Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F4. Child care assistance

F4–2 Current arrangements are complex and could be better balanced

The majority of child care assistance currently provided by the Australian government is in the form of payments to (or through) families to assist with the cost of care. There are two main child care payments: Child Care Benefit (CCB) and Child Care Rebate (CCR).

  • CCB is a means tested payment per hour rate of assistance. The CCB rate for an hour of care is determined by a combination of factors including family income, the number of children in care, the number of hours used, whether the children attend school and the type of child care used.
  • CCR covers 50 per cent of out-of-pocket expenses for approved child care; that is, 50 per cent of the amount of the fee less any entitlement to CCB and Jobs, Education and Training Child Care Fee Assistance. CCR is paid quarterly and has a maximum annual value of $7,778 per child in 2009–10.

Other child care assistance is provided through payments such as Jobs, Education and Training Child Care Fee Assistance, which provides help for parents undertaking job search, work, study or rehabilitation; and the Child Care Services Support Program, which provides payments to child care services to meet a number of objectives, including the provision of services to children with ongoing high support needs.

There is also a fringe benefits tax (FBT) exemption for child care facilities provided on an employer's business premises for the benefit of employees. Salary sacrificed payments for child care (from pre-tax income) or employer subsidised child care are not subject to tax in the hands of the employee or the employer.

Employers can allow employees to salary sacrifice the cost of their child care, or child care may be provided as part of a remuneration package. This is equivalent to providing a tax deduction, but only to a narrow group of parents given the condition that the child care facilities are provided on the employer's business premises for the benefit of employees.

Given that CCR provides a rebate for 50 per cent of out-of-pocket expenses up to a maximum of $7,778 per child for 2009–10, the FBT exemption provides a greater level of assistance only for families with very high child care costs on either the top marginal tax rate or second top marginal tax rate.

The FBT exemption for child care provides a higher rate of assistance for taxpayers earning over $180,000 and incurring child care costs over $16,727 ($64.33 per day in full-time care). Taxpayers with incomes lower than $180,000 would need to be incurring costs in excess of $19,691 to receive a higher rate of assistance from the FBT exemption, although that figure is accurate only for those taxpayers with incomes close to $180,000 because as a taxpayer's income begins to fall below $180,000, any benefit from the FBT exemption falls exponentially due to lower marginal tax rates and higher entitlement to the means tested CCB.

Further, while CCB and CCR are conditional on child care being provided by regulated providers for quality assurance purposes, these important conditions do not apply to the FBT exemption.

Australian government expenditure on child care has risen from around $2.6 billion in 2007-08 to a projected $3.6 billion in 2009–10. This reflects an increasing demand for child care services and policy changes that increase the level of assistance, most notably the increase in the CCR from 30 per cent to 50 per cent in 2008–09.

Chart F4-1 shows how assistance for child care changes as family income increases. For a given weekly fee, out-of-pocket costs increase as CCB is withdrawn. As CCR covers 50 per cent of out-of-pocket expenses, it provides relatively more assistance as CCB is withdrawn.

Chart F4-1: Child care assistance, 2009–10

One child in full-time care (50 hours per week) assuming a weekly fee of $300 per week

Chart F4-1: Child care assistance, 2009–10 - One child in full-time care (50 hours per week) assuming a weekly fee of $300 per week

Note: Assumes that the child is in approved care and not of school age and that the child care fee is constant across all income levels.

Source: Treasury estimates.

The example presented in Chart F4-1 shows that, in combination, CCB and CCR cover the majority of child care fees for a low-income family. This result, however, depends on the child care fees: out-of-pocket costs will be higher if child care fees are higher. There is wide variation in child care fees across Australia, with fees in metropolitan areas significantly higher than fees in regional and remote areas (Australian Government 2009a).

Complexity in the calculation and delivery of payments

Current arrangements for child care assistance can be complex for parents, providers and administrators. The calculation of CCB is particularly complicated as the standard hourly rate can differ based on the type of care, whether the care is part-time or full-time, the number and ages of children a family has in care and whether the care is work-related. While tailoring assistance to particular groups is important, it comes at the cost of additional complexity. This can make it difficult for parents and providers to interact with the system and may deter them from doing so.

The existence of two child care payments and the way they interact can also add to complexity. The current system of child care assistance includes a payment that provides a dollar amount per hour of care (CCB) and a fixed proportional out-of-pocket child care expenses (CCR). The 'hourly rate' payment is means tested while the 'out-of-pocket assistance' payment is not, so that the former provides relatively more assistance to low-income earners and the latter provides relatively more assistance to high-income earners.

Sustainability of current payments

Although the maximum rates of CCB are indexed to CPI, in recent years child care fees have generally increased at a faster rate than CPI. If this trend were to continue, the proportion of child care costs covered by CCB would decline over time. In contrast, an out-of-pocket assistance payment, such as CCR, automatically adjusts to cover price increases (up to the maximum rate of CCR). Over time, this would shift the relative weight of child care assistance away from low-income families and create a flatter rate of child care assistance across the income spectrum.

The use of a pure hourly rate payment can result in the rate of assistance not automatically moving with increases in the cost of child care from year to year, particularly where child care prices rise at a faster rate than CPI. In addition, an hourly rate payment is not responsive to fee differences across service types and locations, which is a feature of the Australian system. As higher-quality care may also come at a higher cost, a flat hourly rate may constrain the use of high-quality care by low-income families.

While assistance provided as a proportion of out-of-pocket costs can help overcome these issues, it may put more pressure on child care fees and government expenditure, particularly if the supply of child care providers is constrained. Putting a dollar amount cap on the out-of-pocket assistance — as is currently done with CCR — can ameliorate these effects.

The sustainability of current payments also needs to be considered in the context of the proposed Council of Australian Governments (COAG) reforms that aim to improve quality standards in child care through the National Quality Agenda by introducing a new National Quality Standard and a new unified national regulatory environment. Over time, these reforms will increase staff qualification requirements and staff-to-child ratios, and these changes are expected to flow through to higher prices for child care.

In the absence of these reforms, child care prices would be likely to rise as a result of State-based changes to child care standards. Victoria has recently legislated improved quality standards. New South Wales, South Australia and the Northern Territory have announced similar intentions. Streamlining the regulation of the sector by moving to a national system will also result in savings for some service providers.

Payment delivery

The way payments are delivered impacts on the experiences of parents and providers. In the current system, CCB can be paid to child care providers who then deduct the relevant amounts from child care fees, or they can be made direct to families. Providing payments to providers as fee reductions (in respect of each family using care) reduces the number of payment points, but may place greater upward pressure on child care prices if the full rate of assistance were provided in this form.

While CCB is generally provided fortnightly, CCR is paid quarterly, so there is some disconnect between when this assistance is provided and the decisions parents make about the purchase of child care. This may affect low-income families, particularly in high-fee areas, who have difficulty paying in advance and may not take the full value of the assistance into account when making decisions about work and child care. It does, however, reduce the pressure on prices by ensuring that parents are subject to a larger proportion of the up-front cost.

Findings

The current child care payment structure could be simpler and more transparent, and could provide greater levels of assistance to lower-income families.

  • The formula for calculating Child Care Benefit (CCB) is overly complex. The existence of two different payments with different types of assistance can add to complexity.
  • CCB makes up the largest proportion of assistance to low-income earners. This assistance has not kept pace with increases in child care prices.
  • Although providing assistance that covers a proportion of out-of-pocket costs can put higher pressure on child care fees and government expenditure, it is more responsive to changes in child care prices and to differences in prices across Australia.

Fringe benefits concessions are not an effective way of targeting child care assistance.