9.5 Family Tax Benefit

Background

Family payments provide an important means of financial support to families. However, years of iterative change have led to a system that attempts to meet mixed objectives that could be better targeted to those most in need and to better reflect the costs of children. Further, overlapping means tests in the system create disincentives for parents, particularly mothers, to participate in the workforce.

Australia’s Future Tax System (2010) (‘Henry Tax Review’) found that, in terms of meeting the costs of children, the current system was more than adequate for young children, with room for better alignment with what research shows about child costs increasing as children get older and the decreasing marginal costs of additional children.

Rationale for government intervention

The key rationale for government to provide assistance to families with the costs of children, as distinct from income support payments, is to ensure that children have an acceptable standard of living. Ensuring that families have adequate income to cover the costs of children also contributes to the broader objectives of poverty alleviation and social inclusion.

Addressing vertical and horizontal equity is also the rationale for the provision of family payments. Vertical equity is the concept that people with lesser means should receive greater assistance, while those with a greater capacity should shoulder a greater financial burden. It suggests that assistance be targeted to families who need it most, with less or no assistance going to families on higher incomes who are able to provide an acceptable standard of living for their children without additional support.

Horizontal equity is the concept that people with similar capacity to pay should pay a similar amount. Taking into account the costs of their dependent children, families do not have the same financial capacity as an individual or couple on the same income without children.

In designing family payments there are trade-offs between the adequacy of assistance; appropriate targeting to those in genuine need; and the desire to maintain incentives for parents to participate in the workforce, particularly secondary earners.

Current structure of the programme

Family Tax Benefit (FTB) is the primary government support to families, with the broad stated objective of supporting low and middle income families with the costs of raising children. It is delivered in two separate payments – FTB Part A (FTB-A) and Part B (FTB-B). Families may be eligible for either or both payments. Unlike income earned in the workforce, FTB payments are exempt from income tax.

FTB-A is paid per child to assist with the direct costs of children (e.g. to cover their food, housing, clothing etc). Rates increase with the age of the child. The payment is income tested based on family income, and the higher income test threshold increases with each additional child. As shown in Chart 9.5.1, the maximum rate of FTB-A is $5,303 per annum for each child under 13 years, and $6,680 per annum for each child aged 13-15 or 16-19 and in full-time secondary school.

 

Chart 9.5.1: FTB-A income test for a family with two children under 13 years

Chart description linked below

Source: National Commission of Audit based on Department of Human Services, 2014.

Text description of Chart 9.5.1: FTB-A income test for a family with two children under 13 years

Eligibility for FTB-A also provides eligibility for several health concessions, including access to the Health Care Card (HCC), reduced co-payments for medicines under the Pharmaceutical Benefits Scheme, access to the concessional threshold of the Extended Medicare Safety Net, more fully subsidised services under the Medicare Benefits Schedule and access to the new Child Dental Benefits Schedule (Grow Up Smiling), which commenced on 1 January 2014. Families receiving FTB-A may also be eligible for Rent Assistance.

FTB-B is targeted to single-income families and is designed to help with the indirect costs of children, that is to assist parents (including sole parents) who are not working as they are caring for children. It is also aimed at providing assistance to sole parents with their additional direct costs of children.

FTB-B is paid per family (regardless of the number of children) and has a two-part income test. To be eligible for FTB-B the primary earner’s income must be below $150,000. The rate of FTB-B that is received is determined by the secondary earner’s income (where applicable – sole parents receive the maximum rate). If it is below $5,183, the family receives the maximum rate, above which the family’s rate of FTB-B is reduced by 20 cents in the dollar until it reaches nil, as shown in Chart 9.5.2. The maximum rates of FTB-B are $4,241 per year for families with a child under five years, and $3,070 for families whose youngest child is aged between five and 18.

 

Chart 9.5.2: FTB-B secondary earner income test for family with youngest child under five years

Chart description linked below

Source: National Commission of Audit based on Department of Human Services, 2014.

Text description of Chart 9.5.2: FTB-B secondary earner income test for family with youngest child under five years

Trends and drivers 

While FTB is a major programme of government expenditure, it is projected to remain relatively static at around $20 billion per year over the forward estimates.

FTB was introduced as part of the A New Tax System package of changes on 1 July 2000. Aims of the family assistance changes were: to simplify a complicated system; increase assistance; improve workforce participation incentives and reduce effective marginal tax rates; and customise the delivery of assistance. Three different payments that were previously available were replaced by FTB-A, while FTB-B replaced six payments (see Australian Government, 1998, ‘A New Tax System’). The introduction of FTB represented a significant expansion in family payments in terms of the generosity of the payments, expanded eligibility and increased Commonwealth expenditure.

There have been a range of changes to FTB since its introduction, both increasing the generosity of and tightening certain elements of the payments. For example in 2004 and 2005 end‑of‑year supplements were introduced for FTB-A and FTB-B respectively, to provide a buffer for families falling into debt on reconciliation of the payments. In 2012, the rates of FTB-A were increased significantly for 16-19 year olds in full-time secondary school in order to better cover the increased costs of older children. In 2009, a primary income earner test on FTB-B was introduced for the first time at $150,000. The indexation of this threshold and the higher income test on FTB-A have been paused since 2009 and currently remain paused until 2017.

Issues and potential areas for reform 

Means testing of FTB-A

A family with two children currently receives some FTB-A when income approaches the top 40 per cent of family incomes. In accordance with the Commission’s principle of targeting support to those most in need, it is reasonable that families earning significantly above the median income - in the top half of family incomes - should not receive significant amounts of assistance from the government.

The current FTB-A means test ensures that the direct costs of children are covered for low‑income families. Currently the lower income test threshold for FTB-A ($48,837 - below which families can receive the maximum rate) is set between the second and third deciles of all family incomes, which is a reasonable benchmark for low income. The 20 per cent taper ensures that families further up the income scale receive a reduced amount of assistance without creating major workforce disincentives. It is recommended that the 20 per cent taper continue until payment reaches nil, which would mean that the payment for an average size family is targeted to those roughly below the median income for all families. Chart 9.5.3 shows the distribution of income for all families, as compared to the current and proposed FTB-A means tests for a family with two children under 13.

 

Chart 9.5.3: Distribution of income for all families with children, 2012-13, and current and proposed means tests for FTB-A for a family with two children under 13

chart description linked below

Source: National Commission of Audit based on Treasury estimates.
Note: Family adjusted taxable income is based on annualised weekly adjusted taxable income in 2013-14 and is not equivalised.

This change would effectively remove the base rate of FTB-A – the minimum level of payment (currently $2,201 per year for a child under 13) that is available to families at the higher end of the FTB-A income scale. If income is greater than the higher income threshold (currently $94,316 plus $3,796 for each child after the first), the base rate begins to be withdrawn by 30 cents in the dollar until it reaches nil. This proposal would impact on families receiving the base or below base rate – with those on the cusp of the lower income taper and base rate receiving a reduced payment and others losing the payment completely.

The income range over which families would be affected would vary with the number and ages of their children. For example, currently a family with one child under 13 would be eligible only for the base rate if their income is above $64,350, with payment ceasing at $101,653. Under the proposed means test their payment would cease for incomes above around $75,354. A family with two children under 13 currently receives only the base rate if their income is greater than $79,862 with payment ceasing at $112,785. Under the proposed means test (and taking account of other proposed changes) their payment would cease at incomes above $99,920. Most families with three or more children will not be affected by this change, as under the current system they are always eligible for assistance greater than base rate. Families with incomes below the lower income threshold will continue to receive the maximum rate, designed to cover the direct costs of children in full.

Means tests can create high effective marginal tax rates (EMTRs) and thus workforce disincentives for families, particularly for secondary earners when welfare is withdrawn as their earnings increase. It is important that this is considered in the design of means tests so that they are effective in targeting payments without creating excessive workforce disincentives, particularly in the context of other interactions that families might be facing in the tax and transfer systems. The proposed tightening of the means test will decrease EMTRs and increase workforce incentives by 30 percentage points over the income range of $98,112 to $112,785 for a family with two children under 13. Conversely, the proposal will increase EMTRs by 20 percentage points for families who currently receive the base rate of FTB-A over the income range of $79,862 and $99,220 for a family with two children under 13.

In addition to the impact of means tests, the provision of income itself creates a disincentive, as a greater amount of income would otherwise need to be earned to provide the same standard of living. FTB is non-taxable, which means that in order to replace it people would actually have to earn more than its value in order to have the same impact on their living standards. For example, someone facing the most common marginal tax rate of 32.5 per cent would need to earn $1.48 for each dollar of FTB in order to replace it, or $15,698 to replace the maximum rate of FTB-A of $10,607 for a family with two children under 13 (excluding the Medicare Levy).

Aligning support to the direct costs of additional children

Research into the costs of children generally shows that there are decreasing marginal costs of children, that is, each additional child costs less than the one before. For example several studies by the National Centre for Social and Economic Modelling (NATSEM) (including Phillips et al, 2013; Percival et al 2007; Percival et al 2002), using an expenditure‑based methodology, found decreasing marginal costs of children. The most recent study found that on average a second child costs 83 per cent of the cost of the first, while a third child costs 69 per cent of the cost of the first. The 2007 study found these figures to be 86 per cent and 71 per cent respectively. This is largely because parents need to buy many new items for a first child that are then shared by younger siblings, and because larger households are better able to take advantage of economies of scale in other purchases such as food or other household items.

Obviously the costs of children vary with individual family circumstances and efforts to calculate the cost of children should not be seen as definitive. For example, a ‘budget standards’ methodology would involve assumptions about the age and sex of the siblings and does not calculate an average cost of second and subsequent children for this reason (see DSS, 2013). However, studies are generally consistent in finding that the costs of children decrease with additional children.

Currently, the full rate of FTB-A is provided for each additional child, the higher income threshold is increased by $3,796 for each additional child, and the Large Family Supplement (LFS) and Multiple Birth Allowance (MBA) provide additional assistance to families with three or more children or multiple births of triplets or more, respectively. The LFS provides $314 per year for the third and each subsequent child. MBA provides an additional payment of $3,752 each year for families with triplets or $4,997 for families with quadruplets or larger multiple births.

Given what is known about the direct costs of children decreasing with each additional child, these elements of the current system disproportionately assist larger families and there is little rationale for them. Changes could be made to better target FTB-A while still covering the direct costs of children in a low-income family and providing assistance towards this to families with higher incomes.

The Commission considers that paying a rate of 90 per cent for second and subsequent children would be reasonable and is generous compared to what studies have shown. Further the LFS, MBA and per-child add-on to the higher income threshold should be removed, as the rates will already cover the direct costs of children and these disproportionately assist large families.

A single payment with a comprehensive means test

The Henry Tax Review recommended that FTB-A and FTB-B be replaced with a single means-tested family payment, covering the direct costs of children in a low-income family, in order to simplify the system, minimise workforce participation disincentives and support families to balance family and work. The Commission considers that ‘single payment reform’ similar to that recommended in the Henry Tax Review is required to ensure that the family payment system achieves its objectives of supporting families to cover the costs of children without creating unnecessary workforce disincentives. Given that FTB-A is adequate to cover the direct costs of children (as found by the Henry Tax Review), the Commission considers that there is little rationale for FTB-B to be retained and that its removal would remove barriers to workforce participation particularly for secondary earners.

When introduced in 2000, FTB-B replaced six existing payments and inherited mixed objectives, including: supporting sole parents with the additional costs of sole parenting; supporting couple families with the indirect costs of children, in effect the opportunity costs of one parent choosing to stay home; and providing financial support for stay-at-home parents. Its recipient population is diverse, including sole-parent families and single-income couple families in which the primary earner can earn up to a $150,000. Many dual-income families become ineligible for assistance (through FTB-A) at similar or significantly lower incomes than single-income families who receive FTB-B.

FTB-B is means tested on the secondary earner’s income in order to ensure FTB-B is targeted to single income families. An income test specifically on the secondary earner’s income is particularly detrimental in terms of workforce participation incentives and this particularly impacts women as they are more likely to take time out of the workforce to care for children.

To address these issues and implement a single payment, it is recommended that FTB-B be abolished.

A new supplement for sole parents

It is generally accepted that the direct cost of a child is higher for a sole parent than a two‑parent household. Many advanced countries recognise this through providing extra support to sole-parent households (OECD, 2011). The Henry Tax Review also found sole‑parent families faced extra costs in raising children, particularly relating to the costs of housing. Examples of extra direct costs of raising children can also include the impact of other economies of scale to families. For example, larger households are better able to take advantage of savings on bulk purchases such as on food or other household items. Two‑parent families are also more flexible in being able to handle unexpected demands on their time, whereas a sole parent may have to pay for additional child care in such cases.

For this reason it is proposed that a new supplement for sole parents with children under eight be paid with FTB-A, reflecting these additional direct costs. Providing assistance with these costs as a supplement with FTB-A will better target assistance to those most in need as maximum rate FTB-B is currently available to sole parents up to incomes of $150,000.

It is recommended that the sole parent supplement only be paid to families with children under eight years of age, in recognition of the fact that parents have more capacity to earn wage income at this stage when children are in school. This is consistent with the eligibility for Parenting Payment (Single) which is available to sole parents until their youngest child is eight.

The Henry Tax Review found that current FTB-B is more than adequate to cover these additional costs, so it is recommended that the supplement be paid at the current maximum rates of FTB-B - $4,241 for families with children under five years of age, and $3,070 for those whose youngest child is aged between five and eight.

Impacts of the Commission’s proposals

This package of proposed reforms is consistent with the objectives of targeting assistance to those that need it most and supporting workforce participation. As a result of these proposals many families, particularly secondary earners, would keep more of their earnings when they return to work or increase their hours. However, the proposed changes would mean that some families would receive a reduction in their FTB, with some families losing access to the payment. Chart 9.5.4 shows the estimated impacts on a range of example family types.

In summary, the greatest impacts would be on single-income families (where one parent stays at home) and sole‑parent families whose youngest child is over eight years of age. As a result of the reduction in the rate of payment for second and subsequent children, all families with two or more children would have a relatively minor reduction in their payment. The tightened means test will affect families who currently receive the base rate of FTB-A ($2,201 for a child under 13) most of whom would lose the payment and some of whom would receive a reduced rate. Families on low incomes who currently receive the maximum rate of FTB-A would not be affected by the tightened means test, in keeping with the objective of providing assistance to cover the direct costs of children in a low-income family.

The maximum rate of FTB-A that a family can receive and the income test ‘cut-out point’ above which their income is too high to be eligible to receive any payment vary with the number and ages of their children. Table 9.5.1 shows the income cut-out points under the current and proposed systems and Table 9.5.2 shows the current and proposed maximum rates, taking into account the full package of proposed changes.

 

Table 9.5.1: FTB-A cut-out points, current and proposed, Family Adjusted Taxable Income

 

No. of children

Aged 13-15 years or 16-19 in secondary school

 

Aged 0-12 years

0

1

2

3

 

Current

 

 

0

-

$101,653

$115,632

$150,599

1

$101,653

$112,785

$143,719

$178,686

2

$112,785

$136,839

$171,806

$206,773

3

$129,959

$164,926

$199,893

$234,860

 

Aged 0-12 years

0

1

2

3

 

Proposed

 

 

0

-

$82,235

$112,292

$142,350

1

$75,354

$106,100

$136,158

$166,216

2

$99,220

$129,966

$160,023

$190,081

3

$123,085

$153,831

$183,889

$213,947

Source: National Commission of Audit.

 

Table 9.5.2: FTB-A maximum annual rates, current and proposed

 

No. of children

Aged 13-15 years or 16-19 in secondary school

 

Aged 0-12 years

0

1

2

3

 

Current

 

 

0

-

$6,680

$13,359

$20,352

1

$5,303

$11,983

$18,976

$25,970

2

$10,607

$17,600

$24,594

$31,587

3

$16,224

$23,218

$30,211

$37,204

 

Aged 0-12 years

0

1

2

3

 

Proposed

 

 

0

-

$6,680

$12,691

$18,703

1

$5,303

$11,453

$17,464

$23,476

2

$10,077

$16,226

$22,237

$28,249

3

$14,850

$20,999

$27,010

$33,022

Source: National Commission of Audit.

 

Chart 9.5.4: Impacts of the proposed package on selected example family types

chart description linked below

Source: National Commission of Audit.

Text description of Chart 9.5.4: Impacts of the proposed package on selected example family types

References 

Australian Government 1998, Tax Reform: Not A New Tax, A New Tax System, Australian Government, Canberra.

Australian Government 2010, Australia’s Future Tax System Review, (Henry Tax Review), Australian Government, Canberra.

Department of Human Services 2014, Guide to Australian Government Payments, Centrelink, Canberra.

Department of Social Services 2013, Updated Costs of Children Using Australian Budget Standards, Canberra.

OECD 2011, Doing Better for Families, OECD Publishing, Paris.

Percival, R and Harding, A 2002, All They Need Is Love...And Around $450,000, AMP NATSEM Income and Wealth Report, Issue 3, Sydney.

Percival, R, Payne, A, Harding, A and Abello, A 2007, Honey I Calculated the Kids... It’s $537,000: Australian Child Costs in 2007, AMP NATSEM Income and Wealth Report, Issue 18, Sydney.

Phillips B, Li, J and Taylor, M 2013, Cost of Kids: The Cost of Raising Children in Australia, AMP NATSEM Income and Wealth Report, Issue 33, Sydney.K