Chapter 3


Chapter 3

Indexation

Purpose

3.1        The second of the suite of measures in the bill would amend the A New Tax System (Family Assistance) Act 1999 and the Paid Parental Leave Act 2010. The amendments build on reforms introduced in the 2009–10 Budget that targeted the family payments system to focus on low and middle income families.[1] These earlier reforms put in place an indexation freeze for four years on:

  • the higher income test free threshold for Family Tax Benefit A (FTB A) of $94,316 plus $3,796 per annum per additional child after the first;
  • the Family Tax Benefit Part B (FTB B) primary earner income threshold of $150,000 per annum;
  • the Baby Bonus income eligibility limit of $75,000 in the six months following the birth or adoption of a child; and
  • the Dependency Tax Offsets income limit of $150,000 per annum.[2]

3.2        The government proposes to extend indexation pauses on higher income limits for a further two years for FTB A and B and the Baby Bonus. It is also proposed that Paid Parental Leave, a newly introduced entitlement, will not be indexed until
1 July 2014.[3]

3.3        The bill also freezes indexation of FTB A and B supplements for three years from 1 July 2011.[4]

Background

Eligibility for FTB A

3.4        The previous chapter outlined basic eligibility for FTB A. The 'higher income free area' threshold is the income level at which the base rate of FTB A begins to reduce, until the benefit ends completely. The Minister's second reading speech noted that:

The income level at which a family's benefit is completely withdrawn varies by family circumstance, depending on the number and age of the children.[5]

3.5        Depending on individual circumstances, as of 20 March 2011, the amount of family income may be $45,114 a year before payment begins to taper off.[6]

Eligibility for FTB B

3.6        FTB B gives extra assistance to single parent families and to families with one main income where one parent chooses to stay at home or balance some paid work with caring for their children. Basic conditions of eligibility for FTB B require that a person and/or their partner must:

  • have a dependent child aged under 16; or
  • have a qualifying dependent full-time student up to the age of 18 (who doesn't receive Youth Allowance or a similar payment); and
  • have care 35 per cent of the time; and
  • meet residential requirements; and
  • have income under a certain amount.[7]

3.7        As of 20 March 2011, that amount was $4,745 per year for the lower income earner. For every dollar earned above $4,745, the payment is reduced by 20 cents per dollar. The benefit cuts out altogether if the higher income earner receives an annual income of $150,000.[8]

3.8        The Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) advised that in 2008–09, around 1.6 million families received
FTB B.[9]

Eligibility for the Baby Bonus

3.9        The Baby Bonus assists with the costs associated with a newborn or the adoption of a child. It was introduced in 2002 and has been income-tested since January 2009.[10] It is payable to:

  • a parent of the newborn child; or
  • families who have care of a newborn child within 26 weeks of the child's birth, and are likely to continue to have care of the child for no less than 26 weeks; or
  • families who have a child entrusted to their care for adoption before the child is 16 years of age.[11] 

Eligibility for Paid Parental Leave (PPL)

3.10      PPL is paid to working parents of children born or adopted on or after
1 January 2011. To be eligible, a parent must:

  • be the primary carer of a newborn or recently adopted child;
  • be an Australian resident;
  • have met the PPL work test before the birth or adoption occurs;
  • have received an individual adjusted taxable income of $150,000 or less in the financial year prior to the date of birth or date of claim; and
  • be on leave and not working from the time the parent becomes the child's primary carer until the end of the PPL period.[12]

FTB A and B supplements

3.11      FTB payments may include a supplement which is paid after the end of a financial year when payments are being reconciled. End of year supplements were originally introduced to address overpayments due to under-estimation of income. They are generally paid as a lump sum.[13]

3.12       The supplements may be used to top-up the payment or to offset an overpayment. The amounts are indexed on 1 July each year in accordance with movements in the Consumer Price Index.[14]

3.13      The maximum FTB A supplement is currently $726.35, which is paid per child. The maximum FTB B supplement is $354.05, which is paid per family.[15]

Indexation pauses

3.14      The substance of the proposed amendments is to pause indexation of:

  • the higher income free threshold for FTB A for a further two years until 1 July 2014;
  • the maximum income limits for eligibility for FTB B ($150,000 for the primary earner) for a further two years until 1 July 2014; and
  • the Baby Bonus eligibility limit of $75,000 family income in the six months following the birth or adoption of a child until 1 July 2014 (equivalent to $150,000 per year).[16]

3.15      The proposed amendments also freeze the income limit for PPL for the primary carer ($150,000) for a further two years until 1 July 2014.[17]

3.16      The FTB A and B supplements would also be frozen at current levels until
1 July 2014.[18]

Financial impact

3.17      The government expects that these measures will deliver savings of
$1.2 billion over the forward estimates.[19] The yearly financial impact of the proposed indexation pauses for FTB A, FTB B and the Baby Bonus for a further two years until 1 July 2014 is set out below. Table 1 also includes the projected savings from the freeze on the indexation of PPL until 1 July 2014.

Table 1: Indexation pauses for certain FTB A, FTB B, Baby Bonus and PPL[20]

2011–12

2012–13

2013–14

2014–15

$0.1m

­-$230.9m

-$471.6m

-$489.0m

3.18      The yearly financial impact of freezing of FTB A and FTB B supplements until 1 July 2014 is set out below.

Table 2: Indexation pauses for FTB A and B supplements

2012–13

2013–14

2014–15

2015–16

­-$76.8m

-$179.1m

-$268.1m

-$279.3m

How many families would be affected?

3.19      The government estimates that in the first year of the reforms, fewer than two per cent of families would no longer be eligible for family payments as a result of all of the proposed changes.[21] The Minister's Second Reading Speech also stated that 'no family will lose any family payments unless their income rises.'[22]

3.20      The Budget Review 2011–12 briefing noted that 'the level of income test tightening proposed is relatively mild compared to that which occurred after the implementation of income testing measures in the 2008–09 Budget.'[23]

FTB A

3.21      The National Welfare Rights Network noted that the freeze to the higher income threshold for FTB A would affect 39,000 families, whose part-rate payments would cease by 2013–14.[24]

FTB B

3.22      Based on data from the National Centre for Social and Economic Modelling, Parliamentary Library analysis estimated that the proposed pauses to the indexation of the FTB B threshold would affect around 11,400 families, who would lose their entitlement in 2013–14. This is equivalent to around one per cent of families who would be eligible for FTB B.[25] However, the government's estimate is greater: that in 2012–13, 9,000 families would be affected, and in 2013–14, about 19,800 would be affected.[26] 

FTB A and B supplements

3.23      FaHCSIA stated that in 2011–12 it would be likely that the foregone amount for families receiving FTB A would be $18.25 per child, and in 2012–13, $43.40 per child. For FTB B, families would forego $11 in the 2011–12 and $22 in 2012–13.[27]

Issues raised during the inquiry

3.24       Submissions to the inquiry generally supported better targeting of the family payments system, particularly pausing indexation of the income thresholds for FTB A and B, the Baby Bonus and PPL. However, most submitters also expressed concern about the proposed changes to FTB A and B supplements.

3.25      The National Welfare Rights Network (NWRN) stated:

At around $18 billion in 2011–12, it is vital that the family payment system provide greater support to those families in need of greater levels of financial assistance. A more highly targeted family payments system ensures that sufficient funds are available to meet other important community needs, in mental health, transport and disability and children's services.[28]

3.26      Commenting on the family payments system in general, FaHCSIA stated:

When this family payment system came into existence in 2000, the design of it was to try to maximise the benefits paid to those on the lowest incomes and then to ... maximise the amounts paid to those on the kind of lowest incomes and then gradually taper off after that.[29]

3.27      Savings from these amendments will be re-targeted to enhance payments for families with teenagers aged 16 to 19. The 2011-12 Budget's biggest family assistance spending measures was the increase in the FTB A maximum rates for 16 to 19 year old full-time students. This rate will now match that paid to 13 to 15 year olds (currently $6,161.20 per annum). These changes are estimated to cost $771.9 million over the next five years.[30]

Indexation pauses to FTB A and FTB B income thresholds and the Baby Bonus

3.28      Witnesses and submitters expressed general support for the indexation pauses to the income thresholds for FTB A, FTB B and the Baby Bonus. The Australian Council of Social Services (ACOSS) stated:

...we believe that this is a better targeted approach to restoring the federal budget to surplus. This has nothing to do with assertions over whether families above a certain income level are rich or not. It has more to do with targeting family assistance towards those in the greatest need of support.[31]

3.29      The Northern Territory Council of Social Service Inc also stated the amendments were 'appropriate, as they target families on above-average incomes who are less likely to experience financial hardship as a result.'[32]

Indexation pauses to FTB A and FTB B supplements

3.30      Some submitters expressed concern about the proposed indexation pauses to the FTB A and B supplements. ACOSS opposed the changes on the grounds that supplements provide important support for families at risk of poverty:

People use them to pay their car registration, they use them to pay for new refrigerators and other major expenses. And although the effective reduction in the real value of those supplements amounts to a few dollars a week, a few dollars a week or a hundred dollars or so a year do make a difference to the poorest families.[33]

3.31      For families who live on less than $30,000 a year, ACOSS argued, the indexation freeze would hit hard:

They particularly struggle with bulky expenses such as car registration, fridges breaking down, having to move house, which frequently happens if you rent privately, and finding the bond. These unavoidable expenses often come up as lump sums and the feedback we have received from members is that people find those supplements particularly useful to meet those kinds of expenses and also to repay debts that they have incurred to meet those expenses in the past including, for example, Centrelink debts. Bear in mind that the part A supplements are per child supplements, so if you have a large family it does make more of a difference, as it should, so it is more than a few dollars a week, on average, in those cases.[34]

3.32      The NWRN was 'very concerned' about the potential effects on families who rely on the supplements:

The freezing of indexation is quite small on an individual basis, and will result in low income families missing out on increased benefits of about $20 per child, per year.

The FTB Supplements were initially introduced, in part, to assist with extensive numbers of overpayments which were a common feature of the family payments system. Debts are still at disturbing levels within the family payments system. Despite attempts in recent years to reduce the endemic incidence of overpayments, one in 12 families had accrued an FTB debt, with the average debt around $1,291 per annum.[35]

3.33      To address this concern, the NWRN offered the following suggestion:

...consideration could be given to capping the annual supplements that are available to higher income earners. We can see no rationale for paying the ... supplement of $726 to a family on $50,000 and providing the same benefit to a family on three times this income. Another option could also be to allow for just one annual FTB supplement per high income family.[36]

3.34      In response to concerns such as these, FaHCSIA provided a history of the FTB supplements:

There is a range of measures that successive governments have put in place to try and assist families to avoid debt. For example, families under More Choice for Families arrangements, families can elect to defer receipt of part of their payment, so, rather than receiving it all as fortnightly instalments, they can receive some of it at the end of the year. Families also have the option of claiming the whole amount at the end of the year. They are also able to work with Centrelink to negotiate an adjustment to their fortnightly rate where they have had a change of circumstances during the year to ensure that the overpayment is recovered during the year so that they do not have an overpayment at the end of the year at reconciliation. There are also arrangements where they can meet their overpayment out of a tax return or some other monies at reconciliation so that they do not end up with a debt to the Commonwealth as a result of reconciliation.

...

Some of the changes are more recent, so the impact of those is harder to assess. But there is a significant number of families electing to use More Choice for Families options to defer some or all of their payments....About 12 per cent of families elect to defer all of their payment to the end of the year. Another 10 to 12 per cent claim only lump sums at the end of the year and another 12 per cent defer part of their payment but not all of their payment.[37]

3.35      Mr Andrew Whitecross of FaHCSIA also stated the department was not 'anticipating that the scale of the change is one which would cause families to be in financial hardship.'[38]

3.36      In correspondence received by the committee, Minister Macklin referred to evidence from ACOSS, that:

the 'loss of income would probably amount to a few dollars a week' [and] that 'on top of that would be a couple of dollars a week, converted into a lump sum, for each child from this measure'. The foregone increase for affected families is actually around $18 a year per child for Family Tax Benefit Part A and $11 a year per family for Family Tax Benefit Part B. This is equivalent to only 35 cents per child for FTB-A and 21 cents per family for FTB-B each week in 2011-12.

The effect on a low income (maximum rate) single parent receiving FTB-A and FTB-B for two young children would $47 per year (equivalent to 90 cents per week) for 2011-12. This represents around 0.34 per cent of their total FTB payments for 2011-12. Their fortnightly FTB payments would continue to rise with normal indexation. For this family, their total Family Tax Benefit (Part A and B) will increase by $12.32 a fortnight (or $321.20 a year) on 1 July 2011.[39]

Indexation freeze on PPL

3.37      Whilst most submitters and witnesses to the inquiry were supportive of the indexation freeze for PPL, ACOSS commented:

The paid parental leave [proposal] will certainly affect low-income families, as well as middle- and high-income families ... They will have less impact on families who did not have the opportunity to be employed in the first place, which are many of the people that we are concerned about.[40]

3.38      Responding to this concern FaHCSIA noted:

The pause on indexation of the Paid Parental Leave income limit will only affect families where the primary carer of the child earns more than $150,000 in the previous financial year. This measure will not impact on low and middle income families.[41]

The $150,000 threshold

3.39      Unlike FTB A, which declines as a family's income rises, FTB B, the Baby Bonus and PPL all have "sudden death" income test cut-offs at $150 000 per family or primary carer. Once the threshold is reached (for example, through a sudden rise in family income due to a promotion or job change), a family's entitlement ceases. However, the Budget Review 2011–12 pointed out that:

The impact of these measures will, however, be restricted only to those families with incomes in the few thousands of dollars above the frozen thresholds, who would have retained access to payment if indexation of the threshold had gone ahead.[42]

3.40      The NWRN supported the proposed measures, stating:

...most families exist on considerably less income. Only about 13 per cent of Australian households have an income of $150,000.

In a tight budgetary environment, the NWRN believes that the modest reduction in benefits arising from this measure, if a family's income increases, is justifiable.[43]

3.41      ACOSS was also supportive of the savings measures:

...as they target families on above-average incomes who are less likely to experience financial hardship as a result.

While families on $150,000 or more are not generally 'rich', the vast majority fall within the top 20% of families with children. Approximately half of families with children have annual incomes below $100,000.[44]

Committee view

3.42      The committee supports the proposed indexation pauses on higher income limits for family payments and for the Family Tax Benefit Part A and Part B supplements. It is the committee's opinion that these measures strike the right balance between keeping the family payments system sustainable in challenging economic and better targeting support for low and middle income families.

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