Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F2. Means testing

F2–5 Means testing family assistance payments

Recommendation 89:

Means testing for family assistance payments should be based on the same measure of taxable income as for income tax, including fringe benefits. However, payments should not be reduced as a result of the inclusion of compulsory superannuation contributions in taxable income. Consideration should be given to aligning the definitions of income and periods of assessment for family assistance payments more closely to those that apply to income support payments. However, this should not include deeming income on assets.

Family payments should continue to be means tested by reference to an estimate in advance of the family's annual adjusted taxable income. Family assistance payments are to assist in the financial support of children. Actual income, rather than deemed income, is a more appropriate basis to means test these payments as it reflects the income readily available to families to support their children. Deeming an income on assets may also discourage families from saving while they have children, which may affect their future wellbeing. Family assistance payments are described in more detail in Section F3 Family and youth assistance.

Currently, taxable income is adjusted to include amounts such as the 'cash' or adjusted value of fringe benefits and salary sacrificed superannuation contributions. The Review is recommending that fringe benefits and superannuation contributions be included in a person's taxable income (see Section A1 Personal income tax) so these adjustments would no longer need to be made. However, including compulsory superannuation contributions in taxable income should not affect family assistance payments (see Taxing retirement incomes in Section A2-2). This could be achieved by increasing the thresholds for family payments. Taxable income would be reduced by the proposal for a 40 per cent savings income discount to individuals for non-business related net interest income, net rental income and capital gains (and losses). See Section A1 Personal income tax.

In the longer term, basing entitlement to family assistance on a test of current actual income using the same definitions and periods of assessment as income support should be explored. This would be more responsive to changes in people's circumstances because fortnightly payments would reflect the current circumstances of the family and not an estimate of its income over a 12-month period. It would also end the current situation where a family can incur a debt at the end of the income year because of unforeseen changes in their circumstances.

Child care assistance is provided to encourage participation in employment or training for low-income families and to recognise that child care is a cost of employment for all families. For this reason, child care should be means tested from a high rate of assistance for low-income families down to a base rate of assistance for all families that use child care in order to engage in the workforce. See Section F4 for more detail on child care assistance.

The means testing arrangements for child care need to operate coherently with other means tested payments received by parents. Because families are potentially eligible for a number of payments and services, it is essential that child care withdrawal rates are considered in conjunction with other withdrawal rates (see Recommendation 100).