Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F3. Family and youth assistance

F3–3 Reform directions — a single family payment and refined youth support

Recommendation 90:

Current family payments, including Family Tax Benefit Parts A and B, should be replaced by a single family payment. The new family payment should:

  1. cover the direct costs of children in a low-income family (that is, the costs associated with food, clothing, housing, education expenses); and
  2. assist parents nurturing young children to balance work and family responsibilities.

Recommendation 91:

The direct cost of children component of family assistance should be a per child payment.

  1. Rates of payment should increase with the age of the children to recognise the higher costs of older children. Three rates of payment should apply: for 0–11 year olds; 12–15 year olds; and 16–18 year olds while in secondary school. These age bands would appropriately accommodate the increasing costs of children (this would require higher payments rates for 12, 16 and 17 year olds). The Baby Bonus should be abolished and a small supplementary payment, reflecting the direct costs of a new-born baby, should be paid over the first three months.
  2. A shared-care rate to recognise the higher costs of separated families should be considered, taking into account interactions with child support as well as other income support payments.
  3. Additional payments for larger families, including the Large Family Supplement, the Multiple Birth Allowance for children over one year, and higher thresholds for larger families should be reconsidered as the case for these payments is not strong.

Recommendation 92:

A supplement for parents nurturing young children (aged under six years) should be provided as a per-family payment, means tested on family income in addition to the recently announced Paid Parental Leave arrangements.

  1. The maximum rate of the supplement should be set such that the total support for single parents wholly reliant on income support is equivalent to the maximum rate of pension.

Recommendation 93:

For single parents with children aged six or older, a parental supplement (which should be considerably smaller than under Recommendation 92), should be paid through the family payment system.

Recommendation 94:

For couples with children aged six or older, a parental supplement at the same rate as for single parents should be paid through the income support system (see Section A1 Personal income tax).

Recommendation 95:

Assistance for families should also recognise that there are specific circumstances, such as parents caring for disabled children and foster care children with higher needs, for which additional support beyond the early years is appropriate.

Recommendation 96:

The total amount of family assistance should be withdrawn with a single means test to avoid cumulative withdrawal rates which create unnecessarily high disincentives for working. A single low taper rate of 15–20 per cent would be appropriate to minimise workforce disincentives.

Recommendation 97:

While family payments should be the main form of assistance for families with children up to the end of secondary school, or the school year in which they turn 18 (the earlier of the two), youth payments should be available to older children in some circumstances.

  1. Dependent older children for whom a suitable pathway may be leaving school and looking for work or combining part-time work and part-time study should have access to a youth payment, governed by strict participation requirements.
  2. Children without access to financial support from their families should continue to have access to a youth payment, governed by strict criteria.

Recommendation 98:

Youth payments should be the main form of income support from the age of 18 until the age of independence.

  1. Family payments should not be provided for those aged 18 and over unless they are completing secondary school in the year they turn 18.
  2. Youth payment rates should reflect the fact that most young people have lower needs than adults but need adequate assistance to participate in education and training.
  3. Dependent youth payment recipients should be subject to a parental income test consistent with that applying to family payments. Family means tests should be designed so that families with dependent children in both the family payments and youth payments system are not disadvantaged.
  4. The age of independence should be aligned for full-time students and non full-time students.

A single family payment for the direct costs of children

Age of child and rate

Rates of assistance for family payments should be guided by evidence of the direct costs of children; that is, the out-of-pocket expenses that parents incur in providing food, clothing, housing and other items necessary for the development of their children. These costs are distinct from the indirect costs that parents incur as a result of being responsible for children, such as income forgone because their availability to work is reduced by the need to care for children.

A three-tiered approach with increasing rates for 0–11 year olds, 12–15 year olds and 16–17 year olds (including 18 year olds in secondary school) would appropriately and simply reflect the changing costs of children as they grow older. These ages also broadly reflect the ages of transition in the education system. While the cost of 0–4 year olds is generally below the cost of 5–11 year olds, the difference may not be sufficient to warrant a separate rate.

The Baby Bonus does not reflect the additional direct costs of children at birth, because in effect it includes an element of income replacement. With the introduction of PPL, the Baby Bonus should be abolished and a small supplementary payment, reflecting the average direct costs of a new born, should be paid over the first three months as part of the per child family payment (including to those receiving PPL).

Abolition of multiple child add-ons

While costs of children studies indicate varying degrees of economies of scale, additional children do not cost more than the first child. It is therefore more appropriate to provide per-child assistance that does not increase with additional children.

Shared-care rates

The costs of children in shared-care families are higher than for those in families where parents cohabit. To provide the same level of support for children in shared-care households, it would be necessary to provide a slightly higher rate of family assistance.

Child support arrangements are built around the current family payments arrangement. As such, any change to family payments would need to be considered in the context of child support calculations.

Higher rate of assistance for parents with young children

Government payments have a role in ensuring that the choice to spend time out of the workforce to care for young children is not unduly constrained by financial need. PPL provides a strong signal that an absence from employment at this time is an appropriate choice and provides an alternative source of income for primary carers after the birth of a child.

Beyond the immediate post-birth period covered by PPL, up to when the youngest child turns six years of age, low- to middle-income families should be paid a supplement as part of family assistance, subject to the family payment means test in order to assist parents to balance work and family responsibilities.

The maximum pension rate is the appropriate benchmark payment rate for single parents with young children. The parental supplement should be set to ensure that a single parent with young children on the participation payment receives a combined amount equivalent to the maximum pension rate. The couple rate should be set at the same rate as that for single parents.

Supporting parents with children six years and over

Supplementary parental support should be provided to parents with youngest children aged six years and over, to raise the level of adult income support payments above the rate of those without children. This reflects the need to ensure that the total support provided to families delivers a higher rate of adequacy, but at a lower rate to that provided for parents with younger children.

For partnered parents, the supplement should be provided through the income support system and withdrawn with income support payments. This recognises that the combined withdrawal of two income support payments occurs well above the minimum wage and close to the average wage.

For single parents, the supplement should be provided through the family payment system and withdrawn with family payments to extend the income range over which the supplement is available.

The proposed payment structure for families, including the arrangements for the Parent Supplement are outlined in Chart F3-8 and Table F3-3.

Chart F3-8: Payment structure for families

Chart F3-8: Payment structure for families

  1. Assistance with the direct costs of children.
  2. Additional parental supplement where the youngest child is under six years, paid as part of the family payment and means tests with the family payment.
  3. Smaller parental supplement for couple parents where the youngest child is over six years, paid as part of income support.
  4. Smaller parental supplement for single parents where the youngest child is over six years, paid as part of the family payment and means tests with the family payment.

Table F3-3: Parent Supplement arrangements

  Youngest child under aged six years Youngest child aged six years or older
Single parent family

Higher rate of supplement
(equivalent to gap between allowance and pension rates)

Paid as part of family assistance
Means tested on family income.

Lower rate of supplement
(set at, for example, half the higher rate)

Paid as part of family assistance
Means tested on family income

Couple family

Higher rate of supplement
(equal to single parent rate)

Paid as part of family assistance
Means tested on family income.

Lower rate of supplement
(equal to single parent rate)

Paid as part of income support
Means tested on personal and partner income.

Parents with older children in special circumstances

Assistance should also be provided in other specific circumstances, such as parents caring for children at older ages with high needs, including some children with disability, and foster care children (taking into account interactions with existing support for these groups).

Education Tax Refund

The Education Tax Refund (ETR) was introduced as a refundable offset to assist certain prescribed education expenses. (See Annex A1 Concessional offsets in detail).

As with any payment that is linked to receipt of other payments (in this case FTB Part A), the ETR creates a sudden death cut out and results in very high (over 100 per cent) effective tax rates at the point at which the main payment (FTB Part A) is extinguished. In addition, as a tax refund, there is a time lag for payment.

Recommendation 6c (see Section A1 Personal income tax) is that the ETR should be removed from the personal tax system and replaced with automatic advance payments through the family payment system at the beginning of each school semester.

Assistance for youth

Family payments should apply when children are under the primary care of their parents; that is, both financially dependent and reliant on their parents for day-to-day needs. As the majority of children progress through secondary education and go on to complete Year 12, it is appropriate that family payments continue to be the primary form of assistance for children up to the end of secondary school or the school year in which they turn 18 (the earlier of the two). Youth income support payments (including Disability Support Pension for young people) should generally become available from this time.

There are older dependent children for whom a suitable pathway may be leaving school before Year 12 and looking for work or combining part-time work and part-time study. In these circumstances, it would be appropriate for a youth payment to be available, with eligibility governed by strict participation requirements. There are also older children who do not have access to support from their family. Youth payments, governed by strict independence criteria, should also be available for these older children. Although this would mean having two payments for older children, there would be no need to make a choice between payments, as the applicable payment would be determined by the activities of the child.

Youth payment rates should reflect the fact that young people generally have lower needs than adults, but should be sufficient to support investment in education, training and other capability-building activities (including combining part-time work and part-time study). Youth rates should not create inappropriate incentives for young people to leave full-time study prematurely and should not favour unemployment over education and training. The rates of payment must make further study practical for those from disadvantaged backgrounds.

The future arrangements for youth payments should build on aspects of the current system, but with some changes that would improve coherence with other aspects of the tax and transfer system:

  • Assistance for youths should have an 'at home' rate and an 'away from home' rate. The at home rate for youth payment recipients under 18 should be aligned with family payment rates to avoid providing incentives to leave education or training. The at home rate should be higher for youths 18 and over. Away from home rates should not create inappropriate incentives for young people to leave home prematurely. Consistent with adult rates of income support, away from home rates should reflect the fact that that partnered youths have lower costs than single youths.
  • The same rate should be paid to dependent and independent young people with similar living arrangements. While all youth payment recipients should be subject to a personal income test, dependent young people should also be subject to a parental income test. This parental income test should be broadly consistent with that which applies to family payments. To avoid reductions in assistance for families with both family payment and youth payment recipients, one option is to operate the two means tests consecutively, with the youth payment parental income test operating after the family payment income test.
  • Young pensioners (including Disability Support Pensioners) have a greater need for assistance than other young people, but have lower needs than adult pensioners. A youth rate structure for pensions minimises inappropriate incentives for young people to claim these payments. To maintain system coherence, the relativity between adult rates of pension and participation payments should be reflected in the youth rate structure.
  • While young people generally have lower needs than adults, some young people have adult responsibilities and face similar costs as adults. The payment of lower youth rates to young parents would result in these families having a lower standard of living than other families. Assistance for young parents should therefore be aligned with that for adults to avoid compromising the welfare of dependent children.
  • Youth payments should be the main form of income support from the age of 18 until the age of independence. The current age of independence for a non-full-time student is 21 while the Australian Government has announced that the age of independence for full-time students will be progressively reduced to 22. The age of independence should be aligned in the future at 21.