7.5 Family Tax Benefits

Family payments assist families with the costs of raising children. This contributes to the broader objectives of poverty alleviation and social inclusion.

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

Currently Family Tax Benefit (FTB) is the key family payment and is delivered as two separate payments – Parts A and B.

Just under 70 per cent of families with children under 16 (around 1.9 million families) receive FTB‑A, at a cost of almost $15 billion per year.

Some 60 per cent of families with children under 16 (1.6 million or so families) currently receive FTB-B, at a cost of almost $5 billion per year. Unlike income earned in the workforce, Family Tax Benefit payments are exempt from income tax.

FTB-A is paid per child to assist with the direct costs of children (for example their food and housing). Payment rates increase with the age of the child and with the number of children in a family. The payment is means-tested based on family income, with payments cutting out at an income around $112,000 for a family with two children under 13 years.

For a family with two children under 13 years, the maximum amount of FTB-A is $10,607 per year.

FTB-B is designed to provide assistance to sole parents and families where one parent stays home to care for children. FTB-B is paid per family (regardless of the number of children). The means test for this payment covers both the income of the primary earner (which must be below $150,000) and secondary earner, whereby the payment phases out by 20 cents in the dollar for income earned above $5,183.

The maximum rates of FTB-B are $4,241 for families with a child under five and $3,070 for families whose youngest child is aged 5 to 18 years.

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 and couple families where one partner chooses to stay home to care for children. Further details of the current structure of the FTB programme is outlined in Section 9.5 of the Appendix to this report.

Addressing vertical and horizontal equity is a key 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. Tax should be paid in proportion to a person’s capacity to pay.

Family payments provide assistance but create a disincentive to work, providing income that would otherwise have to be earned through employment. Means testing further reduces the incentive to work as payments are withdrawn as more wage income is earned.

The Commission considers Family Tax Benefit arrangements could be better targeted to those in need and simplified to boost workforce participation. This would be complemented by improvements in childcare payments proposed in Section 7.6.

Better targeting FTB-A

The Commission proposes that eligibility arrangements for FTB-A be tightened and simplified. Arrangements should be changed so that a base rate is no longer included in the scheme’s design and instead the existing 20 per cent taper continues to phase out assistance.

This change will not affect low-income families. However, it would effectively remove the base rate of FTB-A – a minimum level of payment that is available to families at the higher end of the income scale.

The income range over which families would be affected would vary with the number and ages of their children.

In the case of an eligible family with two children under 13, under the proposed arrangement FTB-A would be phased out at family income of $99,220 versus the current cut off income of $112,785 (Chart 7.9).

Chart 7.9: Existing and proposed rates of FTB-A for a couple with two children under 13 years of age

This chart compares the current rates of Family Tax Benefit A for a family with two children under 13 with those that would be received under the Commission's recommendations. The maximum rate is, and would remain, available to families with income up to $48,837. Currently the maximum rate for two children under 13 is $10,607. Under the proposed changes it would be $10,077. For incomes greater than $48,837 payment would be withdrawn by 20 cents for each additional dollar of income. The proposed changes to the means test would mean that payment would be phased out at $99,220 rather than the current cut-out point of $112,785.

Source: National Commission of Audit.

Abolishing FTB-B

The Commission notes that FTB-B is not well targeted and can act as a significant disincentive (mainly for women) to participate in the workforce. As stated in the Henry Tax Review, while FTB-A is more than adequate in covering the direct costs of young children, FTB-B has mixed and unclear objectives

The families who receive the payment include sole parents and couples where the primary income earner can earn up to $150,000 per year. FTB-B discourages women from working, even part-time, as they bring home a lower proportion of their earnings if they return to work or increase their hours. This problem is exacerbated when more than one means test applies.

The Commission proposes that FTB-B be abolished.

The Commission recognises sole parent families face additional direct costs of raising children. As well as higher costs such as housing, sole parents also have less flexibility in handling unexpected demands on their time such as caring for a sick child. To assist them a supplement (equal to the current value of FTB-B) should be paid to sole parents.

The sole parent supplement should only be paid while children are under eight years of age. Parents have more capacity to earn wage income once children are in school. This is consistent with Parenting Payment (Single), which is available to sole parents until their youngest child is eight.

Further details on the impacts of the Commission’s proposals are outlined in Section 9.5 of the Appendix to this report.

The means testing of most government benefits will usually create potential disincentive effects through higher effective marginal tax rates. These effects arise when benefits are tapered or withdrawn as an individual’s earnings increase. The interactions of means testing arrangements and the tax system can introduce significant complexities. Changes to the Family Tax Benefit system, including abolishing FTB‑B and tightening the targeting of FTB‑A, will have an effect on effective marginal tax rates. While in some cases the changes will reduce effective marginal tax rates and increase workforce incentives, in other cases the reverse will occur.

The Commission notes that these matters must be taken into account in the detailed design of new means tests – both for family benefits and elsewhere throughout the welfare system. Further discussion of potential impacts on effective marginal tax rates is also contained in Section 9.5 of the Appendix.

Aligning support to the cost of additional children

The body of research into the direct costs of children has found that there are decreasing costs for each additional child as items purchased for a first child are passed on to siblings.

Studies undertaken by the National Centre for Social and Economic Modelling in 2002, 2007 and 2013 found decreasing marginal costs of children. The most recent study found that on average a second child costs 83 per cent of the costs of the first, while a third child costs 69 per cent of the cost of the first.

To better align family payments to the costs of children, it is recommended that the new FTB-A payment for second and subsequent children be paid at 90 per cent of the maximum rate.

Currently, families with three or more children or who have multiple births receive extra supplements with FTB-A, in addition to being paid the basic rate per child. The Large Family Supplement provides $314 per year for each third and subsequent child. The Multiple Birth Allowance 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 costs of children, there is little rationale for these extra payments.

Recommendation 20: Family Tax Benefits

In providing benefits to families there are trade-offs between the adequacy of assistance, targeting it to those in need and maintaining the incentive to work. The Commission recommends Family Tax Benefit arrangements be better targeted to those in need and simplified to boost workforce participation including by:

  1. changing arrangements for Family Tax Benefit Part A by introducing a new single means test, with the maximum rate of the benefit paid up to a family adjusted taxable income of $48,837 and then phasing out at 20 cents in the dollar until the payment reaches nil;
  2. abolishing Family Tax Benefit Part B;
  3. introducing a new Family Tax Benefit Part A supplement to be paid to sole parent families who have a child under the age of eight. The supplement should be the same as the current maximum rates of Family Tax Benefit Part B ($4,241 for a family with a child under five, or $3,070 for those whose youngest child is aged five to eight years);
  4. changing the per child rates to be based on the current Family Tax Benefit Part A rates for a first child and paid at 90 per cent of this for second and subsequent children; and
  5. removing the Large Family Supplement and Multiple Birth Allowance recognising that the costs of children are sufficiently covered by the basic rates.