Federal Budget 2008 Submission by nyx11518

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									FEDERAL BUDGET SUBMISSION


      JANUARY 2008
                           CONTENTS




Executive Summary ………………………………………………………………1


Overview of the current benefits system…………………………………….. 2


Parenting Payments……………………………………………………………… 2


Impact of family payments on return-to-work decision…………………… 5


Child Care Payments…………………………………………………………….. 9


Impact of child care payments on return-to-work decision……………... 10




Contact: Kathy Rankin (02) 9458 7441 kathy.rankin@nswbc.com.au
NSW Business Chamber



Executive Summary

The NSW Business Chamber is the largest business association in NSW, drawing its
membership from all sectors, across all business sizes and both regional and
metropolitan locations.
Despite this diversity of membership, there is one challenge that is common amongst
our members – finding and keeping appropriately skilled staff. There is no ‘silver
bullet’ solution and a range of policies are needed to alleviate the impact of this
significant demographic structural shift.
The NSW Business Chamber believes a critical part of the solution comes from
policies that increase workforce participation. In particular, there needs to be
additional focus on lifting the workforce participation of second income earners, many
of who have caring responsibilities. This means making it more attractive for
employees to either return to the workforce or increase the number of hours worked.
The NSW Business Chamber recognises that the business community has an
important role to play in lifting these participation rates. Workplace flexibility or
work/life balance policies were once an ‘optional extra’ for the business community.
They were generally only used by large corporate companies looking to improve their
community relations credentials. Demographic shifts, however, mean that all
businesses, regardless of size, location or industry sector, need to get serious about
ensuring their workplace is flexible enough to interact effectively with the workforce of
the future.
In addition, however, there is also a role for the Commonwealth Government in lifting
participation rates. The current tax and welfare systems mean the Commonwealth
Government has had a significant impact on decisions taken by both employers and
individuals when it comes to finding the right work and family balance.
The current tax/welfare system distorts the choices made by families and employers
and we believe significant changes are needed to meet the demands of the
workforce of the future. In considering both the 2008/09 Budget and longer term
policies to increase labour force participation, NSW Business Chamber calls on the
Federal Government to take these matters into consideration.


The NSW Business Chamber recommends the Australian Government:
1. undertake a review of the current Family Tax Benefits structure, including biases
   within the family payment system and the impact this may have on workforce
   participation

2. explore the workability of a combination of policy options to lower effective
   marginal tax rates and encourage workforce participation

3. review the current structure for FBT exemptions to make it available for all child
   care costs

4. establish a business advice program to assist business, particularly small
   businesses, better understand the tax arrangements around child care salary
   sacrificing possibilities.




Federal Budget Submission 2008                                                      1
NSW Business Chamber



Overview of the current benefits system

There are a number parenting and child care benefits that can be accessed by
individuals – the vast majority of which are means tested1. The system is complex,
with significant interactions between the different assistance types available. These
interactions often mean back-to-work decision making is difficult.
Additionally, income definitions are complicated and varying – some payments are
dependent on household income, some a single income, and there are a number of
different definitions of income.
This complexity has not only led to high marginal tax rates but also a number of
anomalies that need to be addressed if the tax/welfare system is going to be
responsive and flexible to engage the workforce of the future.
There are two types of assistance available to parents:
       • Parenting Payments
       • Child Care Payments

Parenting Payments

1. Maternity Payment (also known as the Baby Bonus)
Key details:
• Non-means tested lump sum payment of $4,133.00 (as at August 2007, indexed
  March/September), replacing all previous allowances when introduced in 2004.
• Made to:
       o   all parents upon the birth of a new child
       o   all parents on the adoption of a child under 2, or
       o   to a carer other than the parent of a newborn child if they care for the child
           within 13 weeks of the child's birth and are likely to continue to have the care
           of the child for no less than 13 weeks.
• In the case of a multiple birth there is a payment per child.
• For claimants aged 17 years or under, it is paid in 13 fortnightly instalments.
• The Baby Bonus is not taxable income and it is not considered income for Family
  Assistance purposes.
Annual cost $1.3 billion per year (2007/08 estimate).


2. Family Tax Benefit (Part A)
Key details:
• Family Tax Benefit Part A helps with the cost of raising children.
• The payment is for children under 21 and full-time students under 24.
• The child must be earning less that $11,929.00 a year.
• The payment is income tested and takes into account the total household income.


1
    All figures from Family Assistance Office (www.familyassist.gov.au) for 2007/08


Federal Budget Submission 2008                                                        2
NSW Business Chamber


• There is a maximum household income level and then a sliding scale so that as
  household wages increase the amount of benefit falls, meaning that both income
  earners can face high marginal tax rates depending on the number of children and
  the total household income.
             Table 1: Income limit at which Family Tax Benefit Part A is no longer paid
                                             Number of Children 18-24

     Number of                Nil             One                     Two             Three
     Children 0-17

     Nil                                    $99,244                 $110,595         $122,823

     One                   $97,845          $109,196                $121,424         $133,651

     Two                  $107,797          $120,025                $132,252         $144,480

     Three                $118,625          $130 853                $143,080         $155,308



• If eligible, the payment amount varies depending on the number of children and
  the household income level.
• If family income is less than $41,318.00 then full payment (table 2) is paid.
                       Table 2: Maximum Rate of Family Tax Benefit Part A
     Payment for each child                         Per fortnight                  Per year
     Under 13                                          $145.46                     $4, 460.30
     13-15                                             $189.00                     $5,595.45
     16-17                                             $46.90                      $1,890.70
     18-24                                             $63.00                      $2,310.45



•    If family income is $41,319.00 or more a year, but less than the amounts in table
    3, the earner will be rated on the sliding scale and the maximum rate per year
    (table 2) will reduce by 20 cents for each dollar earned above $41,318.00.
•   If family income is above the amounts in table 3 only the base rate is paid.
                     Table 3: Income limit beyond which only base rate is paid
                                             Number of Children 13-15
     Number of
                              Nil               One                         Two          Three
     Children 0-12
     Nil                                      $59,842                   $78,366         $96,890
     One                   $54,166            $72,690                   $91,214         $109,738
     Two                   $67,014            $85,538                   $104,062        $122,586
     Three                 $79,862            $98,386                   $116,910        $135,434



•   If the total family income is above these income levels, but below the maximum
    cut off then households face another sliding scale arrangement (Table 4). They
    are paid $1222.75 per child reducing by 30 cents for each dollar earned above
    $91,542 (this threshold increases by $3650 for each additional child beyond the
    first that gets Family Payment Part A).




Federal Budget Submission 2008                                                                     3
NSW Business Chamber


                             Table 4: base rate of Family Tax Benefit Part A
                                                                               Per year with
        For each child               Per Fortnight             Per year
                                                                               supplement
          Under 18                          $46.90            $1,222.75         $1,890.70
            18-24                           $63.00            $1,642 50         $2,310.45



• When first introduced there were a significant number of families required to make
  repayments at the end of the financial year due to miscalculations of income. To
  minimise this, the Government introduced the Family Tax Benefit Part A
  Supplement. The supplement of $667.95 per child is paid after the end of the
  financial year when tax returns have been lodged. If families have been over paid
  then the supplement is used to offset these overpayments.
Annual cost                   $11.3 billion (2007/08)


3. Family Tax Benefit Part B
• Family Tax Benefit Part B provides extra assistance to single parent families and
  families with one main income, where one parent chooses to stay at home or
  balance some paid work with caring for children.
• For two income families with one main income earner, the partner earning the
  higher amount of income is not taken into account and the partner earning the
  lesser amount is subject to the income test.
• All single parent families receive the maximum rate of Family Tax Benefit Part B
  regardless of income.
• The parent earning the lesser amount can earn up to $4,380.00 for the 2007/08
  financial year before it affects Family Tax Benefit Part B.
• The payment is per family not per child.
                         Table 5: Maximum rates of Family Tax Benefit Part B

            Age of youngest child                    Per fortnight               Per year
     Under 5                                           $125.02                   $3,259.45
     5-15 (or 16-18 if full time student)               $87.08                   $2,270.30


• The amount of Family Tax Benefit Part B will reduce by 20 cents for each dollar
  earned above the income limit ($4,380.00 for 2007/08).
• Family Tax Benefit Part B payments will stop if the partner earning the lesser
  amount earns above:
    o   $22,302 in 2007-08 if the youngest child is under five;
    o   $17,356 in 2007-08 if the youngest child is between five and 18.
•   Special arrangements may apply to parents returning to work for the first time
    after the birth of a child, or an eligible child entered their care.
•   As with Part A, there is an annual supplement of $324.85 paid per qualifying
    family at the end of each financial year.
Annual cost                   $3.5 billion (2007/08)




Federal Budget Submission 2008                                                                 4
NSW Business Chamber



Impact of family payments on return-to-work decision

The Maternity Payment (or Baby Bonus) payment is non-means tested, standardised
payment of $317.92 / week (not the actual wage of the primary carer) and is paid
even if the main carer was not working prior to their child’s birth. The weekly payment
compares to a net full time adult ordinary weekly earnings of $853.272. That is, the
payment is 37% of net average adult ordinary time earnings.
The fact that the payment is considerably lower than the average wage means it
would not, at this level, reduce participation in the workforce. In addition, the non-
means tested nature of the payment, coupled with the fact that it is not considered
income for tax purposes, means it does not distort the marginal tax rates of the
primary carer that returns to paid work.
These characteristics mean the Maternity Payment is not acting as a barrier to
returning to work or increase participation and the NSW Business Chamber supports
the retention in the Maternity Bonus in its current form.
While the Maternity Payment, in its current form, is unlikely to act as a barrier to
returning to work, the same cannot be said for the Family Tax Benefits Part A and B.
The sliding scale and three-tier income limit system means Family Tax Benefit Part A
has significantly high marginal tax rates, in some cases above 60%. This is
especially true for situations where the secondary income earner only works part-
time and so has a low wage.
Similarly, the sliding scale system Family Tax Part B means it has significantly high
marginal tax rates for the second income earner, especially if they return to part-time
work. For example, a second income earner on average wages can only work 1 or 2
days a week, otherwise they will lose the Family Tax Part B payment.
The following three case studies highlight the impacts of the interaction between the
family payments, household income and childcare3.


Case Study 1: Single income household versus equal split income household
James and Pam are a single income family with two children (4 and 10). James is the
sole income earner and earns $100,000.00. This means the family is entitled to a
small Family Tax Part A payment and the maximum Family Tax Benefit Part B – a
total of $5923.30. Taking into account tax, their net income is $78,823.30.
Their neighbours, Peter and Lucy, also have two children aged 4 and 10 and have
the same household income of $100,000.00. However, they are a two-income family
with Peter working full-time earning $60,000 and Lucy working 3 days a week
earning $40,000. This means they are not entitled to Family Tax Benefit Part B, so
their total benefit entitlement is $2339.00. Taking into account the tax they pay, their
net income (before child care costs) is $83,139.00
To earn these salaries the family needs to use childcare on the 3 days that Lucy
works. The four year old is in long day care ($75/day) and the 10 year old in after-
school care ($15/day). Their child care costs are $90/day or $13,500.00 a year.
They are only just below the threshold for the minimum Child Care Benefit payment
so get an estimated $0.70/hr for the 4 yr old and $0.60/hr for the 10 yr old. This

2
  $1091.20*52 = 56,742.40 tax paid on this in 06/07 is $12,372 – which leaves a net annual wage of $44,370 or
weekly wage of $853.27
3
  All tax amounts are calculated using 2007/08 rates



Federal Budget Submission 2008                                                                                  5
NSW Business Chamber


translates to an annual Benefit payment of $1,425.00 and an annual bill of
$12,075.00.
With the 30% rebate the child care bill is reduced by $3,028.50 for the 4 yr old and
$594.00 for the 10 yr old to leave a total bill of $8,452.50.
The total net household income is $74,686.50 and leaves the dual-income earning
family $4,136.80 worse off than the single income family.


Case study 2: Below-average income earning family
Jack and Sally have two children, aged 4 and 10. Jack earns $40,000.00 a year and
Sally is not in the paid workforce (they have no child care costs). They are entitled to
the full payment of Family Tax Benefit Part A and Part B – making a total of
$12,504.90
The total household income is $52,504.90 before tax and $45,904.90 net tax.
Sally decides to return to paid work 10 hrs a week (9-2 for two days) and earns
$10,000.00 a year. This takes the earned household income level to $50,000.00. The
Family Tax Benefit Part A entitlement falls to $7184.20 and the Family Tax Benefit
Part B entitlement falls to $2460.30. This takes their total benefit entitlement to
$9644.50 and the total household pre tax income $59,644.50. The household’s post-
tax income is then $53,044.50.
To work these hours Sally puts her 4 yr old in pre-school for two days a week at a
cost of $40/day ($4000/year). Her 10 year old doesn’t need care as he is at school.
Under the child care rebates available the family qualifies for a part-rate of the Child
Care Benefit only. These rates are individually worked out and not published, but the
most rebate possible would be around $26 a week or $1,348.00 a year. Assuming
they receive this, this leaves the family with out-of-pocket expenses of $2,652.00 a
year on child care. They can then reduce their child care bill by a further $795 to
$1,856.40 by getting the 30% Child Care Tax Rebate at the end of the year.
This leaves the family with a net income of $51,188.10 once tax, benefits and child
care payments have been taken into account.
This is $5283.20 higher than the household income when Sally was not working. In
other words, Sally is facing a marginal tax rate of 47 per cent to earn the $10,000.00
she gets from her part-time job. The annual income translates to about $100/week –
Sally is in effect earning $10/hr.


Case Study 3: Average income earner
Harry and Jane have two children, aged 3 and 8. Jane earns the average full-time
adult wage of $56,750.00 / year. Harry is the full-time carer of their two children. The
family gets the maximum Family Tax Benefit Part B and part of the Family Tax
Benefit Part A – a total of $9,418.50. Taking into account the tax Jane pays on her
earnings, the family has a net household income of $54,543.50.
Harry decides to return to work three days a week (9-5) and is earning $25,000.00 a
year. This takes the earned household income to $81,750.00 (pre tax). The family is
no longer entitled to Family Tax Benefit Part B and now gets a reduced Part A
payment. The family’s benefit entitlement falls to $3,781.40. Taking into account the
tax paid by Harry and Jane the net household income is now $71,656.40.




Federal Budget Submission 2008                                                     6
NSW Business Chamber


For Harry to go to work the 3 yr old child has to go to long day care, which is $75/day
and the 8 year old has to go to after-school care which is $15/day. This means their
child care bill is $90/day or $270/week or $14,040.00 / year.
This can be reduced by the Child Care Benefit which would be lower than the top
rate but above the minimum rate – probably somewhere around $2/hr for the 3 yr old
and $1.70 for the 8 yr old. Using these figures this would reduce the child care bill to
$9,975.00. The family could then get the 30% tax rebate for a final child care bill of
$6,982.50.
This leaves the household’s take-home income at $64,673.90 / year.
For Harry to earn an extra $25,000.00, the family is overall just $10,130.40 better off.
This leaves his marginal tax rate at 60%.
Recommendations
1. Undertake a review of the current Family Tax Benefits structure, including
the biases within current PAYE rates and family payment structures and the
impact this may have on workforce participation

Case study 1 highlights that a family with a single income earner on $100,000.00 will
be better off than a duel-income family with the same household income. This bias is
not consistent with the desired work-family options for Generations X and Y.
The rationale behind Family Tax Benefit Part B, in particular, is that the tax system
favours two-income families over single income families. Case study 1 clearly shows
this and Part B is designed to fill this gap. However, as the case study goes on to
illustrate, this is only true if the two incomes are earned while incurring no child care
costs. Once child care costs are included, the two income family faces higher
effective marginal tax rates. This means the disposable income available to the two
income family is less than that of the one income family. Child care is a genuine
work-related cost that is not considered in the current tax/welfare arrangements
around family payments.
The current system ignores two important characteristics of these generations that
differentiate them from the Baby Boomers. First, the education level of the two sexes
is much closer than in previous generations. More women are attending higher
education and have attained skills that are critical for the future growth of the country.
Second, fathers of these generations are becoming increasingly involved in their
children’s upbringing.
The current welfare system, and its bias to the single income earning family, is not
appropriate for the emerging trends in the workforce. A report4 by the Department of
Families, Community Services and Indigenous Affairs identified that in 1984 62% of
couple-families with the youngest child under 5 were made up of one person
employed and the other not. By 2004 this had fallen to 47%.
One option would be to have a single Family Tax Benefit that focused on household
income and not that of the second income earner.
Any changes to the system would not necessarily cost any additional revenue
beyond what is already allocated to Family Tax Part B. The current $11.3 billion
spent on Family Tax benefit part A and the $3.5 billion being spent on Family Tax
Benefit B could be redirected to a reformed Family Tax Benefit , allowing two income
families to be treated the same as single income families. This revenue could be

4
  Baxter et al. (2007) Mothers and fathers with young children: paid employment, caring and
wellbeing, Social Policy Research Paper No.30, Department of Families, Community Services and
Indigenous Affairs


Federal Budget Submission 2008                                                                  7
         NSW Business Chamber


         reflected in either an increase in the threshold at which Family Tax Part A cuts out
         altogether and/or the minimum payment starts.
         Overall, it would result in no net additional cost to government and would help
         encourage an overall increase in household hours worked – with the split of this
         increase left to the household to decide not government.

         2. Explore the workability of a combination of policy options to lower effective
            marginal tax rates and encourage workforce participation
         Case studies 2 and 3 highlight the high marginal tax rates faced by many families, in
         particular the second income earner as they return to work. This needs to be
         addressed to encourage families to take up the flexible work policies offered by
         employers. Without significant changes in this area, it will simply not be worth the
         additional stress of juggling work and family care for many working families.
         There are several options than can be used to lower these effective marginal tax
         rates. These include introducing earned income tax credits, increasing the low
         income tax offset, increasing the tax-free threshold or lowering the bottom income tax
         rate.
         This issue was examined in a recent study by the University of Melbourne5, which
         compared a number of different options to lift the labour force participation rate and
         reduce effective marginal tax rates. The paper looked at 5 options for tax reform –
         the four outlined above plus reducing tapers for a number of welfare payments.
         Apart from the taper option, which was the most expensive and least effective, the
         other four options all provided different positive outcomes for low income families.
         The table below highlights the various outcomes five options.
                                Percent of people experiencing:                                             Budget
                                                                                    Change in:               cost
        Option              Increase in      Reduction      Increase in    participation    jobless          $bn
                              income          in EMTR          EMTR                      households
Reduce lowest tax rate             68.6             11.6            0.2           43,000       -26,000           4.4
Increase tax free                    67              3.5            0.4           40,000       -22,000           4.5
threshold
Increase LITO                       55.6                6           35.8           62,000         -39,000        4.7
Reduce taper rates                   21               7.5           15.3          -21,000         -30,000        6.4
Introduce EITC                      30.3             29.1           14.4           52,000         -62,000        4.7

         Apart from the taper option, which was the most expensive and least effective, the
         other four options all provided different positive outcomes for low income families and
         returning-to-work parents.
         The Chamber recommends the Government undertakes a more extensive study, that
         combines these best four options, to develop a solution that best lowers effective
         marginal tax rates, lowers the number of families on welfare and increases the
         participation rate across the population. The Chamber looks forward to having more
         detail on the increases in the LITO that were proposed by the Labor Party in the 2007
         election campaign as a way of lifting participation rates.




         5
          Buddelmeyer, Freebairn and Kalb. (2006). Evaluation of Policy Options to Encourage Welfare to
         Work, The Australian Economic Review vol. 39, no. 3, pp.273-92.


         Federal Budget Submission 2008                                                               8
NSW Business Chamber



Child Care Payments

1. Child Care Benefit
• Child Care Benefit is a payment to help families who use approved and registered
  child care.
• If family income is $35,478.00 or less, the maximum rate of Child Care Benefit is
  paid.

                             Table 6: Maximum rate for non-school child

     Number of children                        Per week (for 50 hrs of care)           Per hour for each
                                                                                             child
                      1                                     $168.50                          $3.37
                      2                                     $352.17                          $3.52
                      3                                     $549.63                          $3.66
    Maximum rate for a school child is 85 per cent of the maximum non-school child rate.

• If family income is more than $35,478.00 but less than the income thresholds
  below, a part rate of Child Care Benefit is paid.
    Table 7: Income limit beyond which only the minimum rate of Child Care Benefit is paid

                   Number of Children                               Yearly household income
                           1                                                $108,434
                           2                                                $115,900
                           3                                                $131,570


• If the family income is above these thresholds only the minimum Child Care
  benefit is paid (table 8)

                  Table 8: Minimum rate of child care benefit – non school child
                   Per hour each child                    Maximum per week for each child (for 50 hrs
                                                                         of care)
                          $0.564                                               $28.20



Annual cost                 $1.7 billion (07/08)

2. Child Care Tax Rebate
•   The Child Care Tax Rebate is designed to help families with the cost of child care
    and covers 30% of out-of-pocket child care expenses for approved child care,
    with a rebate of up to $4,000 (indexed) per child per year.
•   The Child Care Tax rebate is paid to families as a single payment at the end of
    the financial year in which the child care costs were incurred.
•   The payment is not means tested but families must pass the work/study test –
    that is, both parents must be working or studying at some point during the year.
Annual cost                 $460 million (07/08)




Federal Budget Submission 2008                                                                             9
NSW Business Chamber



Impact of child care payments on return-to-work decision

The two child care payments assist with the cost of child care, but the bulk of the cost
is still borne by parents. The reality is that many families have a child care bill of over
$12,000.00 a year while the child care tax rebate is capped at $4,000.00.
The Child Care Benefits means-testing creates high marginal tax rates in many
income brackets. The Benefit has not kept pace with the high cost of child care. For
example, child care costs rose 13% in the year to June 2007 but the minimum Child
Care Benefit hourly payment only rose 5% for 2007/08 to 0.56 cents per hour.
Consequently, for the minimum rate in particular, it has little or no impact on the
return-to work decision as it is so low. Most Sydney long-day care centres have an
hourly rate of between $5 and $10 per hour. Rates in regional cities are often lower
at $3 to $6 per day
In addition, this structure assumes quality child care with trained professionals can be
found - which is not always the case.
In metropolitan areas in particular it is not unusual for a child’s name to be placed on
a waiting list before it is born, as many centres have lists in excess of 2 years and
employees can usually only access 12 months of unpaid maternity leave.
High child care costs and lack of availability also impacts on employers. High child
care costs and restricted access means many employees are unable to take up
flexible working arrangements, even if employers offer this. This makes child care
cost and access significant issues for the business community.
Many employers would like to offer salary-sacrificed arrangements for child care, but
the tax system does not currently encourage this approach.
An alternative is for the business to operate a Child Care Centre. The current Fringe
Benefits Tax arrangements mean that an employer that builds and operates an ‘in-
house’ child care centre can offer FBT-exempt salary sacrificing arrangements for its
employees.
However, the business that offers to salary-package child care for its employees to
purchase care at the centre of their choice is required to pay FBT on the full amount
paid. The option of building a child care centre is clearly only open for large
businesses with many employees (usually in a single location), and is not practical
for small businesses to undertake.
The impact of this discrepancy is highlighted in case study 4. This shows that unless
there are changes to the FBT system small business will be increasingly likely to lose
staff to larger organisations that can offer employees family-friendly policies that are
also tax friendly.


Case Study 4: Large business v’s Small business child care provisions
There are two employees each earning $50,000.00 a year. Jack works for a large
business that is able to offer FBT-exempt child care but Harry works for a small
business that cannot afford to have its own child care centre. They both have annual
child care costs of $10,000.00 a year.
Jack salary-sacrifices and so is only taxed on a salary of $40,000.00 and his
company pays no FBT and the $10,000.00 worth of child care they provide.
Meanwhile Harry pays tax on his $50,000.00 salary and has to pay $10,000.00 in




Federal Budget Submission 2008                                                        10
NSW Business Chamber


child care. Harry is clearly worse off than Jack, simply because he works for a small
business that cannot afford to build its own child care centre.
Research shows that even large employers are not taking up the current FBT
options. A 2005 Deloitte survey of nearly 600 employers with over 300,000
employees found that only 10 companies had provided a facility that complied with
the current FBT exemption.


Recommendations
3. Review the current structure for FBT exemption, to make it available for all
   child care costs
All child care, no matter the type or where provided, should be FBT-exempt.
Currently FBT exemptions are only available to employers that provide on-site child
care centres. Small businesses can clearly not access such exemptions. Neither
can employees who prefer other child care arrangements, such as family day care or
nannies. Given that SME’s employ around 30% of the workforce, this change would
have a positive impact on over 3 million employees6.
Allowing all salary sacrificed child care services to be FBT-exempt will also help
achieve one of the critical policy goals needed to maintain Australia’s growth rate –
increased workforce participation. Unlike the current means tested systems, an FBT-
exemption for all child care, will act to encourage increased participation because the
tax benefits increase the more child care is purchased. In other words, returning to
work parents will be rewarded for working longer hours, not penalised by high
marginal tax rates via the Child Care Benefit.
This increased workforce participation has an additional benefit for the government in
the form of increased income tax revenue. This additional tax revenue can be used
to offset the cost of the FBT exemption.
The FBT exemption approach also solves the problem of high marginal tax rates
since it is not means tested, so all employees face their marginal tax rate rather than
artificially inflated ones such as those created by the Child Care Benefit system.
This approach recognises the many different types of child care available and the
choices parents have, rather than favouring one option of long day care.
The final benefit of this approach is that it makes child care more affordable for all
working families. The current experience has been that as soon as the Child Care
Benefit increases, child care fees go up by the same amount, parents never see the
benefit and it therefore has no impact on their return-to-work decisions. An FBT-
exemption would act to lower the cost of child care to families and see the benefit of
that lower cost returned to families, not child care centre owners.
Ensuring the benefits are passed on to parents and not child care centre owners
could be further strengthened by exploring the possibility of a system of standard
fees, similar to Medicare. The FBT-exempt benefit would be paid on the standard fee
and parents would pay the full gap. The system would need to be supported by a
realistic standard fee that was reviewed annually.
Expanding the FBT exemption would be partially funded by the current funds directed
at the Child Care Benefit and Child Care Tax Rebate. The removal of means testing
and caps means these funds would not be sufficient to fully cover the FBT change.



6
    ABS publications 6202.0 and 1321.0


Federal Budget Submission 2008                                                    11
NSW Business Chamber


However, the government could expect to see an increase in income tax receipts as
more people returned to work, or increased their hours, due to more affordable child
care. This may also partially offset the cost of the FBT exemption. Modelling by
Econtech suggests a full FBT exemption for child care would cost around $137
million per year.


4. Establish a business advice program to assist business, in particular small
   businesses, better understand the tax arrangements around child care
   salary sacrificing possibilities.
Small business owners increasingly understand the importance of offering family-
friendly work policies to attract and retain staff. However, many businesses do not
know where to start. A key part of such a program would be to explain how the FBT
system works for salary-sacrificed child care. An advice line or web-based service
that provides practical support is critical if small business is to compete with
corporate businesses for a reducing pool of potential employees.
This service could be delivered through the ATO or other business tax advice
sources such as accountants and business associations.




Concluding Comments
Increasing workforce participation is one of the major challenges facing the
Australian economy in the future. The NSW Business Chamber recognises the
business community has an important role to play in lifting participation through
offering flexible workplace opportunities. The Australian government, through the tax
and welfare system, can also have a significant impact on work participation
decisions.


The NSW Business Chamber recommends the Australian Government:


    1. undertake a review of the current Family Tax Benefits structure, including
       biases within the family payment system and the impact this may have on
       workforce participation

    2. explore the workability of a combination of policy options to lower effective
       marginal tax rates and encourage workforce participation

    3. review the current structure for FBT exemptions to make it available for all
       child care costs

    4. establish a business advice program to assist business, particularly small
       businesses, better understand the tax arrangements around child care salary
       sacrificing possibilities.




Federal Budget Submission 2008                                                  12

								
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