CHAPTER TWO - THE TAXATION OF FAMILIES

2.1 Term of reference (b) for the current inquiry asks the Committee to consider the impact of the current tax burden on taxpayers' families. A substantial number of the submissions to the current inquiry dealt with this issue, as did a number of witnesses. Further, the impact of the taxation system, and the effectiveness of family tax benefits as a means of supporting families, have continued as a source of wider political debate.

2.2 This chapter will present evidence obtained on issues relating to the impact of the taxation system on families. Those issues are:

• whether the current tax system provides a disincentive to couples considering establishing a family;

• whether income splitting, or some other variation of family unit taxation, should be introduced;

• whether tax concessions, such as the Family Tax Benefits, are a suitable model for family support, and whether they are currently applied in an equitable way;

• the availability and cost of childcare, and whether the tax system takes sufficient account of this cost;

• whether the HECS scheme has an impact on when, and whether, couples establish families;

• whether the impact of tax on families in rural and regional Australia has special characteristics which should be considered; and

• whether the current tax system is equitable on a 'lifetime' basis.

2.3 Very late in the Committee's deliberations, the Government introduced the 2004/2005 Federal Budget, which proposed changes to a number of family tax programs. Those making submissions to this inquiry, and those who appeared at hearings in the course of 2003, were of course referring to the system as it was at that time. As a result, this chapter will present evidence reflecting the tax system prior to the 2004/05 budget, and will point out areas where the budget has proposed changes.

Is the tax system a disincentive to establishing a family?

2.4 A number of submissions suggested that current tax arrangements either reward people for remaining single and childless, or penalise them for marrying or having children. It was suggested that, while children are regarded as socially desirable in the context of an ageing population likely to reach a population peak during this century, the taxation system gives contrary behavioural cues, making the options of partnering and having children less attractive.

2.5 The Shop Distributive and Allied Employees Association (SDA), for instance, stated in evidence:

The presence of children does place great burdens on families, it does lead to disparities of wealth and it does lead to reduced disposable income. Families should not be penalised for having children. It is no wonder Australia has a declining fertility rate when we effectively penalise families for having children. That needs to be taken account of properly in the taxation and social security system.[2]

2.6 Support for this view came from a disparate range of sources and perspectives. The Festival of Light, for instance, stated in its submission:

Children represent another long-term cost to the family budget. If one were to perform a cost/benefit analysis for having children, the costs, particularly the economic costs, would generally outweigh the benefits. As the economic commitment to the rearing of children increases, there is more and more pressure on the family either to delay the bearing of children, or to avoid it altogether. Clearly, financial considerations play a large part in a couples decision to have or not to have children.

Financial pressures force many women to choose employment rather than motherhood. Social pressures also cause many women to seek a career rather than merely a temporary source of income. Both of these forces militate against the bearing of children or cause women to wait until much later in life to have their children.[3]

2.7 The Women's Action Alliance set the importance of taxation within the wider context of the economic circumstances facing young couples who may be contemplating starting a family:

It is very difficult at the moment. I come from Sydney and, particularly in Sydney but increasingly in other parts of Australia too where housing costs are increasing, it is very difficult to start a family while you are trying to buy a house and perhaps pay off one or two HECS debts. It means that if you want to try and establish yourself in the housing market and do this at the same time you are almost inevitably going to look to postpone having children, because it is very difficult. Increasingly, women particularly are recognising that it is very difficult to combine the two. It is certainly difficult to combine two full-time incomes and have a family. I do think that there are problems there and that it is increasingly being postponed.[4]

2.8 The Committee noted that the submissions which drew attention to this point did not propose solutions directly designed to increase the attractiveness of partnering and having children. Rather, they pointed to this issue as an underlying problem, which can be addressed by reform of the taxation system in specific areas such as by allowing income splitting for wage and salary earners, by reforming the family tax benefit system, and reforming arrangements for subsidising child care.

Income splitting and family unit taxation

2.9 Income splitting was one of the most widely supported proposals put before the Committee. The concept itself is quite simple: that couples ought to be allowed to share their income for tax purposes, enabling them to increase the amount of their total wages in the lower tax brackets. In his submission, for instance, Mr. Nick Renton stated:

Married and de facto couples should be given the option to have each member taxed on half of their combined taxable incomes. The concept of treating couples as one unit is already enshrined in the social security legislation. At present investment income can often be split 50/50 whereas personal exertion income cannot.[5]

2.10 A number of submissions noted that income splitting is already possible for many types of incomes, such as investment income, and suggested that it is unfair that PAYG taxpayers cannot take advantage of income splitting, where other taxpayers can do so:

We further recommend that income splitting between spouses be an option. The argument that this will benefit higher-income groups is a red herring as such couples either already split their income through business partnerships and trusts, or both spouses are already paying at the top level of tax and income-splitting is of no benefit to them.[6]

2.11 One taxpayer exhibited a sense of outrage at the perceived unfairness of this situation:

Why does a couple with two incomes and no kids pay relatively less tax than a single income family? They get the benefit of two tax free thresholds and live comfortably, while we get just one free threshold. We are helping the future of this country by struggling to bring up three kids properly, they are not. The tax free threshold should be available for my wife who is my dependent. All the money I earn is in reality split in half between us it should be halved for tax reasons as well as in reality.[7]

2.12 A number of submissions favoured another model, currently operating in France, which might be referred to as 'family unit taxation':

As I understand it, the system that operates in France is somewhat different from what we in Australia would call income splitting. If we are talking about income splitting as it is normally discussed in Australia, no, I am not advocating income splitting. I believe it gives disproportionate advantage to high-income earners who have the capacity to split their income. On the other hand, if you are looking at a system like that which exists in France that takes into account the number of dependants in a family then I think that is worth looking at very seriously. [8]

2.13 The Womens Action Alliance provided more detail on how the French scheme operates, and how it might operate in Australia:

It is an extension of income splitting; it is not pure income splitting between husband and wife. It allows you to total the income in your family and divide it by the number of dependants that you have. In France they allow a quantity for each dependant, so each adult in a family unit is one unit and every child in a family unit is half a unit. With a couple of exceptions, with a single income family they allow the eldest child to be a whole unit, which provides for equity for sole parent families. Handicapped children get a whole unit, in some sort of acknowledgment of the extra costs that are involved. You have a system whereby you total up all the income in a family so you say, for example, that there are a husband and wife and two children, that that totals three units and so the total family income is divided up among three units and is taxed based on three individual units. So if the family earned $30,000 they will be taxed individually as $10,000, $10,000 and $10,000. It provides benefits to all families, both to two income families, because they have the benefit of splitting up among children, and to single income families on an income and a half. It ensures that the tax system itself takes into account the total family income and the number of dependants, which it currently does not. []

The system is flexible enough to provide for different family types equitably. For example, in France, while the first and second child have a half unit value, a third or subsequent child is worth a whole unit.[9]

Family Tax Benefits

2.14 A number of payments and tax concessions are available to provide assistance to families. These include the Family Tax Benefits (type A and B), the Child Care Benefit, and the Maternity Allowance (all administered by the Families Assistance Office) and the Parenting Payment (administered by Centrelink). The 2004/05 budget proposed abolishing the Maternity Allowance and another program, the 'Baby Bonus', and using those resources to fund a new 'Maternity Payment'. While some of these payments (such as the Maternity Allowance, the proposed Maternity Allowance, and the Parenting Payment) are provided as direct payments rather than as tax concessions, and may therefore be outside the terms of reference of this inquiry, submitters and witnesses made the point that in the area of family support, the welfare system and tax system have become so entwined that any attempt to separate them may in fact distort rather than illuminate.

2.15 Evidence before the Committee related primarily to Family Tax Benefit A, Family Tax Benefit B, the Parenting Payment, and the Child Care Benefit (which is dealt with in the next section).

Program descriptions

2.16 Before discussing evidence received in relation to these benefits, this section will outline the benefits themselves. These benefits are, by their nature, quite complex and this report can only give a very broad overview. Further information is available on the Family Assistance Office website at www.familyassist.gov.au and the Centrelink website at www.centrelink.gov.au.

Family Tax Benefit A

2.17 Family Tax Benefit A was established by the Family Assistance Act 1999, and came into operation on 1 July 2000. Its purpose is "to assist families with the cost of raising children."[10] The benefit is means tested and varies according to the number and age of the children in the family. As the scheme stood in 2003, families earning $31,755 per year or less were entitled to the full amount, while for a family with one child under 18 years of age, the benefit cut out completely once the family income reached $85, 702 per year. The maximum benefit for a family with one child under 13 years of age was $3,401.80 per year.

2.18 Under the 2004/05 budget, Family Tax Benefit A will change in two key ways. There will be an annual increase to all recipients, regardless of income, of $600. This will be paid as a lump sum when the recipient's end of year benefit reconciliation takes place. Second, the 'taper rate' for Family Tax Benefit A, that is, the rate at which the benefit reduces once the recipient earns too much to receive the full benefit, will decrease from 30 cents in the dollar to 20 cents in the dollar.[11] This will mean that families earning more than the minimum threshold income will receive a higher benefit than they previously did.

2.19 Family Tax Benefit A (and Family Tax Benefit B) are payable in four ways:

• as regular payments into a bank account;

• as a lump sum payment into a bank account at the end of the year;

• by reductions in tax withheld by the parent's employer; and

• as a lump sum rebate on the parent's tax return.

2.20 Family Tax Benefit A and B are therefore either part of the welfare system, or the tax system, or potentially both, depending on the payment choices made by the recipients.

Family Tax Benefit B

2.21 Family Tax Benefit B was also established by the Family Assistance Act 1999, and came into operation on 1 July 2000. Its purpose is 'to provide additional assistance to families with one main earner.' Sole parents automatically receive the maximum amount of Family Tax Benefit B, while partnered parents who are not their family's primary income earner can still receive some amount of Family Tax
Benefit B provided their annual income is less than $11,559. The maximum benefit for a child under 5 years of age is $2,920 and for a child older than 5 years, $2,036.70.

2.22 The payment options for Family Tax Benefit B are the same as those for Family Tax Benefit A. However, it should be noted that a recipient of both types of Family Tax Benefit can, if they wish, select a different payment option for each form of benefit.

2.23 Family Tax Benefit B was also amended during the 2004/05 budget. It was amended in three ways. First, the income limit for recipients receiving the full amount of Family Tax Benefit B has been raised to $4000. Second, the taper rate has been reduced from 30 cents in the dollar to 20 cents in the dollar. Finally, where mothers who have been outside the paid workforce and in receipt of Family Tax Benefit B return to the paid workforce, their work income will not be counted against Family Tax Benefits already received.[12]

Parenting Payment

2.24 The Parenting Payment is an income support payment under the Social Security Act 1991 (Part 2.10). Its purpose is to provide primary carers of children with recognition of their parenting responsibilities, adequate income and opportunities for greater financial independence. It is payable to both sole and partnered parents who meet the relevant income, asset and participation tests.

2.25 The maximum Parenting Payment for singles is currently $464.20 per fortnight. This payment begins to reduce once the parent earns $144.60 per fortnight (for a sole parent with one child) and cuts out altogether when the parent earns $1319.60 per fortnight.

2.26 The maximum Parenting Payment for a partnered parent is $351.10 per fortnight. This begins to reduce if the recipient's income is greater than $62 per fortnight or their partner's income is greater than $587 per fortnight.

2.27 Since September 2003, Parenting Payment recipients whose youngest child is older than six years of age have had to attend an annual participation interview, and recipients whose youngest child is older than thirteen years of age have had to satisfy a part time participation requirement. [more]

Issues raised

2.28 Issues raised in relation to Family Tax Benefits and the Parenting Payment related primarily to:

• the application of means testing for Family Tax benefits;

• end of year reconciliations;

• the role of the parenting payment; and

• the complexity of the family tax/welfare system.

Means testing

2.29 A number of submissions argued that the application of a means test to Family Tax Benefit A is fundamentally inequitable and runs counter to the rationale for the payment. The Womens Action Alliance, for instance, stated:

The basic rate of family tax benefit part A really should apply to all families regardless of income, if it is going to be a true measure of horizontal equity. We recognise that that is unlikely to happen in the current environment but, as a matter of principle, I think it should be acknowledged that all families with children are deserving of support and that, at whatever level of income, you have a lesser capacity to pay tax if you are supporting children than if you are not. I think that is a basic principle that should underlie our system.[13]

2.30 The SDA argues that the means test is too harsh, resulting in families, who are in need, being unable to claim the full benefit:

Income limits applying to family payments are too low and need to be adjusted. Given the current level of withdrawal that applies to family tax benefit A, under the current situation you could have two shop assistants each earning $507 a week. Because of the way the means test would apply to them, they would only receive the base and part of the additional payment of family tax benefit A. I do not think anyone in this room would regard a family earning two lots of $507 a week as being high or even middle income earners, yet these people are not entitled to receive the full benefit of family tax benefit A.[14]

2.31 The SDA made a similar point in relation to the Parenting Payment:

Parenting payment was introduced to help low-income families and also to recognise the caring role played by the person at home looking after dependants. The reality is that, because of the means test that applies, virtually nobody in the paid work force today is receiving the parenting payment. Parenting payment recipients are almost totally social security recipients.[15]

End of year reconciliations

2.32 A number of submissions raised concerns regarding the end of year reconciliation process for a person receiving family tax benefits on a more frequent basis. A recipient who has been unable to correctly estimate their income (and therefore their entitlement to receive the benefit) may find themselves indebted to the Commonwealth or, alternatively, may not claim the full benefit they are entitled to during the year. This issue will be discussed in more detail in relation to the Child Care benefit, where it has an especially significant impact.

2.33 In evidence, ACOSS outlined the nature of the problem:

One of those taxation principles which have caused a great deal of trouble is end-of-year reconciliation. Traditionally, social security payments do not have that end-of-year reconciliation, partly because information on incomes is collected more frequently than once annually. We actually advised the government through the bureaucracy at the time that it would be better to collect the income information more frequently and to avoid this end-of-year reconciliation process. We still think that that is the case, for exactly the reasons you raise. It particularly affects sole-parent families and 1 earner families where the primary earner is on a low wage and where the family income hovers around $30,000 to $40,000 a year in that income test range. There are a lot of families in that range.[16]

2.34 Catholic Welfare Australia noted:

the current situation is that approximately 500,000 families are significantly indebted to the Commonwealth due to difficulties associated with forecasting their family income. This outcome is prima [facie] evidence of system failure in the administration of family taxation. Notwithstanding recent measures to give families more choices under the family tax model, the problems are endemic. The resulting indebtedness to the Government adversely affects families wellbeing.[17]

2.35 In February 2003, the Commonwealth Ombudsman released a report on this issue, entitled Own Motion Investigation into Family assistance administration and impacts on Family Assistance Office Customers. The investigation was a result of some 1,855 complaints received regarding the Family Tax Benefits and the Child Care Benefit during the period 1 July 2000 to 3 September 2002.[18] The report noted:

Many complaints related to family assistance debts that had arisen from income estimates. These generally arose because a parents employment or income had unexpectedly changed during the course of the year. Even in cases where Centrelink was notified immediately and payments were adjusted for the rest of the financial year, there was still a debt at reconciliation.[19]

2.36 The Ombudsman outlined the problems associated with the current end of year reconciliation process:

Many families experience periods of low (or reduced income) within a year. During those times, they may have a significant need for the assistance available through family payments. Because family assistance entitlement is based on actual total taxable income over the year, those periods of lower income during the year are effectively averaged out. (Previous or later higher income periods can mean that any assistance provided in these low income periods becomes a debt.)

The new income assessment arrangements can also be difficult for families to understand, particularly because they are different to the income testing approach that applies to other Centrelink payments. Income testing for pensions and benefits use a persons rate of income at a particular point in time as the basis for calculating the payment rate for that fortnightly period. If the rate of income being received changes, the rate of payment changes and, providing Centrelink have been notified promptly, no overpayment will occur. However, under an income assessment based on actual, taxable income for the year in progress, the rate of payment can only be calculated on a forecast or estimate, and some overpayments are inevitable.

There has been a relatively high incidence of debts arising from the end-of-year income reconciliation process where fortnightly payments have been claimed (with the level of debt being relatively high in many cases). Some level of end-of-year adjustment is unavoidable under the family tax benefit system, given that payments during the year are based on a forecast of income. Our complaints also suggest that deficiencies in the clarity and availability of information and the approach taken to income changes notified during the year have increased the incidence and level of debts.[20]

2.37 In response to widespread public concern regarding debts arising from the end of year reconciliation process, the Government released a package entitled More Choice For Families.[21] This package did not contain measures to waive or relieve the debts of families whose income changes had resulted in unavoidable debts; rather, the system allowed them to elect to reduce their payments below their current entitlements, effectively 'paying off' the future debt before it became payable at the end of the year. The Committee notes that, even with the More Choice For Families measures in place, families who promptly inform Centrelink or the FAO of income changes end up with a debt to the government. The only change is that the debt can now be paid off incrementally in advance.

2.38 The Ombudsman made a similar observation:

the analysis suggests that, even if my recommendations are adopted in full, the scheme is likely to continue to result in significant numbers of unavoidable debts for families.[22]

2.39 The 2004/05 budget contains two measures (both noted above) which may go some way to reducing the scale of this problem. The $600 annual payment to Family Tax Benefit A recipients will be paid at the end of the year, upon completion of the end-of-year reconciliation. As a result, families who have unsuccessfully forecast their income, and who incur a debt, will have $600 available to assist the repayment of that debt.

2.40 Second, the budget proposal to amend Family Tax Benefit B so that the income earned by a mother returning to work does not count against the Family Tax benefit B already received, reduces the likelhood of an end of year debt arising from Family Tax benefit B.

Participation requirements and the Parenting Payment

2.41 Submissions for this inquiry closed before the participation requirements for the Parenting Payment were introduced (in the Family and Community Services Legislation Amendment (Australians Working Together and Other 2001 Budget Measures) Act 2003). However, evidence before the Committee did argue against what were then proposals to introduce an activity requirement. The SDA, for instance, argued that a participation requirement for parents with a youngest child under 16 years of age devalued the work of a full time parent:

If a family decides to have a parent at home on a full-time basis they should be supported by government, not penalized. Forcing parents to justify to third parties why they choose to stay at home with their children, would be to put such families under enormous pressure.

The idea of requiring parents caring for children (those under 16 years) to attend regular interviews to discuss return to paid work is an unacceptable attack upon families.

Proposals to effectively discontinue parenting payments when a child reaches thirteen, currently the age barrier is sixteen, are of considerable concern. Is a child of thirteen old enough to come home alone to an empty house while their parent is at work? Such an initiative clearly implies that a caring parent of a thirteen year old is superfluous to requirements. Sixteen years should continue to be the minimum for withdrawal of support.[23]

Complexity of the Family Tax/Welfare system

2.42 A number of submissions and witnesses noted that the current family assistance system, operating as a mix of direct payments and tax expenditures, has become extremely complex and consequently difficult for families to comply with. Catholic Welfare Australia described the situation in the following terms:

The ultimate cause of these problems is that the income transfer system in Australia seems to be like a house under constant renovation. Every few years Government will knock down a wall here, add a level there, excavate in this area, seal off that section. The result is a rather large and precarious structure in which many get lost and no one is very certain that everything really functions. The problems are so significant that the Australian system has become an example of a model to be avoided.[24]

2.43 The Womans Action Alliance made a similar point:

I do not think you will find anybody who has anything to do with the current family payment system who will not acknowledge that it really is a mish-mash. It is extremely complicated; it is very confusing for userseven for those of us who deal with it from day to day and have some sort of knowledge of it. It has been built up over a number of years and payments have been put on payments and, while the government has made an effort to simplify it by combining what were previously 12 payments into three, what we really have now is a whole heap of different parts of three payments so, in effect, it really has not simplified things that much.[25]

Support for the current system

2.44 While almost all of the evidence presented to the Committee in relation to the family assistance system was critical, the Committee did hear some statements of support. ACOSS, for instance, stated:

in international terms our family tax benefit system is probably one of the best designed and targeted anywhere in the OECD from the standpoint of alleviating child poverty. And that is not just a feature of the present family tax benefit; that was a feature of previous reforms such as the family allowance supplement on which it built. It is actually much simpler than many overseas systems that have separate payments for working parents and jobless parents. With the FTB, those are rolled into the one payment, based on need and the costs of the children. [26]

Child Care and the Tax System

2.45 Whilst the Child Care Benefit is delivered as a subsidy (in the form of reduced child care fees) rather than through the taxation system, a number of submissions and witnesses provided the Committee with views regarding it. There are a number of good reasons for the Committee to consider the Child Care Benefit in this report. First, it is clear that the Child Care Benefit is an integral part of the overall family assistance system. It would be remiss of the Committee to consider benefits such as Family Tax Benefits (A and B) and the Parenting Payment without also considering the impact of the Child Care Benefit. Second, the processes for assessing eligibility for the Child Care Benefit, reporting incomes, and reconciling the benefit at the end of the year, are all shared with the Family Tax Benefits. The Ombudsman, for instance, in the Own Motion Investigation into Family assistance administration and impacts on Family Assistance Office Customers, appeared essentially to treat the schemes as targeted variants of the same model.

2.46 Finally, a more direct reason for the Committee to consider this issue emerged from the evidence. It is clear that the rate and nature of workforce participation among parents (and particularly among sole parents and secondary income earners within couples) depends very much upon the availability and affordability of child care. Mr John Wicks, Vice President of the St Vincent de Paul Society's National Social Justice Committee, stated:

What we say is that financial stress will make sure you are poor; deprivation of opportunity will make sure you stay there. The important thing really is deprivation of opportunity, because if you have a temporary financial stress it may go on for a few years, but if you have equal opportunity to get out of it then you have solved the problem. Really what is more important than a short term family benefit here or thereand I am not saying you should not have thatis equality of opportunity in education, in training, in employment opportunities, in housing, in child care. Once you get that, the other side of poverty starts to decrease.[27]

2.47 Dr Steve Hatfield Dodds from UnitingCare gave similar evidence:

Many people who we are working with are living in areas that are far away from the areas they need to work in. I have heard several stories from Sydney about people who are travelling an hour and a half each way every day to access work. That is not impossible, but it makes it very difficult if you are a single mum with two or three small children. Where do you leave them and how do you do that?[28]

2.48 The SDA noted the relationship between formal child care and paid employment:

Overwhelmingly child care of a formal nature is used by parents in the paid workforce for work related purposes. In excess of 90% of long day care, family day care, outside school hours care and vacation care places are utilised for work purposes.[29]

Program Description

2.49 The Child Care Benefit is a benefit paid in accordance with Section 42 of the Family Assistance Act 1999. According to the Family Assistance Guide, its aims are to:

• assist families with the cost of child care,

• provide incentives for low and middle income families with dependent children to participate in the:

(a) workforce, and

(b) community, and

• support parents in balancing work and family commitments.

2.50 The Child Care Benefit is means tested. Families earning less than $31, 755 per year receive the full benefit, which amounts to $2.74 per hour, or up to $137 per week if the maximum 50 hours of subsidised care are used. Over the $31,755 threshold, the amount of the benefit begins to reduce. For single-child families with incomes in excess of $91,035, the minimum amount (46 cents per hour, or a maximum of $23 per week) is payable. There is no income limit at which support cuts out altogether.

2.51 Payments are available for children in approved care (essentially child care centres and some home based child care centres) and in registered care (care provided by friends, grandparents, nannies or other carers registered with the Family Assistance Office).

Issues Raised

Availability of places

2.52 The availability of child care places clearly provide one potential barrier to workforce participation. A lack of available places has two effects: parents who cannot get their children into care cannot move back into the workforce; and market economics associated with an undersupply tend to lead to price increases for those parents whose children are in care.

2.53 Evidence before the Committee suggested that the overall number of child care places is sufficient, but that the distribution of places did not evenly match the distribution of need, resulting in localised undersupply of places. The SDA stated:

In total Australia has about 443,400 child care places available in 9,700 funded services.

At June 2000 estimated demand met for below school age children was 121.7%.

This suggests that overall Australia has sufficient child care places.

However, there are still areas of high local need, especially in rural and remote communities, because of the uneven distribution of places. [30]

Adequacy of the payment

2.54 The maximum Child Care Benefit of $2.74 per hour will be inadequate in most cases to pay the full costs of childcare. Evidence before the Committee suggested that $4.30 per hour is a reasonable estimate of the cost of long day child care, though in some areas the cost will be significantly higher.[31] This clearly leaves a 'gap' which must be paid for by the parents. For a child using the full 50 hours of care per week, the gap on these figures would amount to $78 per week, or $4056 per year (from a total family income not exceeding $31,755). This significant gap is effectively a cost of working, and may therefore restrict workforce participation.

2.55 The SDA stated:

We find that many low-income families cannot access child care because they cannot afford, effectively, to pay the gap between the level of assistance they receive and what else they need to pay. Meanwhile, families who look after their own children or do not utilise formal child care effectively get no support at all out of the system. The whole structure of child-care support, for example, is quite frankly a mess.[32]

Support for other forms of care

2.56 The Committee received some evidence that the child care benefit, or some equivalent benefit, should not be restricted to children in approved or registered care, but instead should be paid to all parents. The payments could therefore provide subsidised childcare for parents who wish to place their children in child care, and income support for parents who choose to forego working in order to stay at home with their children. The Women's Action Alliance stated:

We would prefer to see the same amount of money go to families with children at all of those agesthat is what a neutral system is supposed to doand give families the option as to how they choose to spend that money, whether that be on child care, preschool or keeping their children at home with them, if that is what they choose.[33]

End of year reconciliations

2.57 The Committee noted that the issue of families unavoidably becoming indebted to Centrelink as a result of changing incomes applies also to the Child Care benefit. This was the source of a substantial number of complaints to the Ombudsman prior to the Own Motion Investigation into Family assistance administration and impacts on Family Assistance Office Customers. The Committee has dealt with this issue above.

Families, Tax and HECS

2.58 Like the Child Care Benefit, the Higher Education Contribution Scheme (HECS) initially appears to be somewhat beyond the Committee's terms of reference. However, HECS is collected along with income tax, and may be viewed by many HECS payers as essentially a component of their income tax bill analogous to the Medicare contribution, which is also collected alongside income tax.

2.59 The SDA argued that HECS had now become a significant impost on young graduates, many of whom are required to repay their HECS well before they achieve any elevated level of income:

The current impact of the Higher Education Contribution Scheme puts many low income students and families under pressure and operates as a disincentive for low income students to go to tertiary education.

When HECS was first introduced in 1989 debts were repayable at the rate of 1% on incomes greater than $22,000. In today's terms that would equate to approximately $32,000, given that in 1989 average weekly earnings were $524.50 and in 2000 were $761.50. Below that level, repayments were not required.

The Howard government cut the repayment threshold to $20,701 in 1997-98, thereafter adjusted for movements in the average wage. Moreover the rate of repayment is now higher and generally varies between 3% and 4.5%. This is simply a tax impost by another name.

The HECS scheme should be remodelled to establish equity and fairness for young people. Adding to the current impost on young people and their families by increasing the burden upon those in tertiary education is unfair.[34]

2.60 The Womens Action Alliance argued that the current HECS arrangements provide a significant disincentive to graduates, and especially female graduates, starting a family:

I think the HECS debt works in two ways. Firstly, when you are looking to start a family, having a HECS debt there is off-putting. The notion that you have an accumulating HECS debt can be a disincentive to taking time off from paid work to raise a family or care for a child. I think the reverse is also true: if you do take time out to care for a child and if you have a HECS debt sitting there accumulating while you are out of paid work, that is quite a disincentive to returning to paid work. It may well look to you as though it is not worth going back to paid work and having to repay a HECS debt that has been accumulating. We have made a recommendation that, while a spouse is out of paid employment caring for a family, their HECS debt should not accumulate during that time. There should not be any CPI interest on their HECS debt; it should remain as it was when they left the work force. They can return to it when they go back to work. Otherwise, it is just too difficult for families to face.[35]

2.61 The WAA also argued that the threshold for HECS repayment should recognise the number of dependents the graduate supports:

we think it is appalling that the income threshold for HECS does not take into account the number of dependants that you have on an income. We have a member in South Australia who is at home. They have three small children. Her husband is a nurse; he is on an income of $35,000 a year and he is repaying a HECS debt at the rate of $100 a fortnight. That family is in such dire straits that they are receiving something likeI think I worked it out$8,500 dollars in family payments in recognition of the fact that this family are doing it tough, but the government is still requiring them to repay $100 a fortnight in HECS repayments, despite the fact that this man is supporting five people on his $35,000 a year. We think that is absolutely outrageous, and we think that HECS repayments need to be tailored according to the number of dependants upon that income. It is fine to start repaying your debt at $24,000 or whatever if you are a single earner and are only supporting yourself, but if you are supporting dependants there should be some allowance within that to increase the amount of income that you are allowed to receive before you start repaying your HECS, dependent upon the number of dependants upon that income.[36]

Lifetime Assessment

2.62 As a result of the breadth of the terms of reference for this inquiry, the Committee received a number of submissions advocating fundamental or innovative forms of tax reform. One of those was contained in the submission from Mr Gavin Moodie from the Office of the Vice Chancellor at Griffith University. His submission proposes assessment of the tax liability of adults over their entire lifetime, to be achieved by a final reconciliation upon their death. Mr Moodie's proposal can be summarised from his submission as follows:

Currently tax collections and benefit payments are assessed provisionally periodically throughout the year, fortnightly to quarterly depending on the circumstances. So any over- or under-payment of tax or benefits during the year are recovered at the end of the year when a final assessment is made. This has unfair results for people with income that varies significantly from year to year. Thus a person who earns $30,000 in one year and $0 in another year pays more tax than a person who earns $15,000 in both years. The fairest tax collection system would average income over a whole lifetime.

The transfer system is means tested on current income and assets, but no attempt is made to recover benefits from recipients who subsequently acquire assets and/or income above, say, the Australian average. Furthermore, we have seen that very considerable benefits are transferred to people with superannuation funds, and these benefits are regressive, being of most value to high income earners. Again, no attempt is made to recover these benefits after they have served their purpose of encouraging saving/providing for retirement.

These inequities would be redressed by making each annual tax assessment and (re)payment provisional until a final reckoning upon death. Upon death the deceaseds adult income would be summed. Included in income would be not only taxable income as presently defined, but also transfer payments received by the deceased person during their adult life. This would include benefits, but also major tax expenditures such as concessional treatment of superannuation income and major subsidies such as for the cost of specialised aged accommodation, personal care and health care in the last decades of life.

Set against the adult life income would be the income tax paid by the deceased while an adult. There would be a final tax assessment at an adult lifetime rate. Where the final assessment found that the deceased had paid more than the adult lifetime rate there would be an appropriate repayment to the deceaseds estate. Where the final assessment found that the deceased had paid less tax than the adult lifetime rate the additional payment would be levied against the deceaseds estate. There would be a threshold value of an estate below which all additional assessed tax would be forgiven, say $1 million. Above the threshold tax would be forgiven/collected at a tapering rate.[37]

2.63 The Committee does not endorse the lifetime tax assessment model. Most of the evidence before the Committee, discussed earlier in this chapter, suggested that even an annual reconciliation may result in unfair and onerous debts incurred by taxpayers (in particular, recipients of Family Tax Benefit A and B, or the Child Care Benefit) notwithstanding that they had done everything they could to acquit their responsibilities. Evidence before the Committee suggests that the answer may lie in shorter, not longer, periods of acquittal.

Families in Rural and Regional Australia

2.64 The Committee is concerned that families in rural and regional Australia face a different set of challenges to those faced by families in major centres. The tax/welfare system designed to support families must ensure that it reflects these different challenges. Representatives of UnitingCare told the Committee about the particular challenges they face in supporting rural and regional families:

we provide services right across the country and right into remote areas, particularly through Frontier Services but also through our range of agencies. This is a really big issue. The Uniting Church subsidises most of our rural services and all of our remote rural services, particularly anything involving residential care. Any of you who know the situation in remote and rural Australia will know that it is often just impossible to get staff to come and work in agencies, so we pay for agency staff to come out. There are real issues of equity and justice there. As providers of community services we struggle with those issues every day.[38]

2.65 The Country Women's Association of NSW suggested that the tax imposed on working families, who face the costs of living and working in regional Australia, may in fact be an incentive to move from paid work onto welfare:

A respondent from the Mid North Coast area writes that she and her husband earn $43,000 a year, struggling to pay for a car and fuel to get to work. Her children have to work part-time to assist with the budget. Her children's peers - with parents on benefits - are funded under Youth Allowance - and have a comparative advantage with more available study time than those part-time working children of working families.[39]

2.66 Some of the most compelling evidence on this issue came from the submission of Tony and Veronica Addicoat, residents of rural South Australia with two university-aged children. Excerpts from their submission indicate the particular challenges posed for rural and regional families by the current taxation system:

As the income into the household is $70,000/year we do not receive many government benefits but our children must leave home to further their education. For the past three years we have supported our eldest child while she attended university in Adelaide, she will be continuing in 2003 doing an honours in chemistry. This year we will also have our youngest leave home to attend university to study law. []

City dwellers on our income receive the same family tax benefits as us and their children are able to live at home. This is discrimination against rural people as the cost of living in the country is higher. If the new tax system was fair then all Australians should pay the same tax. []

Living in the rural area also has the problem with health services. In order to access some services we have to travel to the city. The GST on petrol, motel accommodation and food when you are in this situation is immoral. If you have ever had to do an emergency trip to the city for health reasons then you will know that all else leaves your mind and you find the closest food, accommodation and transport. []

In all of this the rural area is suffering in many areas. Most of our money finds its way to the city to support our children. This means that we cannot afford to support our local businesses as we are doing without, even to the point of not being able to afford a raffle ticket for the local footy club, Lions, Rotary and all the other charities. This means that businesses close down and more services go and then it is even harder to get doctors, nurses, and teachers to come to the rural areas.

Maybe there should be a locality tax rebate of worthwhile proportions to rural wage earners on postcode or employment locality. It would have to be in the order of $5000/year. It would not cover all the extra expenses of living in a rural community, but it would help.[40]

2.67 The WA Farmers Federation supported the Addicoat's call for a rebate for rural and regional areas:

Zonal tax rebates are an effective means of compensating for loss/lack of government services (education, health, water, electricity, law & enforcement, transport access, access to labour) and directing people into regional and rural areas.[41]

Conclusions

2.68 The Committee received substantial evidence in relation to the impact of the current tax system on Australian families. While the Committee does not intend to make substantive recommendations in this report, a number of the ideas put to the Committee bear further consideration.

2.69 It is clear that any efforts to increase Australia's birth rate (by encouraging people to have more children, and to have them earlier) must be underpinned by changes to the tax system to encourage and reward the decision to have children. One way to do this may be to allow for income splitting or assessment of tax on the basis of a family income. It may also be appropriate to assess the threshold for HECS repayment on the basis of family income, or at least on a basis which recognises the number of dependents supported by the HECS debtor.

2.70 Substantial evidence in relation to the Family Tax Benefit, the Parenting Payment and the Child Care Benefit pointed to difficulties in the administration of these benefits which may result in families facing significant debts, and which may result in the assistance being poorly targeted, so that those in greatest need receive insufficient help.

2.71 Finally, the Committee recognises that any tax/welfare based family assistance system which seeks to achieve distributive justice must take into account the particular challenges faced by famlies in rural and regional areas.