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Taxation (Support for Children in Hardship) Act 2015

As part of Budget 2015, the Government announced changes to help provide financial relief for children in very low income families. These changes were introduced into Parliament in the Support for Children in Hardship Bill. At the Committee of the whole house stage on 10 November 2015 the aspects relating to Revenue Acts were divided out to form the Taxation (Support for Children in Hardship) Bill. The Support for Children in Hardship Bill had also provided for a $25 per week payment to families in receipt of a main benefit under the Social Security Act, among other changes (see the Social Security Amendment Act (No 2) 2015).

The Taxation (Support for Children in Hardship) Bill was passed and granted Royal assent in December 2015. The new legislation, the Taxation (Support for Children in Hardship) Act 2015, amends the Income Tax Act 2007 to provide for an increase to the base rate of the in-work tax credit. The increase is targeted at low income working families with dependent children. It is part of a wider Budget 2015 package to provide support for families with children in hardship and to encourage families into paid work.

The new Act also increases the abatement rate for Working for Families tax credits (WfFTC) to target the increase in assistance, and the other WfFTC at low income working households. Consequential changes have been made to the Taxation (Annual Rates and Budget Measures) Act 2011, which sets out a timetable for future changes to the WfFTC abatement regime.

CHANGES TO IN-WORK TAX CREDIT AND THE FAMILY CREDIT ABATEMENT RATE

Sections MD 10(3)(a), MD 13(3)(a) (i) and (ii) of the Income Tax Act 2007

The two main changes in the new Act amend sections MD 10(3)(a) and MD 13(3)(a) (i) and (ii) of the Income Tax Act 2007 to increase the base rate of the in-work tax credit by $12.50 a week and to increase the family credit abatement rate by 1.25%.

Background

The in-work tax credit can be claimed by working families with dependent children as long as they are not receiving a main benefit (or Student Allowance) and are normally working either 20 hours a week or more, in the case of a sole parent, or 30 hours a week or more in total for a couple.

The base rate of the in-work tax credit is $60 per week ($3,120 per annum) for eligible working families.

The abatement rate for WfFTC, referred to as the family credit abatement rate, is 21.25 cents in the dollar. It applies when a WfFTC recipient’s family scheme income is more than $36,350 a year.

Key features

Amendments have been made to section MD 10(3)(a) of the Income Tax Act 2007 to increase the in-work tax credit base rate by $12.50 per week to $72.50 per week ($3,770 per annum). The eligibility criteria for the in-work tax credit remain the same and there is no change to the additional rate payable for families with four or more children ($780 per annum per additional child).

The increase in the in-work tax credit base rate provides some additional assistance to low-income working families not in receipt of a main benefit. The increase in the base rate helps ensure there continues to be a reasonable gap between income people can receive on a main benefit and income low and middle income families can receive from paid work.

Amendments have also been made to sections MD 13(3)(a) (i) and (ii) of the Income Tax Act 2007 to increase the family credit abatement rate from 21.25 cents per dollar to 22.5 cents per dollar. The increase applies to both sole parents and couples.

The increase in the abatement rate for WfFTCs aims to ensure that the $12.50 per week increase in the in-work tax credit, and the other WfFTCs, are targeted at the lowest income families likely to be experiencing hardship.

Application dates

The increase in the in-work tax credit rate and the family credit abatement rate come into force on 1 April 2016, this means they apply for the 2016-17 and later tax years. These changes are timed to occur when the main benefit rate for families increases by $25 a week, and the minimum family tax credit (a work-related payment for very low income families) also increases by $14 a week.

Combined impact of main changes

The combined impact of the increase in the in-work tax credit rate and the increase in the family credit abatement rate will depend on whether the family is eligible for the in-work tax credit and the level of their family scheme income. In general, those who are eligible for WfFTC and have income under $36,350 will receive an increase of $12.50 per week of work. Families with family scheme income over $36,350 and less than $88,000 will receive a smaller increase per week worked, and those with family scheme income over $88,000 will likely see a decrease in WfFTC paid. For families who do not qualify for the in-work tax credit, the increased abatement rate will reduce the amount of WfFTC they receive if their family scheme income is above $36,350.

CONSEQUENTIAL CHANGES TO THE TAXATION (ANNUAL RATES AND BUDGET MATTERS) ACT 2011

Sections 2(3), (4) and (5), 5, 14B of the Taxation (Annual Rates and Budget Measures) Act 2011

Sections 2(3), (4) and (5), and 5 of the Taxation (Annual Rates and Budget Measures) Act 2011 have been amended to ensure the Budget 2011 scheduled changes to the WfFTC abatement regime are updated to include the increase to the abatement rate on 1 April 2016.

A new section 14B in the Taxation (Annual Rates and Budget Measures) Act 2011 has been created to ensure each time the abatement threshold is reduced as per the Budget 2011 planned changes, the schedule the Commissioner uses to estimate the amount of WfFTC to pay recipients during the year is updated.

Background

Budget 2011 included changes to WfFTC to ensure the scheme is financially sustainable over time, with proportionally more assistance going to the most vulnerable families. The two main changes were to progressively lower the abatement-free threshold, and progressively increase the family credit abatement rate. The first small phased increase to the abatement rate and reduction to the threshold was made in 2012. Three other similar phased changes were planned to occur alongside increases to the family tax credit rate. The family tax credit rate increases when accumulated inflation reaches 5% since the prior increase. The rate change is made by Order in Council under MF 7 of the Income Tax Act 2007.

The Act brings the second planned adjustment to the family credit abatement rate forward to 1 April 2016, but does not bring forward the reduction in the abatement-free threshold. As a consequence, the planned changes outlined in the Taxation (Annual Rates and Budget Measures) Act 2011 have been updated.

Key features

Amendments have been made to sections 2(3), (4) and (5), and 5 of the Taxation (Annual Rates and Budget Measures) Act 2011 to ensure the Budget 2011 scheduled changes are updated to include the increase to the abatement rate on 1 April 2016.

The table below shows the previous and planned increases to the abatement rate and reductions to the threshold in the new Act.

  Previous (threshold and abatement rate) Planned (threshold and abatement rate)
1 April 2015 $36,350 21.25% $36,350 21.25%
1 April 2016 $36,350 21.25% $36,350 22.5%
Next Order in Council $35,900 22.5% $35,900 23.75%
Subsequent Order in Council $35,450 23.75% $35,450 25%
Last Order in Council $35,000 25% $35,000 25%

The Act changes the timing of the phased changes, but does not change the ultimate proposal of a family credit abatement rate of 25% and abatement threshold of $35,000.

Amendments have also been made to introduce a new section 14B in the Taxation (Annual Rates and Budget Measures) Act 2011, which changes the income bands in Schedule 31 of the Income Tax Act 2007 to reflect each planned reduction to the abatement threshold. This ensures that the Commissioner is able to correctly perform the calculation that estimates the amount of WfFTC to pay recipients as instalments during the year.

Application date

The consequential changes came into force on 10 December 2015 (the day after the date of Royal assent) but do not apply until after 2016 when the family tax credit rate is increased by Order in Council.