Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F3. Family and youth assistance

F3–2 The current system could be simpler, more transparent and better targeted

Table F3-1 summarises the main forms of assistance now available for families and youth.

Table F3-1: Family and youth assistance(a)

Payment description Maximum rates of payment Income test(b) Number of recipients and expenditure(c)

FTB Part A

Per-child payments for dependent children aged under 16; and dependent young people aged 16-20; and 21-24 year old full-time students not in receipt of an income support payment. To be eligible, a parent must have care of a dependent child for 35 per cent or more of the time.

Can include Large Family Supplement and Multiple Birth Allowance.

Can include Rent Assistance (children aged under 16) where a parent has care of a dependent child for 14 per cent of the time.

Maximum rates (annual)(d)

0-12: $4,803.40
13-15: $6,033.45
16-17: $2,018.45
18-24: $2,467.40

Base rates

0-17: $2,018.45
18-24: $2,467.40

Families are paid the higher of the maximum or base rate after the operation of the following income tests:

The maximum rate is available until family income reaches $44,165 a year, after which a withdrawal rate of 20 per cent applies.

The base rate is available until family income is $94,316 a year (plus $3,796 for each FTB child after the first) after which a withdrawal rate of
30 per cent applies.

1.77 million families paid in respect of 3.44 million children

Expenditure: $12.576 billion

FTB Part B

Per-family payment to single income families (including single parents) and to couple families where the secondary earner's income is low.

Maximum rates based on age of youngest child(e) (annual)

0-4: $3,828.85
5-15*: $2,774.00

(*Or 16-18 if full-time student not in receipt of an income support payment).

Limited to families where the higher-income earner in a couple, or a single parent, has an income of $150,000 a year or less.

When the income of the lower earner is over $4,672 a year, the payment is withdrawn at a rate of 20 per cent.

1.36 million families comprising 770,000 couple families and 590,000 single-parent families

Expenditure: $4.360 billion

Baby Bonus

Payment on the birth of a child or the adoption of a child.

$5,185 per eligible child paid in 13 fortnightly instalments.

Payable to families whose estimate of combined adjusted taxable income is $75,000 or less in the six months following the birth of a child or the child's entry into care.

278,000 recipients in respect of 283,000 children

Expenditure: $1.411 billion

Paid Parental Leave (PPL)

Payment to help parents spend time with newborns and adopted children. Recipients must fulfil employment criteria in months before birth or adoption to be eligible. Parents receiving PPL cannot receive the Baby Bonus (except in cases of multiple births) or FTB Part B for the time they receive PPL.

Allows eligible parents up to 18 weeks of leave at the Federal Minimum Wage (currently $543.78 per week).

Primary carers will be eligible if they earned less than $150,000 in the full financial year prior to the birth or adoption of a child.

Introduced from 1 January 2011

Youth Allowance (YA)

YA (Student): Income support for full-time students aged 16-24 in secondary or tertiary education or training and full-time apprentices.

YA (Other): Income support for young people aged 16-20 seeking or preparing for work or temporarily unable to work.

At home rates (annual equivalent)

Under 18: $5,285.80
18 and over: $6,354.40

Away from home and partnered rate:

$9,656.40

(Higher rates are available in some circumstances — for example, parents).

Following a recommendation of the Bradley Review, the Government introduced legislation in late 2009 to improve the YA personal income threshold (PIT).

The changes will increase the PIT threshold to align it with the income test threshold applying to the maximum rate of FTB Part A and replaced the YA per child 25 per cent taper rate with a 20 per cent family taper rate.

YA (Student): 273,100

YA (Other): 82,900

Expenditure

YA (Student): $1.829 billion
YA (Other): $0.539 billion

  1. Payment rates and income tests are current as at 20 September 2009, except where noted.
  2. The income tests refer to the relevant family or parental income test. Youth Allowance recipients are also subject to a personal income test with separate income tests applying for students and non-students. For FTB Part A, a limit on the income earned by children may also apply.
  3. Recipient numbers as at June 2009. Expenditure is for 2008-09.
  4. FTB Part A amounts include the FTB Part A supplement of $711.75 per-child for 2009-10.
  5. FTB Part B amounts include the FTB Part B supplement of $346.75 per-family for 2009-10.

In addition to the payments listed in Table F3-1, income support recipients may receive a higher rate of payment if they have dependent children and will have adjusted activity requirements.

Source: Australian government administrative data; FaHCSIA and DEEWR 2008–09 annual reports.

The current system could be rationalised and remodelled to create a family assistance program that would be simpler, more transparent and provide greater support where it is needed. Support provided through family payments should be designed to better reflect the direct cost of children, including older children in secondary school, while support for young people and adults (including parents) should be provided through income support payments.

Unnecessarily complex, with multiple payments

The family payments system has a number of payments with overlapping, and in some case, competing, objectives. This increases the compliance costs borne by parents and increases the challenge of designing a system that is fair to families in different circumstances. The existence of multiple payments can also result in overlapping withdrawal rates, which raises EMTRs at certain income levels above the levels that would otherwise be achieved with a single family payment.

For families with inconsistent and unpredictable income flows, the need to estimate taxable income ahead of actual earnings can be problematic. This may not only contribute to over- or underpayments through the year, but may also lead to families adjusting their participation due to concern about accruing family payment debts.

Finding

Current arrangements for family payments are made unnecessarily complex by the number of payments, the design of individual payments, and their interaction with the rest of the tax and transfer system.

Payments are not consistent with supporting workforce participation

Workforce disincentives are inherent in any safety net support system; in this way family payments can be seen to contribute to workforce disincentives (both because they provide an alternative to earned employment income and because they withdraw as earned income increases, raising the effective rate of tax paid by parents in the withdrawal range).

Given the objective of providing a basic acceptable standard of living for all Australians, particularly for children in low-income families, conceding the participation objective to some degree is unavoidable. Where assistance is provided in addition to that required to meet safety net objectives, impacts on workforce incentives are a major concern.

However, assistance can be delivered in ways that have different impacts on the incentives people have for workforce participation. In the current system, multiple family payments create overlapping withdrawal rates and increase barriers to participation. Each payment withdrawal rate can add to other taxes and withdrawal rates and can contribute to higher EMTRs.

Cumulative withdrawal rates for family payments affect secondary earners in particular. The simultaneous withdrawal of FTB Part A and FTB Part B add to the EMTRs for secondary earners, as shown in Charts F3-1 and F3-2. These charts show the situation for a secondary earner with a partner who earns $50,000. As the family has two young children, FTB Part A (which begins to be withdrawn when family income reaches $44,165) continues to be withdrawn at a rate of 20 per cent as the secondary earner begins to earn income. Further, FTB Part B begins to be withdrawn at a rate of 20 per cent when the secondary earner's income reaches $4,672.

The combination of FTB Part A and FTB Part B withdrawal rates, together with income tax rates, can lead to high EMTRs for secondary earners. In combination with the other costs associated with working, this may deter secondary earners from entering or re-entering the workforce or increasing their hours of work, particularly when children are young and out-of-pocket child care costs are incurred.

Chart F3-1: Withdrawal of FTB Part A and FTB Part B, 2009-10

Family with two children aged 4 and 6, first earner's income fixed at $50,000 per annum

Family with two children aged 4 and 6, first earner's income fixed at $50,000 per annum

Source: Treasury estimates.

Chart F3-2: Effect of withdrawal of family payments on secondary earner's
effective marginal tax rates, 2009-10

Family with two children aged 4 and 6, first earner's income fixed at $50,000 per annum

Family with two children aged 4 and 6, first earner's income fixed at $50,000 per annum

Notes: Family Tax Benefit Part A begins to withdraw at a rate of 20 per cent when family income is $44,165, while Family Tax Benefit Part B begins to withdraw at a rate of 20 per cent when the second earner's income is $4,672. The combination of these withdrawal rates, together with income tax rates, can lead to high effective marginal tax rates (EMTRs). Other taxes include the marginal tax rate, the low income tax offset and its withdrawal, and the Medicare levy shade in. Source: Treasury estimates.

While high EMTRs can be a disincentive to work, it is also important to consider the number of people actually affected by them. Chart F3-3 shows a distribution of families by income and provides an indication of the number of families who would be affected by means tests at different levels of family income.

Chart F3-3: Distribution of families by adjusted taxable income, 2009-10

Chart F3-3: Distribution of families by adjusted taxable income, 2009-10

Note: The chart shows an estimated distribution of families with dependent children by combined adjusted taxable income for 2009-10. The distribution of families by combined adjusted taxable income is by $10,000 increments up to the income band of $240,000 to $250,000. Adjusted taxable income includes income support.

Source: Treasury estimates.

Finding

Overlapping withdrawal rates from different family payments can increase the workforce disincentives inherent in means tested payments.

Transfer payments need to be designed in a way that supports participation, but that also recognises that some parents are participation-constrained and may still require support. For example, low-income families (including single parents), where parents are working at full capacity (though not necessarily full-time), may still require in-work assistance where their earned income is insufficient. In other families, participation of one or both parents will be limited by circumstances such as foster caring, child or adult disability.

Finding

Transfer payments need to be designed in a way that supports participation, but that also recognises that some parents are participation-constrained and may still require support.

Payments could be better targeted at the cost of children

There is much research on the direct costs of children and different ways to estimate these costs. Research generally indicates that the costs of children increase as they get older. This reflects older children's food consumption, clothing needs, the cost of other school-related items and increasing social needs.

Research also suggests that current FTB Part A rates are broadly adequate for 5–15 year olds and are more than adequate for 0–4 year olds. For 16–17 year olds, FTB Part A is significantly below the cost of children, and Youth Allowance (which offers a higher rate of assistance, with a tighter means test) also falls short of the direct cost of children.

The costs of children increase markedly at the following points in the lifecycle: starting primary school, starting secondary school and entering the final two years of secondary school. The current FTB Part A rate structure is poorly aligned to these points. Rates of assistance are unchanged on starting primary school. The higher 13–15 year old rate only begins to be paid well after most children have started secondary school. Assistance for 16-17 year olds has eroded relative to rates for younger children over the past 20 years.

While less research has been carried out on the cost of older teenage children, the research available does indicate that older teenage children cost more than younger teenage children. For example, Percival et al. (2007) found that in single-child low-income couple families a child aged 16 to 17 cost 43 per cent more than a child aged 13 to 15. These percentages are consistent with major overseas findings (Henderson et al. 1970; McClements 1978).

Table F3-2 provides estimates of the cost of children based on the cost of children research.

Table F3-2: Direct cost of children estimates 2008–09

Age band Average cost in a low income family
($ per annum)
0–4 3,842.72
5–11 4,803.40
12–15 6,033.45
16–18 7,541.81

Source: FaHCSIA modelling.

The current rates of payment can result in drops in assistance as children grow older. For example, as Chart F3-4 shows, there can be a drop in payment for some families when children turn 16. This is of particular concern as the fall in payment affects low- to middle-income families where there is a greater likelihood of pressure for older children to earn money to support themselves or contribute to the family budget, rather than continuing with education.

Chart F3-4: Comparison of payments for 15 and 16 year olds at home

Chart F3-4: Comparison of payments for 15 and 16 year olds at home

Note: Assumes that the threshold for the Youth Allowance parental income test has been aligned with the income test threshold applying to the maximum rate of FTB Part A and that a 20 per cent family withdrawal rate applies to Youth Allowance. The rate of payment for a 16 year old in the chart is the higher of Youth Allowance and FTB Part A at different levels of parental income.

Source: Treasury estimates.

For families with dependent children receiving FTB Part A and Youth Allowance, the reductions in assistance can be larger when the oldest child turns 16, as the family experiences simultaneous reductions from the operation of two 20 per cent withdrawal rates (the FTB Part A family income test and the Youth Allowance parental income test) rather than a single 20 per cent rate. This can compromise not only the effectiveness of Youth Allowance for the older child, but also FTB Part A for younger children. Chart F3-5 provides an example of how assistance for a two-child family can change as the children become older.

Chart F3-5: Assistance to a two-child family at different ages

Chart F3-5: Assistance to a two-child family at different ages

Note: Assumes that the threshold for the Youth Allowance parental income test has been aligned with the income test threshold applying to the maximum rate of FTB Part A and that a 20 per cent family withdrawal rate applies to Youth Allowance. The rate of payment for 16 and 17 year olds in the chart is the higher of Youth Allowance and FTB Part A at different levels of parental income.

Source: Treasury estimates.

It is easier for parents to work as children grow older, so it is reasonable that the activity requirements involve greater expectations of workforce participation on adult income support recipients as children grow older. However, the maximum rate of per-child family payment should be set so as to ensure that where parents are unable to find employment, or to earn enough to support their children, the payments are sufficient to provide for the direct costs of the child.

Infants

In addition to FTB payments, families may receive the Baby Bonus, which is provided to assist with the costs arising from the birth or adoption of a child. The Baby Bonus in effect covers more than the additional direct costs around the birth or adoption of a child and can be considered to assist with forgone income as well. The latter objective will in effect become redundant from January 2011 with the introduction of PPL.

At its current rate of $5,185 per eligible child (paid in 13 fortnightly instalments), the Baby Bonus provides a higher rate of assistance than is necessary to cover the direct costs associated with a new child.

Budget standards work and qualitative research undertaken by the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) indicate that actual direct costs at birth for low-income families are around $2,000 for a first child and $1,000 for a second child. The direct costs of the second child are lower as some items acquired for the first child can be reused for the second child (although this would not always be the case depending on gender and the age gap between children).

Multiple children

In addition to FTB payments, families may receive the Large Family Supplement to compensate for additional direct costs of third and subsequent children and the Multiple Birth Allowance up to age 18 years for families that have three or more children born on the same day. However, evidence does not support the proposition that on average each additional child costs the same or more than the last.

Costs of children generally decline with the number of children in a family. A recent study found that in low-income families, the average marginal cost of the second child is around 83 per cent of those of the first. The average marginal cost of the third and fourth children were estimated to be 71 per cent and 63 per cent of the cost of the first child (Percival & Harding 200725).

Other research finds that any economies achieved by families relate primarily to the additional housing cost associated with children (Henman 2005). If a child shares a bedroom, the economies are significant, but if a child is assumed to require an additional bedroom, the economies are small.

While research identifies varying degrees of economies of scale with additional children, there is no indication that the costs of additional children rise, even where housing economies are not achieved. Aspects of the current system, such as higher thresholds for larger families, Multiple Birth Allowance for children born on the same day up to 18 years of age and the Large Family Supplement are not justified by evidence of the cost of children.

Shared-care families

Children raised in shared-care families (that is, living in more than one household) generally cost more than children living only in one household. For example, the two households face similar housing costs (such as furniture) and often face additional transport costs. Family assistance does not currently recognise the additional costs of children who spend time in two households.

For families with shared-care arrangements, the financial resources available for children involve both family payments and child support transfers. Any changes to family payments, including shared-care rates, would need to be considered in the context of child support calculations.

Single parent families

FTB Part B assists single parent families with additional direct costs of managing a family as a single parent. For the most part, these additional costs relate to costs of housing. While this may be able to be dealt with in part through improvements to Rent Assistance, this does not assist single parents with additional housing costs across all tenures.

Assistance with the additional direct cost faced by single parents is warranted. The current level of FTB Part B is, however, higher than the average additional direct cost of single parents and delivers assistance to single parents up to very high incomes.

FTB Part B for single parents is less detrimental to workforce incentives than for secondary earners (given the means testing arrangements). However, it does raise issues of equity, given that the full rate of assistance is provided up to $150,000, whilst dual-income families lose FTB Part B at much lower income levels.

Housing costs and children

One of the major components of the cost of children is the housing costs parents face for each additional child. Some families achieve economies of scale through shared bedrooms, particularly for younger children and children of the same gender. However, where family payments are made on a per-child basis, not related to sibling gender or sibling ages, it is more appropriate to factor in a consistent per-child additional cost of housing per child.

Under the current arrangements, the per-child family payments are sufficient to cover the additional housing costs associated with each child. In addition, higher maximum rates of Rent Assistance apply to parents with children, which provide a more adequate level of assistance for families than the low level provided to singles and couples without children.

Housing costs associated with children are best taken account of through a per-child family payment, rather than through a housing assistance payment. However, housing assistance payments for parents in rental housing would need to be sufficient to ensure that child payments are not required to cross-subsidise assistance for parents with housing costs (see Section F5 Housing assistance).

Using family payments to assist with the cost of housing associated with children has a number of advantages. Child-related housing assistance is paid to parents irrespective of their housing tenure, that is, whether they rent privately or publicly, and whether they own or are purchasing their own home. Providing housing assistance in this way ensures that the marginal cost of housing associated with children is also provided to those with mortgage costs. The simplest way to do this is through the family payments system.

Findings

Current rates of assistance generally reflect the direct costs of children, but not in all circumstances, and particularly not for older children. FTB Part A rates are broadly adequate for 5–15 year olds and are more than adequate for 0–4 year olds. For 16–17 year olds, FTB Part A is significantly below the cost of children, and Youth Allowance also falls short of the direct cost of children.

Payments that provide additional assistance to larger families are inconsistent with evidence that suggests that the incremental cost of each additional child in a family is not on average more than the cost of the first child.

Shared-care families face higher per-child costs than couple families.

Housing costs associated with children are best taken account of through a per-child family payment, rather than through a housing assistance payment.

Older children and their families face complex choices

When a dependent child reaches 16 years, income support — generally in the form of Youth Allowance, ABSTUDY living allowance, or Disability Support Pension — becomes available. Significant changes to the assistance available to older children and youths were announced by the Australian Government in the 2009–10 Budget. Participation requirements will be introduced for FTB Part A children aged 16–20 from 1 January 2010.

There are still areas of concern, particularly relating to the interaction of FTB Part A and Youth Allowance. Youth Allowance is the primary form of government assistance for young people who are independent or who come from low- to middle-income families. While FTB Part A remains available to parents of dependent 16–20 year olds and full-time students aged 21–24, the maximum rates of assistance are significantly lower.

Differences in payment rates and the existence of the more generous income test on the base rate for FTB Part A, means that there is a point on the income spectrum where one payment becomes more attractive than the other. Chart F3-6 illustrates this for a family with a 16 year old at home.

Chart F3-6: Comparison of FTB Part A and Youth Allowance for a 16 year old dependent child at home

Chart F3-6: Comparison of FTB Part A and Youth Allowance for a 16 year old dependent child at home

Note: Assumes that the threshold for the Youth Allowance parental income test has been aligned with the income test threshold applying to the maximum rate of FTB Part A and that a 20 per cent family withdrawal rate applies to Youth Allowance.

Source: Treasury estimates.

The existence of two payments for youths in identical circumstances but different parental income levels creates complexity. FTB Part A and Youth Allowance are not only paid at different rates but also have different parental means testing and personal income testing arrangements that use different periods of assessment and definitions of income. For many families, the payment that provides them with greater assistance will change over time as children age, parental income fluctuates or payment parameters and assessment periods change.

The choice families make is complicated further because of additional forms of assistance related to the receipt of FTB Part A and Youth Allowance. For example, families receiving FTB Part A may also be eligible for FTB Part B26, whereas FTB Part B cannot be received for similarly aged Youth Allowance children in full-time study. To ensure that they receive the maximum amount of available assistance, people must know a great deal about the payment system and must be able to accurately predict family, second earner and child income.

The choice between payments is a concern for all age groups where both FTB Part A and Youth Allowance are available, although the complexity involved in this choice can vary. For example, at most income levels, Youth Allowance will provide a higher payment for families with multiple children eligible for Youth Allowance.27 The lowering of the age of independence to 22 by 2012 will result in FTB Part A for 22-24 year olds becoming irrelevant.

Finding

For 16–24 year olds, there can be a complex choice between payments with the higher rate of support dependent on a number of factors. This can be confusing for those making choices about which payment to apply for.

Youth payments are not always coherent with the system

The rates of payments to young people reflect the fact that those people have lesser needs than adults. Chart F3-7 shows that the current rates for Youth Allowance can vary to account for differences in age and living circumstances, but they are not always coherent with other parts of the tax and transfer system. For example, the rate of Youth Allowance for those 18 and over at home is slightly higher than the FTB Part A rate for 13–15 year olds, but the Youth Allowance rate for those under 18 at home is lower.

The higher rate for youths living away from home reflects the fact that youths living at home have lower accommodation costs. For recipients without dependent children, the current rates of Youth Allowance are also lower than the rates of Newstart Allowance. The rate for single young people living away from home is the same as the rate for partnered young people.

Chart F3-7: Youth rates of payment

Maximum fortnightly rates of Youth Allowance compared to Newstart Allowance and FTB Part A

Maximum fortnightly rates of Youth Allowance compared to Newstart Allowance and FTB Part A

Note: Payment rates are current as at 20 September 2009. The rates of payment shown in the chart are for recipients without dependent children. The fortnightly rate for FTB Part A for 13 to 15 year olds includes the FTB Part A supplement.

Source: Australian government administrative data.

Higher rates of Youth Allowance are available to recipients with dependent children. In contrast to those without dependent children, for both single and partnered people with dependent children, the rates of Youth Allowance are similar to equivalent Newstart Allowance rates.

Youths with a disability may be eligible for Disability Support Pension (DSP) paid at rates equivalent to Youth Allowance plus a Youth Disability Supplement. Young disability support pensioners with children receive adult rates of DSP. Young people with a partial capacity to work who live away from home are paid at adult Newstart Allowance rates, while those living at home are paid youth DSP rates.

While the maximum rates of payment do not depend on the independence of the recipient, non-independent youths are subject to a parental income test. A person is regarded as independent if they are unable to live at home, have a partial capacity to work, are married or in a marriage-type relationship, have a dependent child, have satisfied workforce participation criteria or have reached the 'age of independence'. The age of independence for a non-full-time student is 21. For a full-time student it is 25, but the Australian Government has announced that this will be progressively reduced until it reaches 22.

Findings

Youth payment rates should reflect the fact that young people in different living arrangements and personal circumstances have different needs. Young people living away from home have higher costs than those living at home.

Current youth payments could be made more coherent with other parts of the tax and transfer system.


25 These figures are based on Table 2: Estimated average costs of children in couple families, by number of children and family income, 2005–06, page 12 (Percival & Harding 2007).

26 FTB-B is available (subject to the income tests) for families with a child aged under 16. If the child is aged over 16, it is available until the end of the calendar year the child turns 18.

27 This assumes that the changes to the Youth Allowance parental income test occur and that families are not affected by the family assets test or Family Actual Means Test (FAMT). The FAMT applies where a parent's income used for the Youth Allowance parental income test is deemed to be an insufficient measure of the means available to the family. The FAMT can apply even where a parent receives an income support payment.