Public 2014 No 28
Issued
2014

Taxation (Parental Tax Credit) Act 2014

Key features and analysis of the Taxation (Parental Tax Credit) Act 2014.

Sections MD 1, MD 2, MD 11 to MD 13 and MD 16 of the Income Tax Act 2007

As part of a package of financial support for families with newborns, Budget 2014 increased the amount of the parental tax credit to $220 per week and extended the payment period to 10 weeks. The abatement formula was also changed to better target the parental tax credit so that it is abated against each dollar of family income earned, above the annual threshold, over the entire year.

Key features

  • The maximum amount of the parental tax credit has been increased from $150 a week to $220 a week, for babies born on or after 1 April 2015.
  • The payment period for the parental tax credit has been extended from eight weeks to 10 weeks.
  • The effective rate at which the parental tax credit is abated will increase to 21.25 cents for each additional dollar of family income over the annual threshold (currently $36,350). This better targets the parental tax credit payments to lower and middle income families.

Application date

These changes apply to parental tax credit payments made in respect of babies born on or after 1 April 2015.

Detailed analysis

Increase in amount and payment period

The parental tax credit is a special payment made as part of the Working for Families (WFF) scheme, on the birth of a newborn baby. To be eligible for the parental tax credit, families must not be entitled to income-tested benefits, certain pensions or a student allowance. Families who receive paid parental leave (PPL) payments cannot claim the parental tax credit as well.

Section MD 12 increases the maximum amount of the parental tax credit from $1,200 to $2,200 for each dependent child born on or after 1 April 2015.

Section MD 11 increases the period for which the parental tax credit is payable (the "parental entitlement period"), from the first eight weeks (56 days) following the birth of the child, to the first 10 weeks (70 days) following birth.

The maximum amount of the parental tax credit payment is reduced, on a pro-rata basis, for the number of days within the parental entitlement period for which the family does not satisfy the qualifying criteria.

The parental tax credit can be paid out in two ways:

  • As a lump sum payment, included within the end-of-year assessment for WFF tax credits.
  • In weekly or fortnightly instalments. Section MD 11(6) has been amended, so that instalment payments are now paid over the 10 weeks following the date on which the application for the parental tax credit is made.

Changes to the parental tax credit abatement formula

A family's WFF tax credits for a year are apportioned into various "entitlement periods". An entitlement period is an unbroken period within a tax year in which the following criteria are met:

  • The applicant is the principal caregiver.
  • As principal caregiver, the person must meet the qualifying criteria on each day of the entitlement period.
  • There is no change in the principal caregiver's marital, civil union or de-facto relationship status.
  • The child/children remain "dependent".
  • The composition of the family's WFF tax credits does not change.

The birth of a newborn, which brings an entitlement to the parental tax credit, will always create a separate entitlement period during the year.

Abatement rules

The parental tax credit, the family tax credit and the in-work tax credit are currently abated at 21.25 cents in the dollar for every dollar by which the person's family scheme income exceeds the abatement threshold (currently $36,350).

The abatement calculation starts by determining the "credit abatement amount" for the full year. This credit abatement amount is then apportioned into the relevant tax credit entitlement periods within the year.

The WFF tax credit amounts for each entitlement period are reduced, in turn, by the amount of the family credit abatement apportioned to that entitlement period; the family tax credit is abated first, then the in-work tax credit and finally the parental tax credit.

Under the previous rules, the parental tax credit was abated against income arising during the 8-week parental entitlement period only. New section MD 2(3) introduces a new abatement formula for the parental tax credit, so that the credit abatement amount that is applied to the parental tax credit is calculated over the full year's income.

The new formula operates by "scaling up" the amount of the credit abatement in respect of the parental tax credit. It does this by taking the credit abatement amount for the entitlement period (the "period abatement amount") and subtracting the amount of the credit used to abate the family tax credit and the in-work tax credit for that entitlement period ("amounts used"). The resulting credit amount is then multiplied by 365 and divided by the number of days in the parental entitlement period that fall within the abatement period.

Example 1: Parental tax credit abatement formula

Nikki and Danny have one child aged 4 and a new baby born on 1 April 2015. Danny works as an electrician earning $95,000.

Their family tax credit entitlement is $8,173, their in-work tax credit entitlement is $3,120 and they are also eligible for a parental tax credit of $2,200, before abatement, for the year to 31 March 2016.

Family scheme income $95,000
Less abatement threshold ($36,350)
Abatement rate *21.25%
Full year abatement $12,463.13

Parental entitlement period = 2 April 2015 - 10 June 2015 (70 days/10 weeks)

Family credit abatement for entitlement period

= $12,463.13 x 70 ÷ 365
= $2,390.19

Family tax credit

($8,173 x 70 ÷ 365) = $1,567.42
Less abatement ($2,390.19)
  –$822.77

In-work tax credit

($3,120 x 10 ÷ 52) = $600.00
Less remaining abatement ($822.77)
  –$222.77

Before the parental tax credit amount is abated, the remaining credit abatement is scaled up, using the new formula at section MD 2(3):

Scaled up credit abatement for parental tax credit
= (period abatement amount - amount used) x (365 ÷ entitlement days)
= ($2,390.19 - $1,567.42 - $600.00) x (365 ÷ 70)
= $1,161.59

PTC amount $2,200.00
Less scaled up remaining credit abatement ($1,161.59)
PTC payable $1,038.41