Reform of family payments

The Rudd Government will take important steps to reform family payments to make them more sustainable for the long-term.

Australia’s spending on family payments is generous by international standards.

The most recent analysis shows our spending on cash family benefits was equal third highest in the OECD, at 2.2 per cent of GDP, well above the average of 1.3 per cent.

In the midst of a global recession that has wiped around $210 billion from Commonwealth revenues, the Rudd Government is taking the tough choices needed to make sure Australia’s family payments system is sustainable in the long-term.

The reforms are designed to maintain the fundamental characteristics of the family payments system.

In particular, the reforms will support low and middle income families with the cost of raising children and promote workforce participation and reward for effort. They will complement other key reforms in the tax and transfer systems, including increasing the Low Income Tax Offset.

These reforms will save $2.4 billion over the forward estimates.

Higher income thresholds for family payments will be paused at current levels for three years until July 2012. This will reduce the growth in family payments to those at the higher end of the income scale.

From 1 July 2009 for a period of three years:

• the Family Tax Benefit Part B primary earner income threshold will remain at $150,000;
• the income threshold for receiving dependency tax offsets will remain at $150,000;
• the Baby Bonus eligibility threshold will remain at $75,000 family income in the six months following the birth or adoption of a child (equivalent to $150,000 a year); and
• the higher income free area of Family Tax Benefit Part A will remain constant. For example this means the income limit for a family with two children under 18 will remain around $112,000 until 2012. Each family’s FTB Part A income cut out depends on the age and number of children.

The Family Tax Benefit Part A lower income free threshold (currently $42,559) and the Family Tax Benefit Part B secondary earner income threshold (currently $4,526) will continue to be indexed annually in line with increases in the costs of living.

These measures will limit the growth of family payments to families at the higher end of the income scale and save $1.4 billion over the forward estimates.

Without these reforms, a single income family with income of around $161,000 a year would be eligible to receive Family Tax Benefit Part B in 2011-12.

Pausing higher income thresholds is a reform that permanently improves targeting of payments to middle income families as families receive less support from the Government as their income rises.

Families affected by these changes will benefit from the significant income tax cuts due to be delivered from 1 July 2009 and 1 July 2010.

Payment rates for Family Tax Benefit (Parts A and B) and the Baby Bonus will also continue to be indexed every year for the cost of living.

Consistent with indexation of other family assistance payment rates, from 1 July 2009, maximum rates of Family Tax Benefit Part A for children under 16 years will be indexed by movements in the consumer price index only, instead of linked to male total average weekly earnings (MTAWE) through the combined couple rate of pension. This will save $1 billion over the forward estimates.

Payments will maintain their value in real terms. In 2009-10 the foregone increase will be around $0.35 a week for each child 12 and under; and $0.49 a week for each child aged 13 to 15.

Important reforms delivered by this Government to the tax-transfer system have substantially increased assistance to low income working families, including:

• the Government’s historic introduction of a national Paid Parental Leave scheme which will particularly benefit low income families and promote continued workforce participation of women; and
• other benefits including the Education Tax Refund, the Medicare Teen Dental Plan, and the 50 per cent Child Care Tax Rebate.

Even after taking into account the reforms to family payments, these other initiatives deliver over $4 billion dollars of additional assistance to low and middle income families over the next four years.

In addition, the Government is also doubling the Low Income Tax Offset, from $750 in July 2007 to $1500 in July 2010. This means the effective annual tax free threshold will increase from $11,000 to $16,000. This assistance through the tax system promotes participation in the workforce by rewarding work.

Alongside these changes, the rate of growth of family tax benefits will be slightly reduced to ensure effective incentives to work remain built into the transfer system. This also ensures the sustainability of the system overall.

These reforms are designed to ensure the current system is sustainable, provides the ongoing support to families who need it most and encourages participation and productivity.