding, the sum of the component parts may not equal the total.

Source: Senate Education and Employment Legislation Committee, Answers to Questions on Notice, Budget Estimates 2024–25, Education Portfolio, Question no. SQ24-000810.

The Productivity Commission’s analysis of 2022–23 administrative data indicated that around 95% of families were entitled to 72 hours or more per fortnight (p. 366).

Many families use more hours of care than they are entitled to subsidies for under the activity test. The Productivity Commission found that around a third of families used unsubsidised hours of care in 2022–23 (Data tables for Figure 6.12).

The Commission also found that a higher proportion of families eligible for 12–18 hours were making use of unsubsidised hours of care, and families in these activity test brackets tended to have lower incomes (Figure 1).

Figure 1  Proportion of families accruing unsubsidised hours by eligible subsidised weekly hours, 2022–23

Source: Productivity Commission, A path to universal early childhood education and care, (Canberra: Productivity Commission, 2024), Data tables: Figure 6.13. Replicates Figure 6.13 on p. 369 of Volume 2 of the report.

In its December 2023 report on child care services, the Australian Competition and Consumer Commission (ACCC) found:

Households with an activity test entitlement of 24 hours used 21 hours of unsubsidised care during the month of September 2023 (or 27% of their total charged hours), compared to just 4 hours for households with an activity test entitlement of 100 hours. (p. 72)

Recent calls for the abolition of the activity test

Productivity Commission

In its 2024 report, A path to universal early education and care, the Productivity Commission recommended significant changes to the CCS to improve affordability and access. This recommendation included the removal of the activity test and increased CCS rates for lower income families (p. 80). The Commission’s report stated ‘children’s eligibility for subsidised ECEC should not depend on their parents’ activity’ (p. 5):

Removing the activity test would mean more families are able to access subsidised ECEC; modelling shows that almost all of those would be families on low incomes who currently face barriers to ECEC participation, although they are likely to benefit significantly from attending. The administrative complexity of the CCS would be reduced, making it easier for families to understand their eligibility for subsidised ECEC and families would no longer have to pay full fees for unsubsidised hours. This would be particularly important for families with variable patterns of work, such as people in casual jobs. It would also lessen families’ concerns about incurring CCS debt if their hours of activity change and give people who are looking for work greater certainty in their access to subsidised ECEC while they are searching for a job. (p. 36)

The Commission noted that while it had recommended the activity test in its 2014 report, there was ambiguous evidence to suggest that the activity test had increased labour force participation (p. 367).             

Australian Competition and Consumer Commission

The ACCC’s December 2023 report on child care services recommended:

Removing, relaxing or substantially reconfiguring the current activity test, as it may be acting as a barrier to disadvantaged children (for example, households with low incomes or in disadvantaged areas) accessing care and creating a barrier to workforce entry or return for some groups. An alternative would be to consider a specific entitlement, such as a certain number of days of care. (p. 9)

Economic Inclusion Advisory Committee

The 2023 report of the Interim Economic Inclusion Advisory Committee recommended abolishing the CCS activity test. The report found the activity test:

• is poorly designed and punitive;
• contributes to children from the poorest households missing out on subsidised early childhood education and care;
• leaves low income families most likely to be paying extra for unsubsidised care;
• acts as a barrier to some parents participating in the labour force and working more hours;
• has significant administrative complexity for little benefit; and
• produces a risk of overpayment for casual employees. (p. 69)

The report raised concerns that the activity test limits access to child care for children in low-income families:

For children growing up in households where one or both parents are not working, the Activity Test limits subsidised access to early childhood education and care. Given children in low income households have been found to benefit the most from early childhood education and care, this restriction is undermining childhood development of these children. While some children in particularly vulnerable circumstances can access the recommended three days of subsidised care a week, the current Activity Test operates to limit this access to many children based on the work related activity of their parents. (p. 69)

The review found that the activity test could act as a barrier to employment participation as care is needed during job search and a lack of certainty around child care can create uncertainty for a parent over whether to take up a job offer (p. 70). The review also raised issues around the effect of the activity test on those with intermittent or irregular casual hours of work (p. 71).

Women’s Economic Equality Taskforce

The Women’s Economic Equality Taskforce recommended abolishing the CCS activity test in its March 2023 letter to the Minister for Women providing advice ahead of the 2023 Budget.

Peak bodies

ECEC peak bodies have called for the removal of the activity test. Early Childhood Australia called for the removal of the activity test to enable its recommendation for a minimum entitlement to 3 days of quality ECEC for all children (pp. 7–8). The Australian Childcare Alliance (which represents a large group of private providers) recommended the removal of the activity test to simplify the CCS system (p. 122).

Impact Economics

An August 2022 report by Impact Economics also recommended removing the activity test. The report stated that ‘at least 126,000 children from the poorest households’ were missing out on child care as a result of the activity test (p. 4).             

Policy position of non-government parties/independents

Coalition

At the time of writing the Coalition had not indicated its position on the Bill. Shadow Minister for Early Childhood Education and Youth Angie Bell has stated: ‘… our position on the activity test is that it's a very important measure, to make sure that $15 billion worth of taxpayer subsidy goes to those who are working, training or looking for work’.

Shadow Treasurer Angus Taylor, Shadow Minister for Education Senator Sarah Henderson and Angie Bell issued joint media release when changes to the activity test were announced in December 2024:

Today’s announcement of a three-day guarantee also fails to address fundamental questions of access, affordability, or quality. Removing the activity test benefits a small number of families, at the expense of hundreds of millions of dollars to the taxpayer.

Australian Greens

At the time of writing the Australian Greens have not stated their position on the Bill but have previously called for the activity test to be abolished. In September 2024, Senator Steph Hodgins-May described the Greens position on the activity test:

This is a test that links children's access to subsidised early childhood education and care to their parents' participation in labour market activities. This is a test that keeps around 40,000 parents out of paid work and about 160,000 children locked out of an early childhood education. This is a test that prevents the most disadvantaged kids from an early education. The Greens have long campaigned for the cruel and unfair subsidy activity test to be abolished. We recognise that a genuinely universal and high-quality early education system doesn't discriminate based on a person's income.

Independents

Zoe Daniel MP

In a media release welcoming the Productivity Commission’s 2024 report, Zoe Daniel stated:

I’m pleased the report recommends abolishing the Activity Test which determines childcare subsidy eligibility based on how much parents work.

The Activity Test has been found to disadvantage single mothers, First Nations families and families on low incomes.

Tinkering around the edges will not deliver the kinds of changes we need to make early learning universally accessible and affordable.

Ms Daniel had previously called on the Government to abolish the activity test.

Senator David Pocock

Senator David Pocock has called for the activity test to be removed and has unsuccessfully moved amendments to a Bill to implement such a change. Senator Pocock stated:

The activity test does not work. Both [the Economic Inclusion Advisory Committee (EIAC) and the Women's Economic Equality Taskforce] recommended it be scrapped, the EIAC stating that it was an example where the social security system reduces rather than enhances economic inclusion, especially for women, and causes additional hardship and disadvantage for children. Yet the government chose not to scrap the activity test in the most recent budget, despite this compelling advice that it is limiting access to early childhood education as people are not able to pick up extra shifts as work. The activity test disproportionally impacts First Nations families, non-English speaking families and low-income families. It is bad policy. It means children don't get the benefit of early childhood education, and it leaves people separated from work for longer.

Dr Monique Ryan MP

Dr Monique Ryan has previously called for the abolition of the activity test:

I have been urging the government to abolish the activity test on the childcare subsidy and to guarantee all Australian children access to three days of quality early childhood education and care. That would be good for the economy, good for parents and good for our kids. It would be an invaluable investment in our future.

Zali Steggall MP

Zali Steggall has previously called for ‘flexibility’ in the application of the activity test:

… particularly in relation to First Nations and vulnerable families. Making workplace participation a prerequisite for childcare subsidy makes it harder for those already doing it tough to begin training or looking at work.

Kylea Tink MP

Kylea Tink MP has previously called for chid care changes including the abolition of the activity test:

… I believe it is imperative that the government accept responsibility for and move quickly towards the development of a new nationally coordinated early childhood education program. The program should guarantee all parents at least three days a week of free or low-cost child care for children of all ages and remove the activity test for all families…

Financial implications

The Explanatory Memorandum states that the activity test changes will cost $426.7 million over five years from 2024–25 (p. 3). The Mid-Year Economic and Fiscal Outlook 2024–25 stated that the measure would cost ‘$291.2 million over three years from 2025–26 (and $129.0 million per year ongoing)’ (p. 240).

The Productivity Commission did some preliminary modelling of a similar change to the activity test for its 2023 draft report. The Commission found that relaxing the activity test so that all families could access at least 3 days (30 hours) of subsidised ECEC a week would increase costs to the government by $1.1 billion per year (p. 39). While the Commission noted some discrepancies in relation to its modelling assumptions and administrative data, it is unclear why there is such a large discrepancy in cost estimates (pp. 623–624).

Key issues and provisions

Key changes and provisions

The main provisions for working out hours of CCS entitlement under the activity test are set out in Schedule 2 to the A New Tax System (Family Assistance) Act 1999 (FA Act).

The Bill will remove references to the activity test throughout the FA Act. Minor amendments will see references to ‘activity tested’ replaced by ‘basic subsidy’ or ‘subsidy’; references to ‘activity tested amount’ replaced by references to ‘basic subsidy amount’; and references to ‘activity test result’ replaced by ‘subsidised hours’.

The key changes are made by item 33 of Schedule 1 to the Bill, which repeals subclause 11(1) of Schedule 2 to the FA Act and substitutes new subclauses 11(1), (1A) and (1B). Under proposed subclause 11(1), when working out an amount of CCS or Additional Child Care Subsidy (ACCS) an individual’s subsidised hours for the relevant fortnight is the highest of:

• the 3 day guarantee (72 hours) or
• an amount worked out using subclause 11(1B).

Where the individual is a member of a couple, the lower number of subsidised hours worked out for each member of the couple is used.

Subclause 11(1B) sets out a table for working out different amounts of subsidised amounts that might apply to an individual depending on their circumstances and whether they are eligible for CCS or ACCS.

Table 3 summarises the proposed new method for working out subsidised hours of approved care for both CCS and ACCS.

Table 3  Proposed method for working out subsidised hours (per fortnight)

Minister’s rules results are set out in Division 4 of Part 3 of the Child Care Subsidy Minister's Rules 2017 and currently apply to some parents/carers with a disability; parents/carers outside of Australia or in gaol or psychiatric confinement; some partners of grandparent or great-grandparent carers; some parents/carers in receipt of certain government payments; some carers; and children attending early education programs at a centre-based day care service. The Rules set different result amounts for the different groups the results apply to.

The Bill renames ‘recognised activity’ as ‘recognised participation type’ but does not change the kinds of activities recognised. Individuals who engage in 48 hours of recognised participation types in the relevant fortnight are eligible for an ‘increased hours result’ of 100 hours of subsidised care (this terminology relates to 72 hours being the minimum guaranteed amount and 100 hours being an increased amount)—these changes are made by items 35–48.

Item 50 amends subclause 15A(1) to increase the subsidised hours of Aboriginal and Torres Strait Islander children from a minimum of 36 to 100.

Activity testing remains

Despite the recommendations from key advisory bodies and peak bodies, the Government has not moved to abolish the activity test. The changes will ease the impact of the activity test and ensure more families can access child care and that families will have fewer unsubsidised hours. The 3 Day Guarantee (or minimum of 36 hours week) is a more generous minimum entitlement than the previous CCB payment.

However, retaining the activity test means retaining a major complexity in the CCS system and will still act as a barrier for families navigating work and care. Workers in casual and part-time roles, and those seeking full-time work, will still need to deal with the uncertainty of their CCS entitlements and whether they can afford child care. This is particularly stressful in locations where child care places are limited and for families who need to make enrolment decisions months in advance of their child’s attendance.

Who will benefit

Minister for Early Childhood Education and Youth Anne Aly stated in her second reading speech on the Bill:

 This legislation will mean real cost-of-living relief for 66,700 families, in the first year alone. Families will save an average of $1,370 per year and about half of these families earn less than $100,000 per year. Lower-income families will save more, an average of $1,460 per year.

This bill also means that over 100,000 families can get more subsidised hours of early childhood education and care. (p. 9)

These estimates appear to suggest that around 67,000 families would, because of the proposed changes, be able to receive CCS for what would otherwise have been unsubsidised hours; and 100,000 families would be able to access additional hours if they chose to. However, it is unclear if the Minister is referring to 100,000 families over the forward estimates as there were only around 40,000 families with CCS entitlements under the 3 Day Guarantee amount in March 2024 (Table 2).

It is also unclear if the estimates of those standing to benefit include those not using approved care who would choose to enrol their child as a result of the 3 Day Guarantee.

Those receiving CCS with activity test entitlements of 24 or 36 hours per fortnight tend to have lower incomes than those entitled to more subsidised hours (Figure 2).

Figure 2  Median family income by eligible subsidised hours and use of unsubsidised hours, 2022–23

Notes:

a. A family’s maximum subsidised hours can change through the year. The Productivity Commission used weekly eligible subsidised hours for a family based on half of the family’s median fortnightly eligible subsidised hours, as reported in weekly-level data for the financial year. Weekly hours were used, rather than fortnightly hours as defined in CCS policy, to allow a simpler comparison with data at the weekly level, but could overstate unsubsidised hours if families use substantially different hours of ECEC across each week of a fortnight.

b. Median family income is the median of incomes across families, where the income for each family is the median of their reported incomes in the financial year.

c. Families with a median of no eligible subsidised hours and no unsubsidised hours represent less than 0.01% of families and are excluded from this figure.

Source: Productivity Commission, A path to universal early childhood education and care, (Canberra: Productivity Commission, 2024), Data tables: Figure 6.11. Replicates Figure 6.11 on p. 369 of Volume 2 of the report.

Aboriginal and Torres Strait Islander children

The Bill would significantly increase the minimum entitlement for Aboriginal and Torres Strait Islander children from 36 to 100 hours of CCS-subsidised care per fortnight, regardless of parents’/carers’ activity level.

Catherine Liddle, CEO of SNAICC – National Voice for our Children (a peak body representing the interests of Aboriginal and Torres Strait Islander children and families) stated:

SNAICC has advocated for many years to remove the Activity Test, which created barriers to Aboriginal and Torres Strait Islander families accessing subsidised care. Many families completely disengaged because there is not enough subsided care available.

Access to ECEC services means our children are more likely to be developmentally ready for big school and they are more likely to access allied health and NDIS supports needed for them to thrive in life.

It means more support for vulnerable families. Recent studies have even correlated access to ECEC services to a decreased likelihood of engaging in youth crime.

Changes will benefit many higher income families

The Productivity Commission found that families with 0 hours of CCS entitlement under the activity test but who were using approved child care services tended to have higher incomes (Figure 2). While there were few families in this category in 2022–23 (around 9,000) their median income was around $186,000 (Data tables for Table 6.4 and Figure 6.11).

The available data indicates these are predominantly couple families where one partner was working full-time and the other partner had a low-level of recognised activity or was working part-time (pp. 208–209).

Increase in demand

The proposed changes are likely to increase demand for ECEC services as families can access more hours of subsidised care and previously excluded families becoming eligible. In its preliminary modelling of an equivalent policy change, the Productivity Commission estimated:

A larger [compared to the change in labour force participation] increase of 6.5% is estimated in the total hours of formal ECEC attended by children. Most of this increase in hours is estimated to come from families who were not using ECEC prior to the policy change. There is a slight increase in estimated ECEC hours by families who were already using ECEC, who experience a fall in out-of-pocket expenses due to having fewer unsubsidised hours (p. 39).

There is limited supply of child care places in many parts of Australia, particularly regional and remote areas. Increased demand would put more pressure on the limited number of places. The Government has made separate commitments aimed at boosting supply including capital funding to expand or build 160 ECEC services. However, it is not clear whether these investments will be enough, or be implemented in time, to meet the increased demand arising from the activity test changes.