Australia's Future Tax System

Architecture of Australia's tax and transfer system

4.2 Historical trends in transfers

Before 1907, social security in Australia consisted of charitable relief provided by benevolent societies, sometimes with financial help from authorities. In 1907, the Harvester Judgment established the concept of an arbitrated 'living wage' — a non‑market wage paid to a 'breadwinner' wage earner for the support of themselves and dependants. This effectively introduced a model where welfare outcomes were pursued via wage‑related benefits rather than tax assistance or transfers, either in cash or kind.

From 1 July 1909, an Australian government old‑age Pension replaced similar schemes operating in various states. An Australian government 'invalid' pension followed in 1910. The first form of family assistance, a non‑means tested maternity allowance, began in 1912. Other than the maternity allowance, these payment programs focused assistance on those with no income and no capacity to work. The principles of these schemes set the Australian social security scene going forward, being: funded from general government revenue; based on circumstance 'categories', not past earnings; and means tested to direct assistance to those regarded as most in 'need'.

The establishment of the modern social security system (1940 to 1970s)

The impact of the Second World War saw the expansion in scope of the social security system at the national level (Chart 4.3). The Australian government also progressively took over and expanded state transfers. This period saw the introduction of:

  • Child Endowment (1941) — a family allowance paid at a fixed rate with no means test;
  • Widow's Pension (1942) — designed to provide support to those who could not reasonably be expected to work, due to either the care of a child or their own age;
  • allowances for the children of pensioners (1943) and allowees (1945);
  • unemployment and sickness benefits (1945); and
  • Special Benefit (1945) — to provide for people who had no other entitlement and were unable to provide for themselves. It was and is tightly means tested.

These changes formed a basic social security architecture, the essential elements of which are discernible in the current income support payment structures.

Over the next few decades the Australian social security system continued to expand. Additional assistance was introduced for those paying rent and for single adults with children. Income support underwent changes to liberalise the means test, to raise single rates in recognition of the higher relative cost of living alone, to provide a common rate structure for pensions and allowances, and to index rates.

In 1972 the Australian government provided its first funding for child care services. A 'universal' Family Allowance was introduced in 1976, replacing Child Endowment and tax rebates for children.

Chart 4.3: Australian government transfers as a proportion of GDP
(1910 to 2007)

Chart 4.3: Australian government transfers as a proportion of GDP(1910 to 2007)

Source: FaHCSIA estimates.

Towards a more 'active' system of social protection (1980 to mid‑1990s)

The Social Security Review was established in 1986, as recognition that economic, social and demographic change had created the need to establish a long term perspective on the priorities and directions of the system. The system was broadened from a predominant focus on poverty alleviation, to a system that also encouraged and rewarded self‑provision (through work and saving) and that was better integrated with other social services and with economic, labour market and tax policies.

The main changes from the review aimed to improve payments for low income families with children and encourage and facilitate economic and social participation of payment recipients. This was particularly aimed at people with disabilities, single parents, widows, partners of income support recipients and the long term unemployed (through improved labour market assistance). Family payment 'benchmarks' were introduced and later increased. The benchmarks represented the level of assistance required by a couple without private income to raise a child and achieve a similar living standard as a couple without a child.

In the late 1980s and up to 1995, changes were made to social security payments to recognise the changing role of women in the labour force and the increased availability of part‑time work. This included gradually increasing the Age Pension age for women; the phasing out of dependency based payments for women; and individual entitlement to income support for partners of income support recipients. The 1995 changes included the introduction of allowances without an obligation to seek work for partnered parents with a child aged under 16 and for older widows and partners of income support recipients with a labour market disadvantage. Other claimants were generally required to claim an activity tested allowance payment.

Also occurring in 1995 was the liberalisation of the allowance income test — the 100 per cent taper was reduced to 70 per cent to improve the reward for part‑time work and couples became subject to an income test designed to improve work incentives for secondary earners.

Other changes during this period included: an increase in the coverage and level of Rent Assistance; the introduction of an 'earnings credit' for pensioners and allowees to improve the rewards for part‑time work; the implementation of the Child Support Scheme; and the introduction of child care fee relief.

Increased assistance for pensioners and families and further work‑related obligations (mid‑1990s onwards)

In 1997 the benchmarking of the single pension to 25 per cent of male total average weekly earnings was included in legislation. Since 1 July 2000, a pension supplement available to all Age Pension recipients increases the rate beyond 25 per cent of male total average weekly earnings.

The Australian government established a reference group to consider and report on Welfare Reform in the late 1990s. The Australian government's initial response to the report of the reference group was the Australians Working Together (AWT) package in 2001. This included: a 'working credit'; the closing of Mature Age and Partner Allowances to new entrants; and new or improved supports and services for parents, people with a disability, the mature‑aged and the long‑term unemployed.

Building on the AWT changes, the Welfare‑to‑Work changes were announced in 2005. These imposed obligations to work part‑time or look for part‑time work on parents with older children and on new claimants of the Disability Support Pension with a partial capacity for work. New claimants were paid Newstart Allowance rather than a pension. Existing single parents on a pension with older children also became subject to part‑time activity requirements, whereas existing Disability Support Pensioners with a moderate capacity did not. The income test for allowances was also liberalised, with the 70 per cent taper being lowered to 60 per cent to improve part‑time work incentives.

This period was also characterised by further increases in support for families. In 2000, as part of The New Tax System package, the Family Tax Benefit (FTB) was introduced, replacing a range of pre‑existing payments and increasing the assistance provided to families with children. Additional assistance for the direct costs of children was provided through an ad hoc increase to both the maximum and base rates of FTB Part A. FTB Part B further increased the level of assistance for single income families including single parents.

In subsequent years, FTB supplements, more generous means testing, and the Maternity Payment resulted in significant increases in family assistance outlays. After a period of tightening, assistance for child care costs was also increased.

In 2005 the Australian government accepted the main recommendations of the Ministerial Taskforce on Child Support. The recommendations were aimed at better aligning child support with community attitudes and have been progressively implemented, with a new child support formula introduced from 1 July 2008.

Retirement incomes policy was a strong focus in the mid to late 1990s, including the 'extended deeming' of financial investments and changes to the treatment of retirement income stream products. Assistance to carers has increased and lump sum payments to both older Australians and carers have been used since 2000.