Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F2. Means testing

F2–2 The current system treats income and assets differently

Means testing is used to determine the rate at which transfer payments are made. Transfer payments subject to means testing include: allowances (for example, Newstart Allowance, Youth Allowance and Parenting Payment (Partnered)); pensions (for example, Disability Support Pension, Carer Payment, Parenting Payment (Single) and the Age Pension); and family assistance (for example, Family Tax Benefits Part A and Part B, and Child Care Benefit).

The means test for allowances and pensions has two parts: an income test and an assets test (see Chart F2-2). A person's payment is calculated by applying the test that results in the least amount of payment.

  • The income test reduces payments at a specified withdrawal rate per dollar of income above a free area. The withdrawal rate is 50 cents for all pension recipients (except Parenting Payment (Single) where it is 40 cents), and 50 and 60 cents for Newstart Allowance recipients. It applies directly to earned income (with certain concessions), but uses a variety of methods to assess income from assets. Actual income from real estate and trusts is used, while deemed income is used for financial assets (see Deeming rate in Section F2-4).
  • The assets test includes most assets, and reduces pensions (other than Parenting Payment (Single)) by $1.50 per fortnight (or $39 per year) for every $1,000 of assets above the free area. Allowance and Parenting Payment (Single) recipients lose their payment entirely if they have assets above the free area. The principal home is exempt from the assets test (although there is a higher asset free area for non-homeowners).

The assets test has a similar effect as deeming a rate of return on assets for those people affected by it.

Chart F2-2: The existing means test base for income support payments

Chart F2-2: The existing means test base for income support payments

  1. Accumulated superannuation benefits which are not being drawn down through an income stream are treated as financial assets for people over Age Pension age. They are not included in the means test for people under Age Pension age unless they are being drawn down.
  2. Free areas and withdrawal rates apply to determine the amount of income support payment.

No asset test applies to family assistance payments (Family Tax Benefit Part A, Family Tax Benefit Part B, Baby Bonus) and Child Care Benefit. Eligibility for these payments is determined by adjusted taxable income. Adjusted taxable income comprises taxable income with adjustments made to improve the fairness of the system and move the means test for these payments closer to that for income support payments. For example, net investment property losses, salary sacrificed superannuation contributions and the adjusted or 'cash' value of fringe benefits are added back to taxable income.

Eligibility for Family Tax Benefit Part A is based on an estimate, made in advance, of the family's annual adjusted taxable income. The payment is reduced by 20 cents for each dollar above a threshold (currently $44,165) until it reaches the base rate of payment (this depends on the number and age of children and whether the family is receiving Rent Assistance). The base rate is then withdrawn from $94,316 (plus $3,796 for each child after the first child) by 30 cents for every dollar over that amount until the payment reaches nil.

Family Tax Benefit Part B has a two-stage test for couple households, such that it is only payable if the higher-income earner has an income of less than $150,000. If this test is satisfied, eligibility is based on the income of the lower earner. The full rate of assistance is payable where the lower earner earns less than the threshold (currently $4,672 a year). The payment is reduced by 20 cents for each dollar earned above this threshold. Full phase-out of the payment depends on the age of the child, with a higher payment and therefore higher phase-out level for children aged less than five years.

Single parents qualify for the full rate of Family Tax Benefit Part B if they have income of less than $150,000 a year and receive no payment when income exceeds this amount.

The income thresholds for receipt of Family Tax Benefit do not apply where people receive an income support payment from Centrelink or the Department of Veterans' Affairs. Rather, in situations where the income cut-out point for receipt of a part-rate of income support is above Family Tax Benefit income thresholds, income support recipients with qualifying children receive the maximum rate of Family Tax Benefit.

In the current system, multiple family payments create overlapping withdrawal rates and increase barriers to participation. Each payment withdrawal taper can be added to other taxes and withdrawal tapers and can contribute to higher effective rates of tax.

Additive tapers for family payments affect secondary earners in particular. The simultaneous withdrawal of Family Tax Benefit Part A and Part B add to effective marginal tax rates of secondary earners. Given other costs associated with working, this may deter secondary earners from entering or re-entering the workforce.

The full rate of Child Care Benefit is paid to families with combined incomes less than $37,960. Above this threshold, assistance is tapered away at various rates, depending on the number of children using approved care. The income cut-out points for Child Care Benefit are around $131,560 for families with one child using approved care, $136,375 (two children) and $153,995 (three children) plus an additional $29,077 for each child after the third.15

The Child Care Rebate is a payment in lieu of providing a tax deduction for child care, in recognition that this is a cost of employment. It is therefore appropriately not means tested, but should have a participation requirement attached (see Section F4 Child care).

Separate means testing arrangements apply to aged care and are considered in Section F7 Funding aged care.

15 These figures are as at 20 September 2009.