11.1 The rationale for the Maintenance Income Test
As noted in Chapter 4, the Maintenance Income Test (MIT) has the effect of reducing a resident parent’s Family Tax Benefit (FTB) Part A by 50 cents for each dollar of child support above a prescribed threshold, usually $1,150 per annum plus $383 for each child after the first. It applies until FTB Part A has fallen to the base rate. Rent Assistance payable as a supplement to FTB Part A is also subject to reduction through the MIT.
The reason for the MIT is that when parents separate, the Government usually has to pay much more to support the primary caregiver and children than if the family had stayed together (in the form of increased FTB, Parenting Payment (Single) and Rent Assistance). Where the non-resident parent has the earning capacity to help support the former partner and the children, it has for many years been government policy that those support payments should reduce government expenditure on benefi ts.
As shown in Figure 11.1, the community attitudes survey conducted by the Australian Institute of Family Studies showed that most respondents believed mothers receiving government income support should keep all or some of these payments.
Figure 11.1: If mothers are on government income support payments, should their government payments be reduced by the total amount of child support, just some of it, or should they be able to keep all of it?
Notes: GP nonsep = general population non-separated sub-sample; CFC sep =
Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (6) = 29.01,
p<.001.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 24.
The Taskforce acknowledges the role of the MIT, and the percentages recommended by the Taskforce in the Costs of Children Table have been adopted after taking it into account.
However, the Taskforce identified two fundamental problems with the way the MIT currently operates.
11.2 Problems with the MIT
11.2.1 Application to non-child support children
FTB is assessed on household incomes. The MIT operates to reduce the total of FTB Part A for all children in the resident parent’s family, not just the child or children for whom the child support is paid. As a consequence, if the resident parent remarries and has a baby with the new spouse, or indeed there are children from a previous relationship living with them, the MIT will operate to reimburse the Government not only for the FTB Part A payable in respect of the child for whom child support is paid but for all children in the resident parent’s household for whom FTB Part A is paid.
This is a serious anomaly. It means in effect that child support paid by the liable parent is being used to reimburse the Government for its expenditure on a new biological child or step-child of another parent, for whom the liable parent has no responsibility.
The MIT should operate only in relation to FTB payable for the child support children and should exclude other children living in the household. The Department of Family and Community Services has advised the Taskforce that this reform is feasible and could be accomplished without undue fi scal impact.
11.2.2 Misalignment with policy towards intact families
The MIT is not aligned with FTB in any coherent policy framework. For separated parents whose combined income for FTB purposes is below $32,485, the level of FTB Part A paid to the primary caregiver as a consequence of the MIT is much lower than if the parents were still living together. In effect, the Government is reducing FTB payments to the family following separation that it would have paid in full when the parents lived together. This appears to be inequitable.
This situation may be illustrated by the example of where a parent liable for child support has a taxable income of $32,484 and the other parent is on Parenting Payment (Single). They have one child, aged six, for whom child support is being paid, and the liable parent has no new dependent children. They are not splitting FTB Part A on the basis of shared care.
If the two parents were still living together as a household, they would be entitled to $4,095.30 in FTB Part A, which is maximum rate for one child of this age. Under the present Child Support Scheme, the liable parent would be paying $3,516 child support per annum for that one child. The resident parent would be entitled to keep $1,150 of that sum, and 50 cents in the dollar thereafter. As a consequence, $1,183, or about one third, of the payer’s child support goes to reimbursing the Government for FTB Part A expenditure that it would have incurred in any event if the parents had remained together.
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11.3 The neutrality principle
The Taskforce believes that the MIT should not claw back FTB Part A beyond the level paid to equivalent intact families. It has termed this the ‘neutrality principle’.
In examining the issues around giving effect to the neutrality principle, the Taskforce considered a number of approaches. These fall into two categories: one is to adopt a totally new methodology for recovering expenditure on post-separation income support. The other is to adjust elements of the existing MIT.
Two totally new methodologies considered and rejected were: the inclusion of maintenance income as ordinary income for income support purposes and in adjusted taxable income for the assessment of FTB; and the calculation of FTB Part A using a notional joint income assessment approach.
The first approach would involve assessing maintenance income as part of the existing income test for a payee’s income support payment. This was rejected on two grounds— the inequity of maintenance payments for children being used to reduce income support for the resident parent and the workforce disincentives arising from applying maintenance income to the income free area and taper making it, potentially, unavailable for earned income. Furthermore, there would be a substantial cost to the Budget in treating maintenance income in the same way as other income for FTB purposes.
The second approach would hypothetically unite a separated couple and determine their notional rate of FTB as a couple compared to the actual FTB Part A they now receive, being separated. The difference in the notional and actual rates of FTB would be the amount available for recovery under the MIT. Although this approach gives practical effect to the neutrality principle on a conceptual level, it was rejected because it would lead to considerable complexities in implementation and administration and, accordingly, in public understanding and acceptance of the policy.
The Taskforce also consulted extensively with the Department of Family and Community Services about further options to improve the fairness of the operation of the MIT by adjusting elements of the existing arrangements. Of these, the most attractive is to adjust the free area to the level where the MIT claws back only the amount of FTB Part A paid to separated parents, as a group, that is in excess of what these families would receive if they had not separated. This approach would deliver equity in the aggregate (equity at the individual level not being administratively feasible). It would also need to be updated alongside any future changes to FTB to maintain the fairness of its application.
11.4 The terminology of maintenance
The Taskforce considers that terminology used in the current context is out of date. ‘Maintenance’ may once have been a generic term for both spousal and child maintenance, but it is no longer. The term ‘maintenance’ should be replaced with ‘child support’ for both the Maintenance Action Test and the Maintenance Income Test.
11.5 Reasonable maintenance action
Flexibility and more choices need to be built in to the Child Support Scheme to enable parents to agree on their parenting responsibilities following family separation. Currently, the operation of the FTB system is such that parents who seek more than base rate FTB Part A must apply for child support almost immediately, at a time when little discussion may have occurred between the parents about the parenting arrangements after separation.
To give parents more time to adjust to the separation and to discuss a parenting plan, the Taskforce proposes that there should be a moratorium on the requirement to apply for child support (the Maintenance Action Test—or MAT) for 13 weeks. In that period, FTB should be determined as though the MAT has been satisfied. Further discussion on parenting plans is provided in Chapter 15.
Recommendation 9
9.1 The mechanisms of the Maintenance Income Test (MIT) should be changed to ensure that it applies only to the children in a family for whom child support is paid.
9.2 The names of the Maintenance Action Test and the MIT should be changed to the Child Support Action Test and the Child Support Income Test in order to better reflect their roles.
9.3 The MIT’s free area, taper rate and scope should be reviewed in order to ensure that the operation of the MIT does not claw back FTB Part A beyond the level paid to equivalent intact families.
9.4 There should be an extension on the moratorium on taking reasonable maintenance action for FTB purposes from 28 days to 13 weeks, in order to give separated parents more time to negotiate a parenting plan. Child support should continue to commence from the date an application is made to the CSA.
11.6 Eligibility for income support of child support payers
The position of the parent paying child support is currently adjusted for the purposes of calculating that parent’s entitlement to FTB. The child support paid is treated as ‘deductible maintenance expenditure’ and the parent’s income is treated as less this amount for the purposes of calculation of his or her FTB. This is because that amount, once paid, is not available to the parent for the support of his or her current family. The Taskforce recognises that this amount is not available for the parent’s self support either. Accordingly, child support paid should be deducted from income considered for the purposes of calculating eligibility for income support payments in the same way as it is deducted to calculate FTB entitlement.
Recommendation 21
21.1 The Government should consider the deduction of child support payments from assessable income for the purpose of the assessment of the income support payment rate (in line with deductible child support maintenance for FTB adjusted taxable income).
21.2 The Government should consider treating the eligibility for income support of each parent in a shared care arrangement (35% to 65% of nights each) more equally.