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Taxation Laws Amendment (Baby Bonus) Bill 2002

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2002

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Taxation Laws Amendment (Baby Bonus) Bill 2002

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello, MP)

 



T able of contents

Glossary                                                                                             1

General outline and financial impact.............................................. 3

Chapter 1      An overview of the Baby Bonus............................... 5

Chapter 2      Eligibility for the Baby Bonus.................................... 9

Chapter 3      Entitlement to the Baby Bonus............................... 23

Chapter 4      Claiming and payment of the Baby Bonus........... 35

Chapter 5      Consequential amendments.................................. 43

Index                                                                                                 45

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ATO

Australian Taxation Office

Commissioner

Commissioner of Taxation

HECS

Higher Education Contribution Scheme

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

 



This bill amends the ITAA 1997 and the ITAA 1936 to implement the Government’s election commitment to introduce the First Child Tax Refund (Baby Bonus) in recognition of the loss of income that generally follows the arrival of a family’s first child. This measure has effect from 1 July 2001 and applies to assessments for the 2001-2002 income year and later income years. As a transitional measure, the Baby Bonus is also available to families who already have children, for the arrival of their first subsequent child on or after 1 July 2001.

The main elements of the Baby Bonus are:

·       it is available to parents following the birth, adoption or otherwise obtaining of legal responsibility for a child on or after 1 July 2001;

·       it is a refundable tax offset of up to $2,500 per annum until the child turns 5 years of age;

·       there is a minimum entitlement of $500 per annum for low income earners (those with a taxable income of $25,000 or less in the claim year) until the child turns 5 years of age;

·       a person may choose to transfer their entitlement to the Baby Bonus to their spouse;

·       a person is able to make a claim for the Baby Bonus as part of their tax return process; and

·       a person who is not required to lodge income tax returns will be able to claim the Baby Bonus by lodging a claim form with the ATO.

Date of effect :  The Baby Bonus will apply to assessments for income years commencing after 30 June 2001.

Proposal announced :  The proposal was announced in Treasurer’s Press Release No. 89 of 28 October 2001.

Financial impact :  The financial impact of the Baby Bonus is set out in the following table:

2002-2003

2003-2004

2004-2005

2005-2006

-$85m

-$250m

-$390m

-$510m



C hapter 1  

An overview of the Baby Bonus

Outline of chapter

1.1         This chapter provides a general overview of the Baby Bonus. It briefly explains each component of the Baby Bonus and refers readers to the relevant chapters for a more detailed explanation of the rules. Diagram 1.1 shows how the Baby Bonus rules relate to each other.

Diagram 1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

No

 
 

 

 

 

 

 

 



Yes

 




 

 

 

 

 

 

 

 



Context of reform

1.2         The object of the Baby Bonus is to recognise the loss of income that generally follows the arrival of a family’s first child. The Treasurer, in his Press Release No. 89 of 28 October 2001, stated:

“One of the hardest times for families, financially, comes on the birth of a first child. Typically, a family loses one of its two incomes for a period of time as the primary carer (usually the mother) gives up, or reduces, her paid employment to care for her child.”

The Baby Bonus is designed to pay back to mothers the tax paid on their income (up to a limit) in the year prior to the birth of the child.

1.3         The measure applies to assessments for the 2001-2002 income year and later income years. As a transitional measure, the Baby Bonus is also available to families who already have children. The way in which the transitional measure is given effect is for the Baby Bonus to be available in respect of the first child born on or after 1 July 2001, whether or not it is the couple’s first child.

Summary of new law

1.4         The repayment of tax will occur over a maximum period of 5 years with a maximum entitlement of $2,500 per year. To ensure that low income earners (those with a taxable income of $25,000 or less in the claim year) and those who were not in the workforce also benefit from the measure, a minimum entitlement of $500 per year will be available. For the purposes of this explanatory memorandum the claim year is the year of income for which the claim relates.

1.5         The Baby Bonus is available to mothers who give birth on or after 1 July 2001 and to a person who adopts or otherwise obtains legal responsibility for a child on or after 1 July 2001.

1.6         A person may choose to transfer their entitlement to the Baby Bonus to their spouse.

1.7         Taxpayers will be able to make a claim for the Baby Bonus as part of their annual income tax return process. People who are not required to lodge tax returns will be able to claim the Baby Bonus by lodging a claim form with the ATO.

Detailed explanation of new law

Eligibility for the Baby Bonus - Chapter 2

1.8         The Baby Bonus is available to:

·       mothers who give birth to their first child on or after 1 July 2001;

·       a person who adopts their first child on or after 1 July 2001 and the child is under 5 years of age;

·       a person who otherwise obtains legal responsibility for their first child on or after 1 July 2001 and the child is under 5 years of age; or

·       a person to whom the entitlement to the Baby Bonus has been transferred.

Entitlement to the Baby Bonus - Chapter 3

1.9         The Baby Bonus is available to a person who has suffered a reduction in taxable income after gaining legal responsibility for a child on or after 1 July 2001.

1.10       The Baby Bonus entitlement is calculated by comparing a person’s taxable income in the base year (usually the year before gaining legal responsibility of the child) to the taxable income in the claim year.

1.11       Gross tax paid by a person in the base year is spread evenly over a maximum period of 5 years. This annual amount, which cannot exceed $2,500, is the maximum Baby Bonus available until the child turns 5 years of age.

1.12       A minimum entitlement of $500 is available to people with taxable income of $25,000 or less.

Claiming and payment of the Baby Bonus - Chapter 4

1.13       The Baby Bonus is available as a refundable tax offset.

1.14       A person may make a claim for the Baby Bonus as part of their annual income tax return process.

1.15       A person can only make one claim for the Baby Bonus each year.

1.16       A person may choose to transfer, on a yearly basis, their entitlement to claim the Baby Bonus to their spouse.

1.17       The Baby Bonus will be administered by the ATO and will form part of a person’s annual income tax assessment notice. This means that it may increase a person’s tax refund or reduce a person’s tax debt.

1.18       The Baby Bonus will be applied (where applicable) to reduce a person’s:

·       tax debts;

·       Family Tax Benefit debts;

·       Child Support Agency debts; and

·       other tax related Commonwealth debts.

1.19       People who are not required to lodge income tax returns will receive their entitlement to the Baby Bonus from the ATO by completing a separate claim form. This will effectively create a nil income tax assessment with the Baby Bonus as a refundable tax offset. An entitlement claimed by lodging a separate claim form may still be applied against other tax related debts.



C hapter

Eligibility for the Baby Bonus

Outline of chapter

2.1         This chapter explains the eligibility rules for the Baby Bonus. In particular it explains: 

·       who is eligible for the Baby Bonus;

·       what are the eligibility rules for the Baby Bonus; and

·       transfer of the Baby Bonus.

Context of reform

2.2         The eligibility rules provide that the Baby Bonus is available to a person in recognition of a fall in income following the arrival of their first child on or after 1 July 2001.

Summary of new law

2.3         To be eligible for the Baby Bonus for a particular period a person is required to:

·       have a child on or after 1 July 2001;

·       continue to have legal responsibility for, and care of, that child; and

·       meet certain residency requirements.

2.4         A person who meets the eligibility criteria has a primary entitlement to the Baby Bonus. For the purposes of this explanatory memorandum that person will be referred to as the ‘primary person’.

2.5         Generally, the Baby Bonus is available to the natural mother. However, where the natural mother is not eligible, the natural father or adoptive parent may be eligible.

2.6                   The Baby Bonus is available to the primary person until the child turns 5 years of age. There are special rules to ensure that if a child dies before the age of 5, the primary person can still be eligible in respect of the next child.

2.7         The amount of the Baby Bonus is usually based on a primary person’s gross income tax liability in the year before the person became legally responsible for the child. The amount can be adjusted as a result of a comparison between the person’s taxable income in that year and the person’s taxable income in the year for which they are making a claim for the Baby Bonus. For low income earners ($25,000 or less in the claim year) a minimum amount is generally available. [Schedule 1, item 2, section 61-350]

2.8         The primary person may choose to transfer their entitlement to the Baby Bonus to their spouse. The decision to transfer remains with the primary person each year. [Schedule 1, item 2, section 61-350]

Detailed explanation of new law

Who is eligible for the Baby Bonus?

2.9         A person will be eligible for the Baby Bonus if they have legal responsibility for, and care of, a child. This person may be:

·       the child’s parent by birth;

·       the child’s adoptive parent; or

·       a person who otherwise obtains legal responsibility for the child, such as through an order issued by the Family Court.

What are the eligibility rules?

2.10       A primary person is eligible to claim the Baby Bonus for a time in the income year for a child if they satisfy all of the following eligibility rules:

·       Rule 1 - the person had a ‘child event’;

·       Rule 2 - the child is a ‘first child’ of the person;

·       Rule 3 - the child was less than 5 years old throughout the period of entitlement;

·       Rule 4 - the person was legally responsible for the child;

·       Rule 5 - the child was in the person’s care;

·       Rule 6 - the person was an Australian resident throughout the period of entitlement;

·       Rule 7 - no other person has legal responsibility and care of the child and has or had primary entitlement for another child; and

·       Rule 8 - the ‘selection rules’ select the person to have the primary entitlement to the Baby Bonus.

[Schedule 1, item 2, section 61-355]

Rule 1 - a child event

2.11       A child event needs to occur before a person can become eligible for the Baby Bonus. There are 3 different events that lead to a child event - the birth of a child, the adoption of a child and where a person otherwise obtains legal responsibility of a child.

 

2.12 A person has a child event at a particular time ( event time ) if:

·       the person becomes legally responsible for a child at the event time;

·       the event time is on or after 1 July 2001;

·       the person is an Australian resident at the event time;

·       the person has not previously been legally responsible for the child before 1 July 2001; and

·       there is no other person who is also legally responsible for the child at the event time and who was also legally responsible for the child at a time before 1 July 2001.

[Schedule 1, item 2, section 61-360 and item 5]

2.13       All 5 of the above criteria need to be met to have a child event.

Legal responsibility

2.14       A person has legal responsibility for a child at an event time, if that person is legally responsible for the day-to-day care, welfare and development of the child. Giving birth is generally an example of becoming legally responsible for a child. [Schedule 1, item 6]

Australian resident

2.15       The term Australian resident takes on the same meaning as that under subsection 6(1) of the ITAA 1936.

Example 2.1

Sue and Colin are Australian residents who have their first child Isabella on 1 December 2001. Isabella is the first child of both Sue and Colin.

Both Sue and Colin have a child event in respect of Isabella as:

·          they became legally responsible for Isabella at the time of birth;

·          the event time (the date of Isabella’s birth) was on or after 1 July 2001;

·          they are Australian residents at the event time (time of birth);

·          they were not previously legally responsible for Isabella; and

·          there was no other person who was legally responsible for Isabella at both the time of her birth and before 1 July 2001.

Example 2.2

Sue and Colin are Australian residents who marry on 20 October 2002 and have their first child Isabella on 1 December 2003. Isabella is the first child of Sue, but Colin has another child, Amy, from a previous marriage. Amy was born on 3 July 2001.

Both Sue and Colin still have a child event in respect of Isabella as:

·          they became legally responsible for Isabella at the time of birth;

·          the event time (the date of Isabella’s birth) was on or after 1 July 2001;

·          they are Australian residents at the event time;

·          they were not previously responsible for Isabella before 1 July 2001; and

·          there was no other person who was legally responsible for Isabella at both the time of her birth and before 1 July 2001.

Colin still has a child event in respect of Isabella, even though he has had an earlier child.

2.16       Although a child event has to be on or after 1 July 2001, it is possible to be eligible in respect of a child born before this date. For example, a person can adopt a child born before 1 July 2001 and still become eligible for the Baby Bonus as long as the child is under 5 years of age. This is because the event time (adoption) occurs on or after 1 July 2001. [Schedule 1, item 2, section 61-360]

Example 2.3

Kasey adopts Brett on 1 December 2001. Brett was born on 5 June 1998. Kasey has a child event for Brett. This is because the child event (adoption) happened on or after 1 July 2001 and the child is under 5 years of age and all the other eligibility rules are satisfied.

Example 2.4

Mark and Jenny are Australian residents who marry on 20 October 2002 and have their first child Sarah on 1 December 2003. Sarah is the first child of Jenny, but Mark has another child, Jill, from a previous marriage. Jill was born on 3 July 2000. Jenny adopts Jill on 31 March 2004, so that both she and Mark are legally responsible for Jill.

Both Jenny and Mark still have a child event in respect of Sarah and Jenny would be entitled to the Baby Bonus in respect of Sarah.

Mark does not have a child event in respect of Jill as he was legally responsible for Jill before 1 July 2001.

Jenny determines if she has had a child event in respect of Jill as follows:

·          she became legally responsible for Jill at the event time (time of adoption);

·          the event time was on or after 1 July 2001;

·          she was an Australian resident at the event time;

·          she was not previously responsible for Jill before 1 July 2001; and

·          there was a person (Mark) who was legally responsible for Jill at both the time of adoption and before 1 July 2001.

Jenny does not have a child event in respect of Jill, as Mark was legally responsible for Jill at the time of adoption and before 1 July 2001.

2.17        The final test for a ‘child event’ is designed to prevent a person claiming the Baby Bonus when they obtain legal responsibility for a child where another person is also legally responsible for the child at that time and before 1 July 2001.

Example 2.5

Paul and Louise are married and are the natural parents of Linda who was born on 6 May 1999. Louise re-marries and the stepfather adopts Linda. The stepfather will not satisfy the final test for a child event as Louise (the natural mother) is also legally responsible for Linda at the time of the adoption and she was also legally responsible for Linda before 1 July 2001.

2.18       A stillborn child born on or after 1 July 2001 does not constitute a child event.

Rule 2 - eligible for first child only

2.19        Where a primary person has more than one child event, they can only be a primary person in respect of the earliest occurring child event. This rule applies irrespective of the period for which the person had primary entitlement to the Baby Bonus for the earliest occurring child event. [Schedule 1, item 2, section 61-365]

2.20       This rule also means that there can only be one claim per primary person in any one income year.

Example 2.6

Peng and her husband have a baby boy, Lo, who was born on 2 March 2003. Peng was eligible for and has been claiming the Baby Bonus each year. The couple adopt a second child, Mei-Ling, in January 2005.  Mei-Ling was born on 18 October 2002 (before Peng gave birth to Lo).

As Peng gave birth to Lo before adopting Mei-Leng, the birth of Lo is her earliest occurring child event. Even though Mei-Ling was born before Lo, Peng is eligible for the Baby Bonus in respect of Lo only.

Example 2.7

Sue and Colin are married, are Australian residents and have their first child Isabella on 1 December 2003. Isabella is the first child of Sue, but Colin has another child, Amy, from a previous marriage. Amy was born on 3 July 2001.

Both Sue and Colin have a child event in respect of Isabella. Colin still has a child event for Isabella, even though he had an earlier child, Amy.

The ‘first child only’ rule operates to determine the birth of Amy as Colin’s earliest occurring child event because Amy was born before Isabella. This means Colin cannot have primary entitlement to the Baby Bonus in respect of Isabella.

Rule 3 - child less than 5 years old

2.21       A primary person is only eligible to claim the Baby Bonus up to the day of the child’s 5th birthday. This rule restricts a person’s eligibility for the Baby Bonus to a child under the age of 5 years. [Schedule 1, item 2, subparagraph 61-355(3)(c)(i)]

2.22       If a child turns 5 during an income year, then primary entitlement to the Baby Bonus will end when the child turns 5. 

Example 2.8

Alenka and Phillip have a child born on 31 October 2002. In the income year in which the child turns 5, the total of the entitlement days will begin on 1 July and end on 30 October.

2.23       Although the total number of entitlement days will generally end on the day before the child’s 5th birthday, there are circumstances which will extend the claim period to beyond the 5 th  birthday (see paragraph 2.35 - rules concerning death of the child).

Rule 4 - legal responsibility

2.24               Legal responsibility can arise in various ways - through birth, adoption or other Court orders (e.g. parenting orders).

Rule 5 - child in the primary person’s care

2.25       For a child to be in a person’s care, it is not a requirement for the child to be living with the person on a daily basis. In other words, a mother continues to have the ‘care’ of the child for periods when she and the child are apart. This applies even if the mother and child are temporarily not living in the same house, such as when the child stays with a relative for a holiday. 

2.26       A parent who deserts a child would not be considered to be caring for the child as they have ceased to be involved in the child’s daily life. 

Rule 6 - residency

2.27       A primary person must be a resident of Australia for taxation purposes:

·       at the event time; and

·       throughout the period of entitlement.

Example 2.9

Francesca, Tony and their baby, Gino, became residents of Australia on 20 November 2002. Gino was born on 7 August 2002 before they left Italy.

Francesca is not eligible to claim the Baby Bonus in respect of Gino as she was not a resident at the event time (the time of Gino’s birth).

Francesca and Tony have a second child, Tina, who is born in Sydney on 18 October 2003. Francesca is eligible for the Baby Bonus for Tina as she meets the eligibility criteria.

Tina is Francesca’s first child born since Francesca became an Australian resident and Francesca was a resident throughout the period of entitlement (2003-2004 income year).

Rule 7 - another carer with entitlement for another child

2.28       A person cannot be the primary person (i.e. have primary entitlement to the Baby Bonus) for a child for a particular period if:

·       another person has both legal responsibility for, and care of, that child for that particular period; and

·       the other person has already been a primary person (i.e. the person has already had a primary entitlement to the Baby Bonus) for another child.

[Schedule 1, item 2, section 61-370]

2.29       The practical effect of this rule is that where a couple have a baby neither parent is entitled to the Baby Bonus if one of those parents has previously been, or currently is, entitled to the Baby Bonus for another child.

Example 2.10

Bob and Wendy are Australian residents who marry on 20 October 2004 and have their first child Lisa on 1 December 2005. Lisa is Bob’s first child, but Wendy already has another child, Lofty, from a previous relationship. Lofty was born on 3 July 2002.

Bob adopts Lofty on 31 March 2006, so that now both Wendy and Bob are legally responsible for Lofty.

Wendy has a ‘child event’ for Lisa even though she has had an earlier child. However, Wendy does not have ‘primary entitlement’ for Lisa because she has already had an earlier occurring child event in respect of Lofty (see paragraph 2.20 which explains the ‘first child only’ rule).

Bob has a ‘child event’ in respect of Lisa. However, Bob does not meet all the eligibility rules and cannot be the primary person for Lisa because:

·          Wendy has both legal responsibility for, and care of, Lisa for the particular period; and

·          Wendy has already had a ‘primary entitlement’ to the Baby Bonus for Lofty.

Therefore, both Wendy and Bob have no primary entitlement for Lisa.

Rule 8 - the selection rules

2.30       There are situations where more than one person meet eligibility rules 1 through 7 inclusive for a particular period. In such cases the selection rules (eligibility rule 8) determine who has primary entitlement to the Baby Bonus.

2.31       The following selection rules identify (in the following order) which person has primary entitlement to the Baby Bonus:

·       the natural mother is the primary person [Schedule 1, item 2, paragraph 61-375(3)(a)] ;

·       the adoptive mother is the primary person [Schedule 1, item 2, paragraph 61-375(3)(b)] ;

·       the woman is the primary person [Schedule 1, item 2, paragraph 61-375(3)(c)] ;

·       the natural father is the primary person [Schedule 1, item 2, paragraph 61-375(3)(d)] ;

·       the adoptive father is the primary person [Schedule 1, item 2, paragraph 61-375(3)(e)] ;

·       in any other case - the primary person will be determined by the Commissioner having regard to any agreement between the competing persons and any other matters relevant to identify the primary person [Schedule 1, item 2, subparagraphs 61-375(3)(f)(i) and (ii)] .

2.32       Table 2.1 illustrates who has primary entitlement to the Baby Bonus when there is more than one person who has legal responsibility for, and care of, a child.

Table 2.1:  Selecting the primary person

 

natural mother

natural father

de-facto partner (female)

de-facto partner (male)

natural mother

n/a

natural mother

new paragraph 61-375(3)(a)

natural mother

new paragraph 61-375(3)(a)

natural mother

new paragraph 61-375(3)(a)

adoptive mother

natural mother

new paragraph 61-375(3)(a)

adoptive mother

new paragraph 61-375(3)(b)

adoptive mother

new paragraph 61-375(3)(b)

adoptive mother

new paragraph 61-375(3)(b)

natural father

natural mother

new paragraph 61-375(3)(a)

n/a

de-facto partner

(female)

new paragraph 61-375(3)(c)

natural father

new paragraph 61-375(3)(d)

adoptive father

natural mother

new paragraph 61-375(3)(a)

natural father

new paragraph 61-375(3)(d)

de-facto

partner

(female)

new paragraph 61-375(3)(c)

adoptive

father

new paragraph

61-375(3)(e)

Eligibility and the total number of entitlement days

2.33       The total number of entitlement days is the period in an income year for which a primary person satisfies the eligibility criteria for the Baby Bonus. The number of entitlement days is needed to calculate the amount of the Baby Bonus. The total number of entitlement days may be for less than an income year.

2.34       For example, the total number of entitlement days for the 1st and 5th years may be less than 365 when the base year elected is the year prior to the birth of the child. Where a child is born halfway through the year the total number of entitlement days will be 182 days. The total of the entitlement days may also be less than 365 where there is a change in legal responsibility.

Example 2.11

John and Sandra have a baby, Luke, who was born on 13 April 2002. After a period of separation, sole legal responsibility for Luke is awarded by the Family Court to John from 10 May 2005. Prior to this date Sandra had been eligible to claim the Baby Bonus. Sandra is eligible for part of the 2004-2005 income year, before she lost legal responsibility of her son. From 10 May 2005, John becomes eligible for the Baby Bonus.

Example 2.12

Jessie was born on 10 July 2003. She was placed for adoption by her natural mother on 2 November 2003. Jessie was adopted by Tania and Ross on 15 March 2004. The natural mother is eligible for the Baby Bonus for the period that she cared for Jessie that is, from birth date (10 July 2003) to the date that she placed Jessie for adoption (2 November 2003). Following Jessie’s adoption, Tania becomes eligible for the Baby Bonus for part of the 2003-2004 income year, that is, from 15 March 2004.

Special extension of eligibility where a child dies before the age of 5

2.35       If a child dies before the age of 5, the year of death will be the last year that a primary person will be eligible for the Baby Bonus in respect of that child. The person’s primary entitlement for the child will be extended from the date of death to the end of the income year. [Schedule 1, item 2, subsection 61-380(2)]

Eligibility for a subsequent child where the first child dies before the age of 5

2.36       Where a primary person already has another child (who was born on or after 1 July 2001) at the time of the first child’s death (before the age of 5), the primary person is eligible for the Baby Bonus in respect of the younger child until that younger child turns 5 years old. This means that a primary person may be eligible for the Baby Bonus for more than 5 years in cases where there has been the death of a child before the child turned 5. [Schedule 1, item 2, subsection 61-380(3)]

Example 2.13

Anne and Brian have a son, Tom, who was born on 11 August 2002, a daughter Sally who was born on 15 October 2004 and another son Alan who was born on 12 February 2006. Tom dies on 30 May 2006.

Anne is the primary person and is eligible to claim for Tom for the full year in her 2005-2006 income tax return. She is then eligible to claim for Sally in her 2006-2007 and later income tax returns, until Sally turns 5.

2.37       Where a primary person did not have another child (who was born on or after 1 July 2001) when the first child died (before the age of 5), they will be eligible for the full 5 year Baby Bonus upon the arrival of their next child. [Schedule 1, item 2, subsection 61-380(3)]

Example 2.14

Olivia and Owen have a daughter, Ellen, who was born on 5 November 2003. At the time of Ellen’s death on 8 February 2004, Olivia and Owen have no other children.

Olivia and Owen have another child, Matthew, on 11 December 2007.

Olivia is the primary person, and is able to claim for Ellen in her 2003-2004 return for the period 5 November 2003 to 30 June 2004.

Olivia will later be eligible to claim for Matthew until he turns 5 years old.

Transfer of the Baby Bonus

To whom can the Baby Bonus be transferred?

2.38       A primary person may transfer their entitlement for a particular income year to their spouse. The spouse will then become the transferee for that year. The spouse of the primary person includes a person, who although not legally married to the primary person lives with the primary person on a genuine domestic basis as the primary person’s husband or wife. [Schedule 1, item 2, section 61-385]

Restrictions on transfer

2.39       For a primary person to transfer their entitlement:

·       the transferee must have been the spouse of the primary person at all times when the primary person had a primary entitlement for the child for the income year;

·       the transferee must not have a primary entitlement for any child for any time during the income year; and

·       the primary person must not have already made a claim for that income year.

[Schedule 1, item 2, section 61-385]

2.40       A primary person is taken to have made a claim at the time of lodging their claim form for the relevant income year.

How can a transfer be made?

2.41       At the end of an income year a primary person may elect to transfer their entitlement to the Baby Bonus to their spouse.  The transfer must be made in the approved form.

2.42       The transfer is made by both the primary person and their spouse signing a document specifying the following:

·       the name of the primary person and their spouse;

·       the name of the child and the date of the child event;

·       the income year to which the transfer relates; and

·       the total number of days the primary person was eligible for the Baby Bonus.

[Schedule 1, item 2, section 61-385]

2.43       Consistent with the self-assessment system these elections will not need to be sent to the Commissioner, however, they will need to be retained for verification purposes.

2.44       Where a primary person elects to transfer their entitlement to the Baby Bonus to their spouse, the primary person ceases to be entitled to the Baby Bonus for that income year. [Schedule 1, item 2, section 61-395]

2.45       Where the primary person makes a transfer, their spouse becomes entitled to the Baby Bonus for that income year. [Schedule 1, item 2, section 61-400]

2.46       A transfer for a given year is irrevocable once made. [Schedule 1, item 2, section 61-390]

Example 2.15

Sarina Smith is a resident of Australia and gives birth to her first child William on 25 March 2002.

Sarina’s partner, Chip Jones, lives in the USA and will be arriving in Australia on 1 July 2002. Sarina stays at home to look after baby William and claims the Baby Bonus for the first 3 years. She returns to the workforce on 1 February 2005 and Chip cares for William from February 2005 onwards.

Sarina becomes eligible for the Baby Bonus because she satisfies all the eligibility criteria.

Sarina chooses not to transfer the Baby Bonus to Chip for the first 3 years while she is at home caring for the baby.

Sarina returns to work in the 2004-2005 income year and transfers her primary entitlement to the Baby Bonus to Chip (the transferee) for that income year. There are no restrictions on Sarina’s ability to transfer the entitlement to the Baby Bonus to Chip because:

·          Chip is Sarina’s spouse throughout the whole 2004-2005 income year that Sarina had primary entitlement for William (even though Chip is not legally married to Sarina, Chip lives with Sarina on a daily basis as her husband); and

·          Sarina has not already made a claim for the 2004-2005 income year.

Sarina and Chip complete an election that would look like the following:

Primary person:                                                           Sarina Smith

I agree that my Baby Bonus entitlement for the 2004-2005 income

year be transferred to my spouse.

Spouse’s name:                                                            Chip Jones

Child’s name:                                                  William Jones

Date of child event:                                         25 March 2002

Total number of days eligible:                         365

Spouse’s signature:                                          …………………..

Primary person’s signature:                              …………………..

 



C hapter

Entitlement to the Baby Bonus

Outline of chapter

3.1         This chapter sets out the method for calculating the amount of a claimant’s Baby Bonus. In particular, it explains:

·       the formula used to calculate the amount of the Baby Bonus; and

·       special rules that apply to people whose taxable income is $25,000 or less.

Summary of new law

3.2         The Baby Bonus is available to a claimant, who may either be a primary person (as explained in Chapter 2) or the spouse of a primary person.

3.3         The maximum amount of the Baby Bonus that a person can claim in a year is one-fifth of the basic income tax liability in the base year.

3.4         The base year for a primary person may be either the income year before, or the income year in which, the primary person obtained legal responsibility for, and care of, the child. For a spouse, the base year will be the income year prior to transfer.

3.5         The amount of the Baby Bonus available to a person each year is limited to a maximum of $2,500.

3.6         The Baby Bonus entitlement is calculated by comparing the taxable income of a person in the base year to the taxable income in the claim year. If a person has any taxable income in the claim year, the Baby Bonus will be reduced by the proportion of claim year taxable income to base year taxable income.

3.7         Where a person has legal responsibility for, and care of, a child for only part of the year, that person’s entitlement is pro-rated accordingly.

3.8         For claimants whose taxable income is $25,000 or less there is a minimum entitlement of $500.

3.9         Tables 3.1 and 3.2 illustrate how the amount of the Baby Bonus is affected by the levels of taxable income in the base year and claim year. Each table assumes that the person is legally responsible and cares for the child for the full year.

Table 3.1:  Amount of the Baby Bonus where there is no taxable income in the claim year

Base year taxable income

Taxable income of the claim year

Annual entitlement

$5,000

0

$500

$10,000

0

$500

$15,000

0

$500

$20,000

0

$500

$25,000

0

$776

$30,000

 

0

$1,076

$35,000

0

$1,376

$40,000

0

$1,676

$45,000

0

$1,976

$50,000

0

$2,276

$55,000

0

$2,500

$60,000

0

$2,500



Table 3.2:  Amount of the Baby Bonus where the taxable income of the claim year is half of the taxable income in the base year

Base year taxable income

Taxable income of the claim year

Annual entitlement

$5,000

$2,500

$500

$10,000

$5,000

$500

$15,000

$7,500

$500

$20,000

$10,000

$500

$25,000

$12,500

$500

$30,000

 

$15,000

$538

$35,000

$17,500

$688

$40,000

$20,000

$838

$45,000

$22,500

$988

$50,000

$25,000

$1,138

$55,000

$27,500

$1,250

$60,000

$30,000

$1,250

Detailed explanation of new law

When is a person entitled to claim the Baby Bonus?

3.10       A person is entitled to claim the Baby Bonus when they have satisfied the eligibility requirements for a particular income year. [Schedule 1, item 2, subsection 61-355(1)]

3.11       A claimant may be a primary person, that is, someone who satisfies the eligibility rules. Alternatively, the claimant may be the spouse of the primary person where the primary person has elected to transfer their entitlement to the Baby Bonus to their spouse.

Base year

3.12       Generally a claimant’s base year will determine the claimant’s basic income tax liability and establishes the base (maximum) amount of the Baby Bonus to which the claimant may be entitled. However, for those with an income of $25,000 or less in the claim year they will be entitled to a minimum $500.

3.13       Different rules apply for determining the base year of a primary person and the base year of a spouse of the primary person.

Base year of a primary person

3.14       A primary person, who is an Australian resident at any time in the income year before the event year, has a choice as to whether the base year is the income year before, or the income year in which, the child event occurred. Where no election is made, the base year will be the income year before the income year in which the child event occurred. [Schedule 1, item 2, paragraph 61-430(1)(a)]

3.15       If a primary person was not an Australian resident in the year before the event year, their base year is the event year. In this circumstance there is no choice of base year. [Schedule 1, item 2, paragraph 61-430(1)(b)]

3.16       It is usually beneficial for the primary person to elect as the base year the income year which has the higher taxable income. This will provide a higher basic income tax liability, and therefore maximise their entitlement. The base year will generally be the income year before the event year, as there is usually a period of absence from the workforce in the event year which will reduce the primary person’s basic income tax liability for that year. 

3.17       In some cases it may be more beneficial for the primary person to choose the event year as the base year. This will occur where the child event happens towards the end of the income year, or where the primary person has a lower basic income tax liability in the income year before the event year.

Example 3.1

Patricia has her first child, Naomi, on 6 December 2002. Patricia is the primary person in respect of Naomi. Patricia has a taxable income of $35,000 in the 2001-2002 income year, which results in a basic income tax liability of $6,880. Patricia’s taxable income in the 2002-2003 income year is $28,000 which results in a basic income tax liability of $4,780. Patricia chooses the 2001-2002 income year as her base year, that is, the income year before the event year, as she has a higher basic income tax liability in that year.

Example 3.2

Acacia adopts her first child, Helen, on 25 June 2003, that is, in the 2002-2003 income year. Acacia is the primary person in respect of Helen. Acacia has a taxable income of $30,000 in the 2001-2002 income year and a taxable income of $35,000 in the 2002-2003 income year. Her basic income tax liability for these years is $5,380 and $6,880 respectively. Acacia chooses the 2002-2003 income year (the event year) as her base year, as she has a higher basic income tax liability in that year.  

Base year of spouse (transferee claimant)

3.18       A primary person may choose to transfer their entitlement to the Baby Bonus to their spouse, a transferee claimant. This is most likely to occur when, for example, the mother returns to work and the child’s father leaves the workforce to care for the child, resulting in a reduction in his taxable income.

3.19       Where a primary person transfers their entitlement to the Baby Bonus for a particular child to their spouse, the base year for the spouse is always the income year before the first year for which entitlement for that child was transferred. [Schedule 1, item 2, subsection 61-430(4)]   

3.20       A spouse cannot elect the income year of the transfer, or any other year, as an alternative base year.

3.21       Once the base year for a spouse has been determined it remains constant for the spouse in respect of that child. This means that a spouse’s base year cannot be changed in a later income year, regardless of the number of times entitlement is transferred to that spouse.

Example 3.3

Mei-Ling has a son, Yung Shen, on 23 July 2003, that is, in the 2003-2004 income year. She returns to work on 23 November 2003 and her husband, Chee Leong, stays at home to look after the baby.

Mei-Ling, being the primary person, elects 2002-2003 as her base year. After doing their calculations, Mei-Ling and Chee Leong decide that it would be more beneficial for Chee Leong to claim the Baby Bonus for the 2003-2004 income year. Mei-Ling transfers her entitlement to the Baby Bonus for that year to Chee Leong, her spouse.

The base year for Chee Leong is the income year before the first year for which entitlement was transferred for Yung Shen, that is, the 2002-2003 income year.

For the 2004-2005 income year, Mei-Ling stays home while Chee Leong returns to work. Mei-Ling does not transfer her entitlement for that year.

For the 2005-2006 income year, Mei-Ling returns to work, Chee Leong stays at home and Mei-Ling again transfers her entitlement to the Baby Bonus to Chee Leong. Chee Leong’s base year remains the same as his earlier year of claim, and is therefore the 2002-2003 income year.  

3.22       If, however, a primary person transfers their entitlement to the Baby Bonus for a particular child to a different spouse, there will be a new base year for the new spouse. The base year of the new spouse will be the income year before the income year in which the transfer to the new spouse occurred. As in the case of the original spouse, the base year for the new spouse will remain constant.

Example 3.4

Continuing on from Example 3.3, during the 2006-2007 income year the relationship between Mei-Ling and Chee Leong ceased, and Mei-Ling married Kim Fah.

Mei-Ling remained the primary person in respect of Yung Shen, and continued to work, while Kim Fah left the workforce to care for Yung Shen. Mei-Ling decided to transfer her entitlement to the Baby Bonus to Kim Fah, the new spouse, for the 2007-2008 income year. Mei-Ling could not transfer her entitlement to the Baby Bonus to Kim Fah for the 2006-2007 income year as Kim Fah was not her spouse for the entire period of entitlement.

Kim Fah’s base year is the 2006-2007 income year, the income year before the first year for which entitlement for Yung Shen was transferred to Kim Fah.

How to elect a base year

3.23       The election of a base year must be in writing by the primary person in an approved form. There is no requirement to lodge the election of the base year with the ATO, however, the primary person is required to keep the election with their taxation records. [Schedule 1, item 2, subsection 61-430(2)]

3.24       The election cannot be made after the primary person has lodged a claim. [Schedule 1, item 2, paragraph 61-430(3)(a)]

3.25       The election of a base year by the primary person has to be made before the primary person chooses to transfer their entitlement to the Baby Bonus for any income year to their spouse [Schedule 1, item 2 , paragraph 61-430(3)(b) ] . This restriction prevents a primary person electing to transfer in the event year, and then in a later year choosing the event year as the base year, thus ‘undoing’ the transfer.

3.26       The election of a base year is irrevocable. Once a primary person has elected a base year at the time of lodgment of the first claim, it cannot be changed in a later income year. [Schedule 1, item 2, subsection 61-430(2)]

Calculation of the Baby Bonus

Meaning of terms used in the calculation

Basic income tax liability

3.27       The basic income tax liability is the amount of income tax calculated on the taxable income after taking into account any ‘special provisions’ but before taking into account any offsets or adjustments. [Schedule 1, item 2, subsection 61-420(1)]

3.28       The income tax on taxable income is calculated using the applicable income tax rate or rates (contained in the Income Tax Rates Act 1986 ). The special provisions which apply to working out the basic income tax liability are those provisions listed in section 4-25 of the ITAA 1997 .

3.29       Liabilities such as the Medicare levy and HECS are not included for the purposes of calculating the Baby Bonus. Similarly, offsets and adjustments are not included for the purposes of calculating the Baby Bonus. If offsets or adjustments were taken into account, then the amount of the Baby Bonus would be reduced.

3.30       A primary producer, for example, calculates their basic income tax liability using both Schedule 7 of the Income Tax Rates Act 1986 and subsection 392-35(3) of the ITAA 1997 (which is a special provision for calculating basic income tax liability) . A primary producer is not, however, required to calculate their tax offset under Subdivision 392-C of the ITAA 1997 for the purposes of the Baby Bonus .

Taxable income

3.31       Taxable income is equal to assessable income less allowable deductions.

Base Amount

3.32       The base amount of the Baby Bonus to which a claimant is entitled in an income year is the lesser of:

·       one-fifth of the claimant’s basic income tax liability for the base year; and

·       $2,500.

[Schedule 1, item 2, paragraphs 61-420(1)(a) and (b)]  

Example 3.5

Nadia has her first child, Roman, on 25 June 2005, in the 2004-2005 income year. Nadia is the primary person in respect of Roman. Nadia had a taxable income of $55,000 for the 2003-2004 income year and a taxable income of $84,000 in the 2004-2005 income year. Nadia elects the 2004-2005 income year as her base year. The basic income tax liability on a taxable income of $84,000 is $26,860; 1/5th of this amount is $5,372. Since this amount is more than the maximum base amount of $2,500, the base amount to which Nadia is entitled is $2,500 per income year.

3.33       A claimant is entitled to the maximum amount of $2,500 where their taxable income in the base year is $52,666. Claimants whose taxable income in the base year exceeds $52,666 will still be entitled to a maximum base amount of $2,500 in any income year. 

Calculation of the tax offset (Baby Bonus)

3.34       A claimant’s Baby Bonus for an income year is the base amount adjusted for any amount of taxable income in the claim year. This determines the entitlement amount. The entitlement amount is then adjusted for any period during the claim year where the claimant is not eligible to claim the Baby Bonus. [Schedule 1, item 2, sections 61-415 and 61-420]

Formula



3.35       The Baby Bonus is calculated in accordance with the following formula:

 



3.36       The entitlement amount is the amount calculated using the following formula:



3.37       The formula for calculating the Baby Bonus can also be represented in amalgamated form:

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

·       Base amount is the base amount previously determined;

·       TIi is the taxable income of the claim year;

·       TIb is the taxable income of the base year; and

·       Total of the entitlement days  is the total number of days that a primary person was eligible for the Baby Bonus.

[Schedule 1, item 2, subsection 61-425(1)]

3.38       A claimant’s base amount will be reduced where the claimant earns taxable income in the claim year. The base amount is reduced by the proportion of taxable income in the claim year compared with the taxable income in the base year. For example, if a claimant returns to work and earns one-third of their base year taxable income in the claim year, the Baby Bonus will be reduced by one-third.

Example 3.6

Mary’s first child Belita was born on 1 April 2003, in the 2002-2003 income year. Mary is the primary person in respect of Belita. She elects her 2001-2002 income year to be her base year.

Mary’s base year taxable income of $40,000 gives her a basic income tax liability of $8,380 in the base year. Her base amount of the Baby Bonus is therefore $1,676 per income year (1/5th of $8,380). 

Mary can claim the Baby Bonus in her 2002-2003 income tax return. Her taxable income for the 2002-2003 income year is $30,000.

As Mary has taxable income in her claim year, her Baby Bonus will be less than the base amount. Additionally, as her daughter was born on 1 April she is only eligible to claim the Baby Bonus for 91 days in that year.

Using the formula, Mary’s entitlement is calculated as follows:

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

$1,676  ´   [1  -  (30,000/40,000)]  ´   (91/365)  =  $105

The amount of Mary’s Baby Bonus is $105.

Taxable income of $25,000 or less in the income year

3.39       Where a claimant’s taxable income is $25,000 or less in the claim year, the claimant has a minimum entitlement amount of $500. [Schedule 1, item 2, subsection 61-420(2)]

3.40       The minimum entitlement amount will apply regardless of whether the claimant lodges an income tax return for the income year.

Example 3.7

Phillipa has a son, Alex, on 23 April 2003, that is, in the 2002-2003 income year. She is the primary person in respect of Alex. Phillipa’s base year is the 2001-2002 income year. Her taxable income for the base year is $26,000, giving her a base amount of $836.

Phillipa claims the Baby Bonus in her 2002-2003 income tax return.

Phillipa returns to work and for the 2003-2004 income year her taxable income is $23,000.

Using the formula, Phillipa’s entitlement in the 2003-2004 income year is:

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

$836  ´   [1  -  (23,000/22,000)]  ´   (365/365)  =  0

However, as Phillipa’s taxable income is less than $25,000 in the 2003-2004 income year, Phillipa is entitled to the minimum entitlement amount of $500 for that year. 

3.41       The minimum entitlement amount will not limit a claimant’s Baby Bonus if the claimant is entitled to a greater amount using the formula.

Example 3.8

Lola’s daughter, Dolores, was born on 28 February, in the 2002-2003 income year. Lola is the primary person in  respect of Dolores.

Lola’s taxable income in the base year (2001-2002) was $24,000 and her basic income tax liability was $3,580. Her base amount is therefore $716 per income year (1/5 th of $3,580). Although Lola stays home to care for Dolores she continues to earn interest and dividend income, and in the 2003-2004 income year her taxable income is $4,000. As Lola is the primary person in respect of  Dolores for the full year, her total number of entitlement days is 365 days.

Using the formula, Lola’s base amount of $716 is reduced to $597.  This is calculated as follows :

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

$716  ´   [1  -  (4,000/24,000)]  ´   (365/365)

Lola is also entitled to the $500 minimum base amount, as her taxable income in the claim year was less than $25,000. As Lola’s Baby Bonus calculated using the formula is greater than $500, Lola is entitled to claim the greater amount of $597.

3.42       The Baby Bonus calculated using the formula will generally be higher than the minimum entitlement amount where the proportion of claim year taxable income compared with base year taxable income is low. Where the claim year taxable income is a higher proportion of the base year taxable income, the $500 minimum entitlement may provide a greater benefit than the formula amount.

No entitlement in a particular year

3.43       A claimant may not be entitled to claim the Baby Bonus in a particular income year because the taxable income of that year exceeds the base year taxable income. This does not preclude the claimant from entitlement in future income years.

Example 3.9

Jane has a son, Joseph, on 15 February 2006, that is, the 2005-2006 income year. Jane is the primary person in respect of Joseph.

Jane’s taxable income in the 2004-2005 income year is $30,000, and her taxable income in the 2005-2006 income year is $26,000. Jane chooses the 2004-2005 income year as her base year. Jane is entitled to claim the Baby Bonus for the 2005-2006 income year, as her taxable income is lower in that year than the base year.

Jane returns to work in August 2006 and her taxable income for the 2006-2007 income year is $35,000. Jane does not have any entitlement to the Baby Bonus in the 2006-2007 income year as her taxable income in the income year is higher than the base year and her taxable income exceeded $25,000 in that income year.

Jane resigns from her employment in August 2007, and her taxable income for the 2007-2008 income year is $10,000. Jane is entitled to claim the Baby Bonus for the 2007-2008 income year, even though she was not entitled to the Baby Bonus in the previous year.

Pro-rata of entitlement

Base year is the year before the child event

3.44       Where a claimant’s base year is the income year before the income year in which the child event happens, the first year a claim for the Baby Bonus can be made is the year of the child event. This will result in a pro-rating of the Baby Bonus entitlement in the year in which legal responsibility was obtained and in the year in which the child turns 5. [Schedule 1, item 2, subsection 61-425(2)]

3.45       The Baby Bonus will be pro-rated in the year in which legal responsibility was obtained as the claim can only be made for the period for which the claimant was eligible. The Baby Bonus will also be pro-rated in the year that the child turns 5, as eligibility to the Baby Bonus ceases when the child turns 5. The pro-rating in the year the child turns 5 will be the number of days from 1 July in the income year until the child turns 5. 

Example 3.10

Fiona gives birth to a son, Damian, on 15 January 2002, that is, the 2001-2002 income year. Fiona is the primary person in respect of Damian. Fiona has taxable income of $40,000 in the 2000-2001 income year, with a basic income tax liability of $8,380, and chooses that year (i.e. the year before the child event) as her base year. Her base amount is $1,676 per income year (1/5th of $8,380).

Fiona’s first year of claim is the year of Damian’s birth, that is, the 2001-2002 income year. Her base amount of $1,676 is pro-rated from Damian’s date of birth, on a daily basis. Therefore, Fiona receives 166/365 days entitlement, being $762 for the 2001-2002 income year. 

Assuming Fiona has no taxable income in the following income years, her entitlement would be $1,676 for the following 4 years (i.e. 2002-2003 to 2005-2006 income years), and the remaining 199 days entitlement of $913 in the 2006-2007 income year, the year in which Damian turns 5.

Base year is event year

3.46       Where a claimant’s base year is also the income year in which the child event occurs, the minimum entitlement of $500 will not apply for that year. The minimum entitlement will only occur where the base year is not the income year in which a claim is being made. [Schedule 1, item 2, subsection 61-420(2)]

3.47       If a claimant makes a claim in respect of an income year which is also the base year, the Baby Bonus will be nil. This is because as the base year and claim year are the same, the taxable income for both years are also the same. Therefore, where the base year is the event year, the first income year to claim the Baby Bonus is the income year following the base year.

3.48       In the year that the child turns 5, where the base year is the event year and no transfer of entitlement occurred in the event year, the total of the entitlement days will include the number of days in the base year for which a primary person was eligible for the bonus. This ensures that the primary person’s total number of entitlement days is not less than 5 years. [Schedule 1, item 2, subsection 61-425(2)]

Example 3.11

In Example 3.10, if Fiona had taxable income in the 2001-2002 income year of $40,000 and choses the year of birth as her base year, she is not entitled to a Baby Bonus in the 2001-2002 income year.

In the income year of Damian’s 5th birthday (2006-2007), Fiona’s total entitlement days (365) includes 199 days from 1 July 2006 to Damian’s 5th birthday. The total entitlement days also include the number of days in the base year for which she is eligible for the Baby Bonus (15 January 2002 to 30 June 2002 - i.e. 166 days).

This means that in her 2006-2007 income tax return, Fiona is entitled to the full $1,676 amount, as the total entitlement days are 365.

Child dies before the age of 5

3.49       Where a child dies before reaching age 5, a claimant is entitled to the Baby Bonus for the remaining part of the year, irrespective of when the child died during the year. This is because the primary person’s eligibility period is extended from the date of death of the child to the end of the income year. [Schedule 1, item 2, section 61-380]

Example 3.12

Victoria is the primary person in respect of her son Julius. Julius was born on 20 November 2002.

Julius died on 11 March 2004. Although Victoria only had legal responsibility for, and care of, Julius for 254 days in the 2003-2004 year, she is entitled to the full 365 days.

 



C hapter

Claiming and payment of the Baby Bonus

Outline of chapter

4.1         This chapter explains:

·       how to make a claim for the Baby Bonus;

·       when a claim can be made; and

·       how the ATO will pay the Baby Bonus.

Summary of new law

4.2         There can only be one claimant per year in respect of a child born on or after 1 July 2001, unless there has been a change in legal responsibility in relation to the child during the year.

4.3         A primary person cannot revoke a claim to the Baby Bonus, nor revoke an election to transfer their entitlement to the Baby Bonus to their spouse. [Schedule 1, item 2, sections 61-410 and 61-390]

4.4         A primary person can only make a claim in respect of one child per year.

4.5         The Baby Bonus is claimed through the ATO as a refundable tax offset.

Detailed explanation of new law

How to claim the Baby Bonus

One claimant per child

4.6         As established by the eligibility rules (see paragraph 2.10), only one person can be eligible to claim in respect of a child for any given entitlement period.

4.7         Where there is a change in legal responsibility there may be 2 claimants for the child but the entitlement days will differ.

Example 4.1

Ram and Sita have a daughter Sonu who was born on 15 October 2001. Sita was the primary person in the 2001-2002 income year and claimed a pro-rated Baby Bonus. Ram and Sita separate and Ram is given sole legal responsibility for and care of Sonu on 2 April 2003.

Ram can claim the Baby Bonus for the period 2 April 2003 to 30 June 2003 as he has sole legal responsibility for and care of Sonu for this period and is considered the primary person for this period. Sita can claim the Baby Bonus for the period before she lost legal responsibility for Sonu (1 July 2002 to 1 April 2003), as she was the primary person for this period.

Example 4.2

Michel was born on 20 August 2001. His natural mother places him in an adoption centre on 30 July 2002.

Pierre and Justine are Australian residents for income tax purposes and have no children. On 27 May 2003 they adopt Michel.

Michel’s natural mother is entitled to the Baby Bonus for the period 1 July 2002 to 30 July 2002. Michel’s natural mother can claim the Baby Bonus in her income tax return for the 2002-2003 income year.

Justine, as the primary person, is entitled to the Baby Bonus for the period 27 May 2003 to 30 June 2003 in her income tax return for the 2002-2003 income year.

Election to claim the Baby Bonus is irrevocable

4.8         Once a primary person, most commonly the mother, decides who will claim the Baby Bonus, the primary person cannot change their mind at a later time for any reason. For example, a mother who had transferred her entitlement cannot change her mind following a later event such as her spouse’s taxable income being amended. [Schedule 1, item 2, section 61-410]

Example 4.3

Angela has a child, Christian, who was born on 23 October 2001. Angela is the primary person in respect of Christian.

Angela is married to Noel and according to their calculations, Angela has a higher entitlement than Noel in the 2001-2002 income year. Therefore, Angela decides to claim for the Baby Bonus for that year.

Angela calculates that Noel will have a higher entitlement than herself for the 2002-2003 income year. Angela therefore elects to transfer her entitlement for the 2002-2003 income year to Noel.

Noel’s income tax return for the 2002-2003 income year is later amended by the Commissioner to include omitted income. This amendment has effectively reduced Noel’s Baby Bonus entitlement because his income has increased. Angela cannot revoke her election which would allow her to claim the Baby Bonus for the 2002-2003 income year.

A primary person can only make a claim in respect of one child

4.9                        A primary person cannot claim the Baby Bonus in respect of 2 children in the same income year. The primary person will claim the Baby Bonus in respect of the first child. [Schedule 1, item 2, section 61-365]

 

4.10          Where a child dies in an income year before reaching 5 years of age and the claimant is eligible to claim in respect of another child (a younger sibling), there will still be only one claim for that income year and it will be in respect of the deceased child. However, in the following year, the claimant can claim the Baby Bonus in respect of the other child. [Schedule 1, item 2, subsection 61-380(3)]

Example 4.4

Clara and George have 2 children - Carol who was born on 12 December 2001 and Margaret who was born on 4 June 2003. Clara is the primary person and is entitled to claim the Baby Bonus in respect of Carol, as Carol was born before Margaret.

Carol dies on 11 October 2005. Clara can claim a full year’s entitlement of the Baby Bonus in respect of Carol as her eligibility period is extended to the end of the income year. Clara cannot claim any amount in respect of Margaret in the year that Carol died.

As Carol died before the age of 5, Clara can claim the Baby Bonus in respect of Margaret in the following year and up to and including the year in which Margaret turns 5. The first claim in respect of Margaret will be in the 2006-2007 income year.

When can a claim be made?

Base year is the year before the event year.

4.11       If the base year is the year before the event year, the first year in which a claim can be made is the event year.

4.12       In this first year, the entitlement amount will be pro-rated based on the number of days from the time the legal responsibility was obtained to the end of that income year. There will also be a pro-rata claim in the income year in which the child turns 5 years of age, based on the number of days from 1 July up to the day on which the child turns 5. There will be full year claims in the intervening 4 years of income if there is no change in legal responsibility.

Example 4.5

Sophie goes on maternity leave on 1 February 2002 and gives birth to Henry on 14 February 2002. Sophie ends her maternity leave on 30 April 2002. For the period 1 May 2002 to 30 June 2003 Sophie is on leave without pay. Sophie resigns from her job on 1 July 2003 and does not have any taxable income in subsequent years.

                                   

 

 

                                                          Maternity         Leave                              Leave                            

    Resignation                                      leave         without pay                      without pay

 

 



   30/6/01                                  1/2/02           30/4/02         30/6/02                                                            30/6/03

 

                                                          14/2/02

                                                          Birth of               Total eligible days

                                                          Henry                          137

 

 

                            

   30/6/01                                                                          30/6/02                                                             30/6/03

 

 



Taxable income $30,000                                       Taxable income $26,000                              Taxable income $0

Basic income tax liability $5,380                          Basic income tax liability $4,180                                                 

Base amount $1,076                                              Base amount $836

 

Sophie elects her base year to be the year ended 30 June 2001, as this gives her a higher base amount. This means that Sophie can claim for Henry in her income tax return for the year ended 30 June 2002.

As Sophie only had legal responsibility of Henry for 137 days in her first year, she will need to pro-rate her entitlement amount. Sophie will also need to adjust her base amount to account for her taxable income in the income year.

Sophie’s calculation of the Baby Bonus for the year in which she gave birth to Henry is as follows:

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

$1,076  ´   [1  -  (26,000/30,000)]  ´   (137/365)

=  $1,076  ´   [1  -  0.867]  ´   0.375

=  $54

Sophie’s calculation of her Baby Bonus for the subsequent 4 income years after she gave birth to Henry will be as follows:

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

$1,076  ´   [1  -  (0/30,000)]  ´   (365/365)

=  $1,076  ´   1  ´   1

=  $1,076

In the year in which Henry turns 5, Sophie will again be required to pro-rate her entitlement amount, as she will only be eligible to claim for Henry until he turns 5. The total entitlement days will be the period from 1 July to 13 February, 228 days.

Sophie’s calculation of her Baby Bonus for the year in which Henry turns 5 will be as follows:

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

$1,076  ´   [1  -  (0/30,000)]  ´   (228/365)

=  $1,076  ´   1  ´   0.625

=  $673

Sophie’s claims will be as follows:

 

 

                30/6/02                    30/6/03                   30/6/04                   30/6/05                 30/6/06               30/6/07

                 $54                         $1,076                     $1,076                    $1,076                  $1,076                 $673

 

 

 

 

 



Base year is the event year

4.13       Where the event year is elected to be the base year, a full year claim may only be made in the income year after the event year and each later income year but not after the income year in which the child turns 5. This means that there is no pro-rating of the entitlement, but there is a delay in receiving the entitlement.

Example 4.6

Assume that Sophie’s taxable income for the income year 2000-2001 is $26,000 and taxable income for the income year 2001-2002 (the year of Henry’s birth) is $30,000.

Sophie elects her base year to be the income year 2001-2002, the year of birth. Sophie makes this election to delay the payment to ensure she receives her maximum entitlement. Sophie can only start to claim for Henry in the following income year, the year ended 30 June 2003. Sophie will be entitled to a full year claim in the years ended 30 June 2003 to 30 June 2007.

 

                                                          Maternity         Leave                              Leave                           

    Resignation                                      leave          without pay                      without pay

 

 



   30/6/01                                  1/2/02           30/4/02         30/6/02                                                            30/6/03

 

                                                          14/2/02

                                                          Birth of               Total eligible days                                  Total eligible days

                                                            Henry                          137                                                                   365

 

 

                            

   30/6/01                                                                          30/6/02                                                             30/6/03

 

 

Taxable income $26,000                                      Taxable income $30,000                                Taxable income $0

Basic income tax liability $4,180                         Basic income tax liability $5,380                                                 

Base amount $836                                                Base amount $1,076

 

Sophie’s first claim will be made in respect of the year ended 30 June 2003, and in this year she had legal responsibility of Henry for the full year. She will not need to pro-rate her claim. Sophie will also not need to adjust her base amount in any income year as she has no taxable income in any future years of income.

Sophie’s calculation of her Baby Bonus for her first claim will be as follows:

Baby Bonus = base amount ´ [1 - (TIi/TIb)] ´ (total entitlement days/365)

$1,076  ´   [1  -  (0/30,000)]  ´   (365/365)

=  $1,076  ´   1  ´   1

=  $1,076

In the year in which Henry turns 5, as Sophie has elected her base year to be the year of birth, the number of days for which she is eligible to claim the Baby Bonus is increased by the number of days from the date of Henry’s birth until the end of the income year of Henry’s birth.

In the year in which Henry turns 5, Sophie is eligible for 228 days, and the number of days from Henry’s birth to the end of the income year is 137. Therefore, the number of days that Sophie is eligible to claim for Henry in the year he turns 5 is 365. This means that she is entitled to a Baby Bonus of $1,076 in the year Henry turns 5.

Sophie’s claims will be as follows:

 

 

                30/6/02                    30/6/03                   30/6/04                   30/6/05                 30/6/06               30/6/07

                 $0                            $1,076                    $1,076                    $1,076                  $1,076                 $1,076

 

 

 



         

            

How the ATO will pay the Baby Bonus

4.14       The Baby Bonus will be claimed as a refundable tax offset.

4.15       Claimants who lodge income tax returns will make a claim for the Baby Bonus in their income tax return. The Baby Bonus will be provided as part of the ordinary income tax assessment and refund process and will form part of the claimant’s income tax assessment notice. [Schedule 1, item 2, section 61-405]

4.16       Claimants who are not required to lodge income tax returns will receive their entitlement to the Baby Bonus from the ATO by completing a separate claim form. This will effectively create a nil income tax assessment with the Baby Bonus as a refundable tax offset. [Schedule 1, item 2, section 61-405]

4.17       As a refundable tax offset, the Baby Bonus will be applied (where applicable) to reduce the claimant’s:

·       tax debts;

·       Family Tax Benefit debts;

·       Child Support Agency debts; and

·       other tax related Commonwealth debts.

4.18       Tax debts will include:

·       income tax debts;

·       Medicare levy;

·       HECS debt; and

·       Supplement Loan Scheme debt.

 

 



C hapter 5  

Consequential amendments

Outline of chapter

5.1         This chapter explains amendments to various provisions of the ITAA 1997 and the ITAA 1936 as a consequence of the introduction of the First Child Tax Offset (Baby Bonus).

Detailed explanation of new law

Amendments to the ITAA 1997

Amends the list of tax offsets

5.2         Division 13 of the ITAA 1997 is amended to insert, in the list of tax offsets, a reference to the offset provided for a first child in new Subdivision 61-I. [Schedule 1, item 1]

Inserts the first child tax offset

5.3         Division 61 of the ITAA 1997 is amended to remove the note at the end of section 61-345 which advises that the Division has ended and inserts new Subdivision 61-I which introduces the first child tax offset provisions. [ Schedule 1, item 2]

First child tax offset is a refundable tax offset

5.4         Division 67 of the ITAA 1997 which explains the refundable tax offset rules is amended to ensure that the first child tax offset is to be subject to the refundable tax offset rules. [Schedule 1, item 3]

Dictionary definitions

5.5         Division 995 of the ITAA 1997 which provides a dictionary of defined terms is amended to insert the following definitions:

·       base year has the meaning given by new section 61-430 (see paragraphs 3.14, 3.19 and 3.23 to 3.26) [Schedule 1, item 4 ] ;

·       child event has the meaning given by new section 61-360 (see paragraphs 2.12 and 2.16) [Schedule 1, item 5 ] ;

·       legally responsible for a child means that a person is legally responsible (whether alone or jointly with someone else) for the day-to-day care, welfare and development of a child (see paragraph 2.14) [Schedule 1, item 6] ; and

·       primary entitlement to the first child tax offset has the meaning given by new subsection 61-355(2) (see paragraphs 2.10 and 2.21) [Schedule 1, item 7 ] .

Amendments to the ITAA 1936

Ability to amend an assessment

5.6         Subsection 170(10AA) of the ITAA 1936 is amended to insert a reference to new Subdivision 61-I, being the Subdivision dealing with the tax offset for the first child, to ensure that an assessment can be amended in respect of the Baby Bonus. [Schedule 2, item 1]

 



I ndex        

Schedule 1:  Income Tax Assessment Act 1997

Bill reference

Paragraph number

Item 1

5.2

Item 2

5.3

Item 2, section 61-350

2.7, 2.8

Item 2, section 61-355

2.10

Item 2, subsection 61-355(1)

3.10

Item 2, subparagraph 61-355(3)(c)(i)

2.21

Item 2, section 61-360

2.12, 2.16

Item 2, section 61-365

2.19, 4.9

Item 2, section 61-370

2.28

Item 2, paragraphs 61-375(3)(a) to (e) and subparagraphs 61-375(3)(f)(i) and (ii)

2.31

Item 2, section 61-380

3.49

Item 2, subsection 61-380(2)

2.35

Item 2, subsection 61-380(3)

2.36, 2.37, 4.10

Item 2, section 61-385

2.38, 2.39, 2.42

Item 2, section 61-390

2.46, 4.3

Item 2, section 61-395

2.44

Item 2, section 61-400

2.45

Item 2, section 61-405

4.15, 4.16

Item 2, section 61-410

4.3, 4.8

Item 2, sections 61-415 and 61-420

3.34

Item 2, subsection 61-420(1)

3.27

Item 2, paragraphs 61-420(1)(a) and (b)

3.32

Item 2, subsection 61-420(2)

3.39, 3.46

Item 2, subsection 61-425(1)

3.37

Item 2, subsection 61-425(2)

3.44, 3.48

Item 2, paragraph 61-430(1)(a)

3.14

Item 2, paragraph 61-430(1)(b)

3.15

Item 2, subsection 61-430(2)

3.23, 3.26

Item 2, paragraph 61-430(3)(a)

3.24

Item 2, paragraph 61-430(3)(b)

3.25

Item 2, subsection 61-430(4)

3.19

Item 3

5.4

Item 4

5.5

Item 5

2.12, 5.5

Item 6

2.14, 5.5

Item 7

5.5

Schedule 2:  Income Tax Assessment Act 1936

Bill reference

Paragraph number

Item 1

5.6