Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F4. Child care assistance

F4–3 Reform directions — a streamlined child care payment

Recommendation 99:

Child Care Benefit and Child Care Rebate should be combined into a single payment to parents (or to child care centres) in respect of each child based on a percentage of child care costs. The payment should have the following features:

  1. a high rate of subsidy for low-income families that covers most of the costs of child care (up to 90 per cent). This would involve a small co-payment for low-income families;
  2. a base rate of assistance for all families that use child care to facilitate parental engagement in the workforce. The base rate of assistance should be set as a proportion of child care costs, with reference to the marginal tax rate faced by the majority of taxpayers. (Based on the indicative personal income tax rates scale in Section A1, this would indicate a rate of assistance of 35 per cent);
  3. access to the base rate of assistance subject to a requirement that parents participate in work, education or training. Where parents are not participating, the maximum rate of assistance should be available for a limited number of hours. The number of hours subsidised without a participation requirement should be the same as the number of hours of universal access to pre-school (15 hours by 2013); and
  4. coverage of the full costs of child care for at-risk children and children facing multiple disadvantages, without participation requirements on parents.

Recommendation 100:

The child care payment should be means tested down to the base rate of assistance based on family income and should have regard to the interaction with other means tested payments (income support and family payments) and marginal tax rates, to ensure that effective marginal rates of tax are not excessive.

Recommendation 101:

The fringe benefits tax exemption for child care facilities provided on an employer's business premises for the benefit of employees should be removed.

Designing a single child care payment

A key element in simplifying the delivery of child care assistance would be to combine CCB and CCR into a single payment. To maintain rates of assistance over time and to accommodate the wide distribution of child care prices in Australia, the assistance (maximum and base rates) should be set as a percentage of out-of-pocket expenses.

Low-income families should receive a high rate of assistance to facilitate workforce participation and support the use of child care for early learning and development. It is envisaged that, in the long term, up to 90 per cent of out-of-pocket expenses would be covered.

Assistance would be means tested on family income (consistent with the family payment arrangements) and would provide a base rate of assistance for all secondary earners (regardless of primary-earner income) and all single parent families.

Because the means test adds to the effective rates of tax faced by the parent whose employment decisions depend on the cost and availability of child care, the threshold for means testing of child care will need to interact coherently with income support means testing. It is particularly important that child care means testing be coherent with the effective rates of tax from the withdrawal of other transfer payments faced by secondary earners and single parents. If assistance is based on a percentage of out-of-pocket costs, the means test would need to take into account families who have multiple children in child care.

To recognise that child care costs can be a cost of employment for single parents and secondary earners, the payment should have a base rate of assistance for all families. Using the marginal rate of tax faced by the majority of taxpayers may be an appropriate proxy for this, as some secondary earners will face lower rates of tax and some will face high rates. Under the illustrative rates scale (see Section A1 Personal income tax), this would imply a base rate of 35 per cent of out-of-pocket costs. For families receiving the base rate of assistance, an annual cap on assistance should be retained (but indexed), to limit assistance to a standard level of child care services for high-income families.

To link child care assistance with workforce participation (or activities that support future workforce participation), access to the base rate of assistance should be subject to a requirement that parents be participating in work, education or training. Where parents are not participating, the maximum rate of assistance should be available for a limited number of hours. The number of hours of child care that are subsidised without a participation requirement should be the same as the number of hours of universal access to pre-school. The Early Childhood Education National Partnership specifies that this will be 15 hours by 2013 (COAG 2008).

For children 'at risk' or facing multiple disadvantage, assistance for the full cost of care to encourage use of child care is envisaged. Access to quality child care is particularly important in supporting the development of children from families experiencing, or at risk of experiencing, social exclusion. This can include children from jobless or low-income families, Indigenous children, children from minority cultural or linguistic backgrounds and children with a disability.

To ensure the child care payment is sustainable and maintains cohesion with other aspects of the tax and transfer system, the parameters underlying the payment and the means test would need to be reviewed over time. This includes the timing of how assistance is delivered; that is, the proportion of assistance delivered up-front compared to the proportion of assistance delivered each quarter (or other time period). While the majority of assistance (at least for low-income families) should be delivered on a regular basis, the quarterly payment approach could be retained for the base rate of assistance, or some portion of the base rate of assistance, for all families. This could help to balance the objectives of maintaining a meaningful price signal to parents and providers and ensuring that child care remains affordable for low-income families.

Fringe benefits tax exemption is not appropriate

The fringe benefits tax (FBT) exemption for child care facilities provided on an employer's business premises was intended to encourage the creation of additional child care places. However, only higher-income employees working for larger businesses able to establish a child care centre can benefit from the concession.

Even if the exemption were to be broadened to remove the restriction on the employer providing the child care, an FBT exemption is not an appropriate vehicle for providing child care assistance because it adds complexity, relies on employers being prepared to put in place salary sacrifice arrangements and does not operate coherently with the other child care payments (CCB and CCR).

The FBT exemption cannot be used to assist low-income families with child care. While it is possible to provide this assistance separately, it would remain difficult to provide the two forms of assistance in a coherent way.

CCB and CCR are intended to be the primary form of child care assistance. The FBT exemption is now a remnant of an older system of support largely overtaken by an alternative system of direct support.