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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021



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ISSN 1328-8091

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BILLS DIGEST NO. 8, 2021-22 3 AUGUST 2021

Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 Michael Klapdor Social Policy Section

Contents

The Bills Digest at a glance .............................................. 3

Purpose of the Bill ........................................................... 4

Structure of the Bill ......................................................... 4

Background ..................................................................... 4

Australian Government funding for child care ........... 4 Child Care Subsidy ..................................................... 4

Additional Child Care Subsidy ................................... 5

Direct support to providers ....................................... 5

Committee consideration ................................................ 5

Senate Selection of Bills Committee ........................... 5

Senate Standing Committee for the Scrutiny of Bills .............................................................................. 6

Policy position of non-government parties/independents...................................................... 6

Position of major interest groups..................................... 6

Financial implications ...................................................... 7

Statement of Compatibility with Human Rights................ 7

Parliamentary Joint Committee on Human Rights ..... 7 Key issues and provisions ................................................ 7

Current Child Care Subsidy design .............................. 7

CCS eligibility ............................................................. 7

Activity test ................................................................ 7

Table 1: Child Care Subsidy Activity test ................... 8 Income test ................................................................ 8

Table 2: Child Care Subsidy hourly rate caps ............ 8 Table 3: Child Care Subsidy income test ................... 9 Annual cap ................................................................. 9

Additional Child Care Subsidy ................................... 9

Date introduced: 24 June 2021

House: House of Representatives

Portfolio: Education, Skills and Employment

Commencement: Schedule 1 on the earlier of a day fixed by Proclamation or 1 July 2022; Part 1 of Schedule 2 on the earlier of a day fixed by Proclamation or 11 July 2022; Part 2 of Schedule 2 on the earlier of a day fixed by Proclamation (but not before Part 1 of Schedule 2 commences) or 1 July 2023.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at August 2021.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 2

Abolishing the annual cap ......................................... 10

Cap was not recommended by Productivity Commission ............................................................. 10

How many families are affected by the cap? .......... 10 Key provisions - Schedule 1 .................................... 11

A New Tax System (Family Assistance) Act 1999 .. 11 A New Tax System (Family Assistance) (Administration) Act 1999 ..................................... 11

Increased CCS rate for two or more children in child care ................................................................... 11

Additional complexity ............................................. 12

Contrast with Labor child care policy ...................... 12

Figure 1: current and enhanced Child Care Subsidy compared with Labor’s design ................... 13 Australian Greens proposal ..................................... 13

Who will benefit? .................................................... 13

Figure 2: Grattan Institute comparison of workforce disincentives for second earners ........... 14 Figure 3: Child Care Subsidy rates per week under different models, family with two children aged <6 years in care................................. 15

Table 4: weekly out-of-pocket costs of child care under different CCS models, family with two children aged <6 years in care................................. 15

Interaction with early childhood education ............ 15 Key provisions - Schedule 2 .................................... 16

Phase 1: A New Tax System (Family Assistance) Act 1999 ................................................................. 16

Table 5: Applicable CCS percentages by income for standard rate and ‘higher rate’ children ........... 17 Phase 1: A New Tax System (Family Assistance) (Administration) Act 1999 ..................................... 18

Phase 2: A New Tax System (Family Assistance) Act 1999 ................................................................. 19

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 3

The Bills Digest at a glance The Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 proposes changes to the A New Tax System (Family Assistance) Act 1999 and the A New Tax System (Family Assistance) (Administration) Act 1999 to:

• remove the maximum annual limit (the annual cap) of Child Care Subsidy (CCS) amounts that can be paid to families with annual adjusted taxable income of over $190,015 and

• increase the rate of CCS paid to families with multiple children under six years of age who are eligible for CCS.

The amendments will commence in July 2022 or on an earlier date fixed by Proclamation.

The measures were announced on 2 May 2021 and are expected to cost $1.7 billion over the forward estimates.

In 2021-22, the annual cap limits the total amount of CCS that can be paid to a family with income over $190,015 per annum to $10,655 per child. Around 18,000 families reach the cap each year. However, the cap can act as a disincentive to work with some parents or carers choosing to work less in order to avoid reaching the cap. Removing the cap will remove this disincentive but the benefit of the change will flow only to families on relatively high incomes.

An income test determines the rate of CCS paid. The rate is calculated as a percentage of child care fees charged by providers or an hourly rate cap set by the government—whichever is lower. Families with a combined income under $70,015 can receive a CCS rate paid at 85 per cent of the fee charged or the hourly rate cap. Families with income over this threshold receive a lower percentage.

Under the proposed changes, an increased rate of subsidy will be paid to families with more than one child aged under six years of age also attending child care. The CCS rate for eligible second and subsequent children will be the percentage amount worked out under the income test plus 30 percentage points up to a maximum of 95 per cent.

Around 250,000 families with two or more children in child care are expected to benefit from the enhanced CCS. As at December 2020, there were 946,190 families with children attending CCS approved child care services.

Families with multiple children in child care can have very high out-of-pocket costs. In couple-families, the high costs are a significant disincentive for the second earner to undertake work, or to work more than a few days per week. The proposed changes will reduce this disincentive for some families.

Some issues may arise with regard to the interaction of the proposed changes and children in early childhood education (preschool)—children in standalone preschools may make their younger siblings ineligible for the higher rates of CCS for second and subsequent children.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 4

Purpose of the Bill The purpose of the Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 (the Bill) is to amend the A New Tax System (Family Assistance) Act 1999 (the FA Act) and the A New Tax System (Family Assistance) (Administration) Act 1999 (the FA Admin Act) to:

• remove the maximum annual limit (the annual cap) of Child Care Subsidy (CCS) amounts that can be paid to families with annual adjusted taxable income of over $190,015 and

• increase the rate of CCS paid to families with multiple children under six years of age who are eligible for CCS.

The amendments will commence in July 2022 or on an earlier date fixed by Proclamation.

The measures were announced on 2 May 2021, just prior to the 2021-22 Budget, and are expected to cost $1.7 billion over the forward estimates.1

Structure of the Bill The Bill contains two Schedules. Schedule 1 provides for the removal of the annual cap. Schedule 2 provides for the changes to CCS rates for families with multiple children under six years of age and is divided into two Parts. The two Parts provide for the changes to be implemented in two phases, one commencing from July 2022 and the second from July 2023 (or earlier dates fixed by Proclamation).

Background

Australian Government funding for child care The Australian Government provides child care fee assistance to families and direct assistance to services. Funding support aims to ‘enable parents and carers to participate in the workforce by making early childhood education and care affordable and accessible’.2 The main program is the Child Care Subsidy (CCS). Estimated expenditure on the CCS in 2021-22 is $9.5 billion.3

Child Care Subsidy Assistance with the cost of child care fees is delivered via the CCS.4 The CCS system commenced on 2 July 2018 and replaced two previous payments: Child Care Benefit and Child Care Rebate.5

The CCS is means tested with rates of payment based on family income, hours of care used, type of care used, and parents’ or carers’ level of work, training or study. An activity test determines the number of hours per fortnight a family is eligible to receive CCS.6 A maximum hourly amount payable via the subsidy is set by the Government (the hourly rate cap) with families receiving a

1. J Frydenberg (Treasurer), M Payne (Minister for Women), A Tudge (Minister for Education and Youth), J Hume (Minister for Superannuation, Financial Services and the Digital Economy and Minister for Women’s Economic Security), Making child care more affordable and boosting workforce participation, media release, 2 May 2021.

2. Department of Education, Skills and Employment (DESE), ‘Early Childhood: Providing child care’, DESE website, last modified 30 April 2021. 3. Australian Government, Portfolio budget statements 2021-22: budget related paper no. 1.4: Education, Skills and Employment Portfolio, p. 30. 4. DESE, ‘Child Care Subsidy’, DESE website, last modified 4 May 2021. 5. For background information on the previous payments and to the introduction of the Child Care Subsidy, see M Klapdor,

Family Assistance Legislation Amendment (Jobs for Families Child Care Package) Bill 2016, Bills digest, 39, 2016-17, Parliamentary Library, Canberra, 2016. 6. Department of Social Services (DSS), ‘3.5.2.10 CCS - activity test - general’, Family assistance guide, DSS website, last reviewed 1 July 2020.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 5

percentage of this rate or the actual fees charged based on their income.7 The payment is paid directly to providers to be delivered to families in the form of a fee reduction.

The CCS can be paid for Centre Based Care (long day care and occasional care in a child care centre), Outside School Hours Care, Family Day Care and In-Home Care.8 Different hourly rate caps apply depending on the kind(s) of care used.9

Child care services must meet certain conditions to be approved to pass on the CCS. This includes any regulatory requirements set by state and territory authorities under the National Quality Framework (NQF).10

Additional Child Care Subsidy Additional Child Care Subsidy (ACCS) provides targeted assistance to families/children facing barriers to accessing child care including children at risk of abuse or neglect, grandparent carers, families facing temporary financial hardship and those on activity-test income support payments.11

Direct support to providers The Australian Government also provides direct support to child care services to assist with the establishment and running costs of services in areas where they may otherwise be unviable, for delivering services to children with disability or other special needs, and to assist with professional development.

These supports are primarily provided under the Department of Education, Skills and Employment’s (DESE’s) Community Child Care Fund program.12 The fund consists of different grant categories:

• open competitive grants, restricted non-competitive grants (for specified services, primarily those previously funded under the Budget Based Funded program which provided assistance to Indigenous, regional and remote services)

• the Connected Beginnings Program and

• the Special Circumstances grants (for services that have experienced a natural disaster or other unexpected event).13

In addition, the Inclusion Support Program assists services to improve their services for children with additional needs, particularly children with disability.14

Committee consideration

Senate Selection of Bills Committee In its report on 24 June 2021, the Senate Selection of Bills Committee stated that it had deferred consideration of the Bill until its next meeting.15

7. DSS, ‘3.5.3 CCS - hourly rate caps’, Family assistance guide, DSS website, last reviewed 1 July 2020; DSS, ‘3.5.1 CCS - combined annual ATI’, Family assistance guide, DSS website, last reviewed 1 July 2020. 8. DESE, ‘Child care service types’, DESE website, last modified on 13 July 2021. 9. Ibid.

10. Australian Children’s Education & Care Quality Authority (ACECQA), ‘National Quality Framework’, ACECQA website, n.d. 11. DESE, ‘Additional Child Care Subsidy’, Child care provider handbook: Appendix B, DESE, 13 November2020. 12. DESE, ‘Community Child Care Fund’, DESE website, last modified on 10 December 2020. 13. Ibid. 14. DESE, ‘Inclusion Support Program’, DESE website, last modified 1 December 2020. 15. Senate Selection of Bills Committee, Report, 7, 2021, The Senate, Canberra, 24 June 2021.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 6

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills raised issues with a number of amendments in the Bill which it considered to be insufficiently justified Henry VIII clauses. Henry VIII clauses authorise delegated legislation (such as a legislative instrument) to make substantive amendments to primary legislation. In this instance, items 10, 11 and 13 of Schedule 2 to the Bill allow the Child Care Subsidy Minister’s Rules 2017 to prescribe different durations from those set out in the FA Act and the FA Admin Act which affect an individual’s eligibility for, or rate of, CCS.

Regarding Henry VIII clauses, the Committee’s report states:

The committee has significant scrutiny concerns with Henry VIII-type clauses, as such clauses impact on the level of parliamentary scrutiny and may subvert the appropriate relationship between the Parliament and the executive, impacting upon Parliament's constitutional role as lawmaker-in-chief. Consequently, the committee expects a sound justification to be included in the explanatory memorandum for the use of any clauses that allow delegated legislation to modify the operation of primary legislation.16

The Committee did not consider the Explanatory Memorandum as offering sufficient justification for allowing the Minister’s Rules to alter the primary legislation in these instances. The Committee requested more detailed advice from the Minister as to why these clauses were considered necessary and appropriate.17

At the time of writing, the Minister’s response had been received but not yet published by the Committee.18

Policy position of non-government parties/independents Shadow Minister for Early Childhood Education and Development Amanda Rishworth has described the proposed changes as a ‘half-hearted child care policy’ which ‘falls abysmally short of what is required to provide genuine relief for families’.19 The Shadow Minister stated that the vast majority of families would not receive any additional CCS under the proposed changes.20

At the time of writing, the other non-government parties and independents had not commented on the proposed changes.

Position of major interest groups Early Childhood Australia, a peak body, welcomes the additional funding for child care that the proposed changes offer. However, CEO Samantha Page noted that the changes ‘add complexity to an already complex system’. Ms Page also stated: ‘we are disappointed that changes are planned to come in to effect in 2022, meaning many families currently using child care won’t have any relief’.21

The Australian Childcare Alliance, which represents privately owned child care providers, commended the Government’s proposed changes. President Paul Mondo stated: ‘The removal of

16. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 10, 2021, The Senate, 13 July 2021, p. 5. 17. Ibid. 18. Senate Standing Committee for the Scrutiny of Bills, ‘Ministerial responses’, The Senate, Canberra. 19. A Rishworth (Shadow Minister for Early Childhood Education and Development), Expensive child care stopping Australians

from working, media release, 7 July 2021. 20. Ibid. 21. Early Childhood Australia, Early Childhood Australia welcomes further investment in early education, media release,

2 May 2021.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 7

the annual CCS cap for many families and the increased support for multiple-child families are the sensible next step in providing greater work options for parents.’22

Financial implications According to the Explanatory Memorandum, the changes in the Bill will cost $635.5 million in 2022-23 and $655.9 million in 2023-24.23 According to the 2021-22 Budget, the proposed changes will cost $1.7 billion over five years.24

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.25

Parliamentary Joint Committee on Human Rights At the time of writing, the Parliamentary Joint Committee on Human Rights was yet to consider the Bill.

Key issues and provisions

Current Child Care Subsidy design

CCS eligibility For a person to be eligible for the CCS, their child must:

• be a ‘Family Tax Benefit child’26 or ‘regular care child’27—this essentially means that the child must an Australian resident and in the adult’s care for at least 14 per cent of the time

• be 13 or under and not attending secondary school and

• meet immunisation requirements.28

The claimant, and/or their partner, must:

• meet residency requirements and

• be liable to pay for the child care provided by an approved provider.29

Some exemptions from these requirements can apply in special circumstances. For example, Services Australia can waive the residency requirements in certain circumstances.30

Activity test The activity test determines how many hours of child care a claimant can receive CCS for. This depends on how much time a single parent or both partners in a couple/two-parent family

22. Australian Childcare Alliance, Australia's peak body for early learning (child care) services welcomes the reforms to the Child Care Subsidy improving affordability for many families, media release, 2 May 2021. 23. Explanatory Memorandum, Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021, p. 3. 24. Australian Government, Budget measures: budget paper no. 2: 2021-22, p. 81. 25. Explanatory Memorandum, op. cit., p. 4. 26. DSS, ‘2.1.1 FTB child and regular care child’, Family assistance guide, DSS website, last reviewed 1 July 2021. 27. DSS, ‘2.1.1.13 Regular care child’, Family assistance guide, DSS website, last reviewed 20 March 2020. 28. DSS, ‘2.6.1 CCS eligibility’, Family assistance guide, DSS website, last reviewed 2 July 2018. 29. Ibid. 30. DSS, ‘2.6.2.20 CCS - Australian residency exceptions’, Family assistance guide, DSS website, last reviewed 2 July 2018.

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undertake recognised activities: these include paid work, study, training or volunteering.31 For couple/two-parent families, the maximum number of hours of subsidised care a person can receive is calculated using the person with the lowest level of activity. See Table 1 for a breakdown.

Table 1: Child Care Subsidy Activity test

Hours of recognised activity (per fortnight) Maximum number of hours of CCS (per fortnight)

8 hours to 16 hours 36 hours

More than 16 hours to 48 hours 72 hours

More than 48 hours 100 hours

Source: Department of Social Services (DSS), ‘3.5.2.10 CCS - activity test - general’, Family assistance guide, DSS website, last reviewed 1 July 2020.

Families that earn $69,390 or less in 2021-22 and do fewer than eight hours of recognised activities in a fortnight are able to access 24 hours of subsidised care per fortnight.32 Families that do not meet the activity test and have a child/children attending a preschool program provided by a centre-based Long Day Care centre are able to access 36 hours of subsidised care (however, this only applies to the child attending the preschool program).33

A range of other exemptions are available for families in certain circumstances (such as disability or care requirements).34

Income test The income test determines the rate of CCS a person will receive for the hours they are eligible under the activity test. The CCS will pay a percentage of the child care fee or a percentage of the hourly ‘rate cap’, whichever is lower. The income test determines the percentage paid. The current hourly rate caps are set out in Table 2.

Table 2: Child Care Subsidy hourly rate caps

Type of child care Hourly rate cap

Centre Based Day Care—long day care and occasional care $12.31 (for below school-aged children)

Family Day Care $11.40

Outside School Hours Care—before and after school, and vacation care $10.77 (for school-aged children)

In Home Care - per family $33.47

Source: Services Australia (SA), ‘Child Care Subsidy: How much you can get: The type of child care you use affects it’, SA website, last updated 1 July 2021.

The income test assesses the combined adjusted taxable income of the family. Adjusted taxable income is the sum of taxable income, adjusted fringe benefits, target foreign income, net investment losses, tax free pensions or benefits and reportable superannuation contributions less

31. DSS, ‘3.5.2.10 CCS - activity test - general’, Family assistance guide, DSS website, last reviewed 1 July 2020. 32. SA, ‘Activity level and subsidised care’, SA website, last updated 5 April 2021. 33. DSS, ‘3.5.2.20 CCS - activity test exemptions’, Family assistance guide, DSS website, last reviewed 20 March 2020. 34. Ibid.

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any child maintenance expenditure.35 Table 3 shows the applicable percentage by income range for 2019-20. These amounts are adjusted based on movements in the Consumer Price Index on 1 July of each year.36

Table 3: Child Care Subsidy income test

Combined annual adjusted taxable income Applicable CCS percentage of the actual fee charged or the relevant hourly rate cap (whichever is lower)

Equal to or below $70,015 85%

Above $70,015 and below $175,015 Decreasing from 85% to 50% Subsidy decreases by 1% for each $3,000 of family income

Equal to or above $175,015 and below $254,305 50%

Equal to or above $254,305 and below $344,305 Decreasing from 50% to 20% Subsidy decreases by 1% for each $3,000 of

family income

Equal to or above $344,305 and below $354,305 20%

Equal to or above $354,305 0%

Source: SA, ‘Child Care Subsidy: How much you can get: Your income can affect it’, op. cit.

Annual cap If a family earns more than $190,015 per year (and less than $354,305) then the total amount of CCS they can receive in 2021-22 is $10,655 per child.37 Families earning less than $190,015 per year do not face a cap. Families earning over $354,305 cannot receive any CCS under the income test.

Additional Child Care Subsidy Additional Child Care Subsidy (ACCS) provides targeted assistance to families/children facing barriers to accessing child care.38 There are four categories of the ACCS:

• child wellbeing—aimed primarily at children at risk of abuse or neglect

• grandparent—for grandparent carers who receive income support (such as a pension) and who are the principal carer of children

• temporary financial hardship—for those experiencing significant financial stress due to exceptional circumstances and

• transition to work—for those receiving certain income support payments such as Parenting Payment, Newstart Allowance or Disability Support Pension and who have a Job Plan (employment pathway plan) in effect.39

35. DSS, ‘1.1.A.20 Adjusted taxable income’, Family assistance guide, DSS website, last reviewed 10 August 2020. 36. DSS, ‘3.5 CCS entitlement’, Family assistance guide, DSS website, last reviewed 2 July 2018. 37. SA, ‘Child Care Subsidy: How much you can get: Your income can affect it’, SA website, last reviewed 1 July 2021. 38. DESE, ‘Additional Child Care Subsidy’, Child care provider handbook: Appendix B, op. cit. 39. Ibid.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 10

The child wellbeing, grandparent and temporary financial hardship categories of ACCS allow eligible families to receive a subsidy equal to the actual fee charged by their child care service (up to 120 per cent of the hourly rate cap—see Table 2 above) for up to 100 hours per fortnight and be exempt from the activity test. The transition to work category provides a subsidy equal to 95 per cent of the actual fee charged (up to 95 per cent of the hourly rate cap) with subsidised hours determined by the activity test.40

Abolishing the annual cap Schedule 1 of the Bill proposes to remove the annual CCS cap. As set out above, the annual cap limits the total amount of CCS that can be paid to a family with income over $190,015 per annum. The limit for 2021-22 is $10,655 per child.

Minister for Education and Youth Alan Tudge stated in his second reading speech for the Bill:

Removing the annual cap also means we will remove a structural disincentive to take on additional days of work for many families. This will encourage parents, especially second income earners who are more often women, to get back to work or to work more.41

Cap was not recommended by Productivity Commission An annual cap was a feature of the Child Care Rebate, one of the payments CCS replaced in July 2018. The Productivity Commission’s 2015 report on child care—which recommended replacing the existing payments with a single payment—considered the use of such caps:

The most direct way to manage the cost to taxpayers is by capping the hours to which subsidies apply and/or the total subsidy a family can receive for a child’s use of ECEC [early childhood education and care] services.

Caps, to the extent that they are binding, distort behaviour. Anecdotal evidence suggests that many families vary their working hours or make other arrangements to stay under the $7500 CCR [Child Care Rebate] cap, to avoid paying full fees for ECEC services. As a result, the CCR cap acts to restrain the hours that the second income earner, or even both parents, are willing to work.

While a cap on the amount of subsidy per child is a simple way to manage cost to government, it has had unintended consequences, distorting work and care choices.42

The Productivity Commission did not include an annual cap on the amount of subsidy that could be paid in the payment model it recommended to Government. The Government’s CCS model was based partly on the Productivity Commission’s model but included an annual cap. It is unclear why the cap was included but, as the Productivity Commission found, it is a simple way to manage expenditure on the CCS.

How many families are affected by the cap? The annual cap affects only higher income families. Administrative data quoted in one media report stated that around 200,000 families receiving CCS had income above the $189,390

40. Ibid. 41. A Tudge, ‘Second reading speech: Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021’, House of Representatives, Debates, [proof], 24 June 2021, p. 3. 42. Productivity Commission (PC), Childcare and early childhood learning, report, 73, vol. 2, PC, Canberra, 2014, p. 582.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 11

threshold at which the annual cap applied in 2020-21.43 However, only around 18,000 of these families reached the cap each year. Some families may have chosen to work fewer hours and use less child care in order to not reach the cap.

Key provisions - Schedule 1

A New Tax System (Family Assistance) Act 1999 Item 1 repeals the definition of annual cap at subsection 3(1) of the FA Act.

Item 4 repeals ‘Step 2’ of the method statement for working out an amount of CCS at subclause 1(1) of Schedule 2 of the FA Act. Step 2 refers to working out whether the annual cap applies and the effect on a person’s rate of CCS if the cap does apply.

Items 3, 5 and 6 amend other steps in the method statement at subclause 1(1) to remove references to the annual cap.

Item 7 repeals subclauses 1(2) and (3) of Schedule 2 of the FA Act. These subclauses set out the annual cap and how it applies for members of a couple (where CCS amounts received by each member of a couple for the same child are added together to determine if the annual cap is reached).

Items 8-13 amend provisions for the calculation of ACCS rates (at paragraphs 5(b)-(e) and 7(b)-(e) of Schedule 2 of the FA Act) to remove references to the annual cap and the steps in the method statement relating to the annual cap.

Items 14 and 15 repeal the relevant provisions in Schedule 4 of the FA Act that provide for the annual indexation of the CCS annual cap amount.

A New Tax System (Family Assistance) (Administration) Act 1999 Items 17 and 18 remove a reference to the annual cap at paragraph 67CE(1)(b) of the FA Admin Act, which sets out when the Secretary of the Department of Education, Skills and Employment must notify a CCS recipient about a change in their entitlement.

Item 19 amends subsection 105E(6) which sets out the process for reconciling CCS amounts at the end of the financial year for individuals who were members of a couple for part of that year. The amendments remove a reference to paragraph 1(3)(b) of Schedule 2 of the FA Act which will be repealed by item 7.

Increased CCS rate for two or more children in child care The ‘enhanced’ CCS measure announced in May 2021 will provide an increased rate of subsidy for families with more than one child aged under six years of age who are also attending child care. The CCS rate for eligible second and subsequent children will be the percentage amount worked out under the income test (Table 3) plus 30 percentage points up to a maximum of 95 per cent. For example, where the second child would be eligible for a CCS rate of 50 per cent of the fee paid or hourly cap under the current system, they will receive a CCS rate of 80 per cent of the fee paid or hourly cap under the proposed changes.

The rate for the first child aged under six in child care will stay the same. Where two or more children are not aged under six years—for example, one child aged three and one child aged six—

43. K Curtis, ‘Parents could work more after care cap axed’, Sydney Morning Herald, 6 May 2021 p. 7.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 12

the family will not be eligible for the higher rate of CCS. Families with income over the higher income limit (currently $354,305) will remain ineligible for any CCS for any children.

Additional complexity The proposed changes will add complexity to the child care fee assistance system with different payment rates depending on the age and number of children in a family, on top of the existing income and activity tests. One of the key reasons for the introduction of the CCS was that it was simpler than the previous fee assistance system. Then Social Services Minister, Scott Morrison, stated in 2015 that the child care sector and families had ‘screamed’ at the Government: ‘for goodness sake make this simpler, it is far too complicated’.44

Contrast with Labor child care policy The changes in the Bill contrast with the Australian Labor Party’s proposed changes to the CCS’s design.45 The two parties’ policies offer different approaches to improving child care affordability. Labor’s policy, announced in Opposition Leader Anthony Albanese’s 2020 Budget in reply speech, proposed to increase the maximum CCS rate to 90 per cent of the fee charged or the hourly rate cap (whichever was lower).46 The rate would gradually reduce by one percentage point for every $5,000 of family income above $80,000.47 Labor’s CCS design does not have an upper income limit or an annual cap, but the CCS rate would reach zero for families with an annual income of around $530,000.48

Labor’s proposal would cost an estimated $6.2 billion over four years (compared to the $1.7 billion cost over the forward estimates for the changes proposed by the Government).49

Figure 1 compares the current CCS income test design with the Government’s enhanced CCS proposal and Labor’s proposal.

44. S Morrison (Minister for Social Services), Address to the Australian Childcare Alliance QLD National Conference, Brisbane, media release, 18 July 2015. 45. Australian Labor Party (ALP), ‘Labor’s cheaper child care plan’, ALP website, n.d. 46. A Albanese, ‘Second reading speech: Appropriation Bill (No. 1) 2020-2021’, House of Representatives, Debates,

8 October 2020, p. 7148. 47. Derived from information in ALP, ‘Labor’s cheaper child care plan’, op. cit. 48. Ibid. 49. D Crowe, ‘Childcare at heart of Labor budget’, Sydney Morning Herald, 9 October 2020; Frydenberg et al, Making child care

more affordable and boosting workforce participation, op. cit.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 13

Figure 1: current and enhanced Child Care Subsidy compared with Labor’s design

Sources: Parliamentary Library estimates based on SA, ‘Child Care Subsidy: How much you can get: Your income can affect it’, op. cit.; DESE, ‘Enhanced Child Care Subsidy’, op. cit.; Australian Labor Party (ALP), ‘Labor's cheaper child care plan’, op. cit.

Australian Greens proposal The Australian Greens have called for free child care,50 similar to the arrangements in place from 6 April to 12 July 2020 under the COVID-19 Early Childhood Education and Care Relief Package.51

Who will benefit? According to the Department of Education, Skills and Employment (DESE), around 250,000 families with two or more children in child care are expected to benefit from the enhanced CCS. Of these, around 41,700 have three or more children under the age of six.52 As at December 2020, there were 946,190 families with children attending CCS approved child care services. Of those attending child care services, 904,710 families with 1,266,880 children had their eligibility for CCS assessed.53

Families with multiple children in child care can have very high out-of-pocket costs. In couple-families, the high costs are a significant disincentive for the second earner to undertake work, or to work more than a few days per week. The combined effect of higher child care fees, lower CCS benefits, lower Family Tax Benefit payments and income tax can mean that there is little or no increase in family income when a second earner undertakes more work. Research by the Grattan Institute suggests some second-earners in families with two children in child care lose

50. M Faruqi, Free and universal early learning, media release, 9 October 2020. 51. M Klapdor, Family Assistance Legislation Amendment (Early Childhood Education and Care Coronavirus Response and Other Measures) Bill 2021, Bills digest, 61, 2020-21, Parliamentary Library, Canberra, 5 May 2021, pp. 7-9. 52. Senate Education and Employment Legislation Committee, Answers to Questions on Notice, Education, Skills and Employment

Portfolio, Budget Estimates 2021-22, Question no. SQ21-000446. 53. DESE, ‘Child Care in Australia report December quarter 2020’, DESE website, last modified 10 May 2021.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 14

more than 80%—and sometimes 100%—of their additional earnings moving from three days of work a week to four or five days.54 The Grattan Institute found the budget measures will reduce these disincentives for many families but some will still gain only a small benefit from additional work (Figure 2).55

Figure 2: Grattan Institute comparison of workforce disincentives for second earners

Notes: Primary earner works full time, 2 children requiring care. Each day of work for second earner results in 2 days of approved care, costing $110 each. Source: D Wood, K Griffiths and O Emslie, ‘The Coalition’s child-care subsidy plan: how it works, and what it means for families and the economy’, The Conversation, 3 May 2021.

Figure 3 and Table 4 compare the current, enhanced and Labor CCS models for a family with two children aged under six years in child care for four days a week. The enhanced and Labor CCS model provide the same increase in assistance for such a family where their income is under $70,000. A two-child family with income between $70,000 and $205,000 would be slightly better off under the Labor model, while those with income between $205,000 and $329,000 would be better off under the enhanced CCS. The Labor model does not have an income limit so the small number of families with very high incomes (around two per cent of families according to officials from the DESE) are better off under this design compared to the current and enhanced CCS models.56

For families with three or more children aged under six years in care, the enhanced CCS model offers a higher level of assistance to eligible families than the Labor CCS.

54. D Wood, K Griffiths and O Emslie, ‘The Coalition’s child-care subsidy plan: how it works, and what it means for families and the economy’, The Conversation, 3 May 2021. 55. Ibid. 56. Senate Education and Employment Legislation Committee, Official committee Hansard, 28 October 2020, p. 33.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 15

Figure 3: Child Care Subsidy rates per week under different models, family with two children aged <6 years in care

Sources: Parliamentary Library estimates based on SA, ‘Child Care Subsidy: How much you can get: Your income can affect it’, op. cit.; DESE, ‘Enhanced Child Care Subsidy’, op. cit.; ALP, ‘Labor’s Cheaper Child Care Plan’, op. cit.

Table 4: weekly out-of-pocket costs of child care under different CCS models, family with two children aged <6 years in care

Annual family income ($)

Current CCS ($) Enhanced CCS ($) Labor CCS ($)

50,000 $126.00 $84.00 $84.00

100,000 $209.96 $125.98 $117.60

150,000 $349.96 $223.96 $201.60

200,000 $430.19 $294.00 $285.60

250,000 $430.19 $294.00 $369.60

Notes: Based on a fee of $10.50 per hour per child, ten hours of care per day, for four days a week. Sources: Parliamentary Library estimates based on SA, ‘Child Care Subsidy: How much you can get: Your income can affect it’, op. cit.; DESE, ‘Enhanced Child Care Subsidy’, op. cit.; ALP, ‘Labor’s Cheaper Child Care Plan’, op. cit.

Interaction with early childhood education A key issue for the proposed changes will be how it interacts with early childhood education (preschool). Currently, children in standalone preschools are not eligible for CCS as these preschools are not considered ‘approved’ providers.57 Preschool programs delivered through

57. DSS, ‘1.1.A.90 Approved provider, approved child care service, approved child care (CCS)’, Family Assistance Guide, DSS website, last reviewed 2 July 2018.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 16

centre-based day care services are eligible. In 2019, around 87.7 per cent of children attended preschool in the relevant state-specific year before primary school (generally, at age four) and 40.7 per cent of children attended a program within centre-based day care.58

Those children in preschool who are ineligible for CCS may make their siblings ineligible for the higher rate of CCS as the enhanced CCS is only available where multiple children under the age of six attend child care services. This will create an incentive for families to move children from standalone preschools to preschool programs within centre-based child care services.

Key provisions - Schedule 2 Schedule 2 is divided into two phases. Phase 1 is to commence on a date fixed by proclamation or on 11 July 2022, whichever occurs first. Phase 2 must commence after Phase 1, either on a date to be fixed by proclamation or 1 July 2023, whichever occurs first.

Phase 1 is a ‘transitional phase’ where families with two children under the age of six can receive the higher rate of CCS, with CCS eligibility for the older child ceasing after 26 consecutive weeks of no sessions of care being provided in an approved child care service (or immediately if the Secretary considers the CCS recipient does not intend for the child to enrol or attend a service).59 Phase 2 will be the ongoing arrangement with CCS eligibility for the older child ceasing after 14 consecutive weeks of no sessions of care being provided in an approved child care service.60 In his second reading speech, Minister Tudge stated: ‘A two-phased approach will ensure Services Australia has time to complete the necessary system build to give effect to the government's commitment without jeopardising implementation at the earliest possible date’.61 The proposed amendments in Phase 2 offer only a minor change to the criteria so it is unclear how they would affect the development of the ICT systems or implementation dates.

Phase 1: A New Tax System (Family Assistance) Act 1999 Item 2 inserts the new term higher rate child into the list of definitions at subsection 3(1). The definition refers to the meaning of the term given in proposed subclause 3B(1) of Schedule 2 (inserted by item 7).

Item 3 amends subclause 2(1) of Schedule 2—which sets out how to use the applicable percentage worked out under the income test to determine an individual’s hourly rate of CCS—to refer to the applicable percentage being worked out at clause 3 and proposed clause 3A of Schedule 2. Proposed clause 3A is inserted by item 7.

Item 6 amends subclause 3(1) of Schedule 2 to state that an individual’s applicable percentage for a session of care is the amount worked out in the table at subclause 3(1)—that is, according to the income test set out at Table 3—‘unless that percentage is determined in accordance with clause 3A’.

Item 7 inserts proposed clauses 3A and 3B into Schedule 2 of the FA Act. Proposed clause 3A is used to determine the applicable percentage for sessions of care provided to a child considered a higher rate child (this clause does not apply in working out CCS rates for in-home care). For higher rate children, the applicable percentages at clause 3 are increased by 30 percentage points except

58. Steering Committee for the Review of Government Service Provision, Report on Government Services 2021: Part B: child care, education and training: 3 Early childhood education and care, Table 3A.17, Productivity Commission, Canberra, 2021. 59. Explanatory Memorandum, op. cit., p. 2. 60. Ibid., p. 3. 61. A Tudge, ‘Second reading speech: Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021’, House of

Representatives, Debates, [proof], 24 June 2021, p. 3.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 17

for item 1 of the table (the highest rate) which is increased from 85 per cent to 95 per cent. Table 5 shows the applicable percentage as currently applied and the proposed higher rate child applicable percentages—the income thresholds shown are for the 2021-22 income year.

Table 5: Applicable CCS percentages by income for standard rate and ‘higher rate’ children

Combined annual adjusted taxable income Standard rate—applicable CCS percentage of the

actual fee charged or the relevant hourly rate cap (whichever is lower)

Higher rate child— applicable CCS percentage of the actual fee charged or the relevant hourly rate cap (whichever is lower)

Equal to or below the lower income threshold (currently $70,015)

85% 95%

Above the lower income threshold ($70,015) and below second income threshold (currently $175,015)

Decreasing from 85% to 50% Subsidy decreases by 1% for each $3,000 of family income

Decreasing from 95% to 80% Subsidy decreases by 1% for each $3,000 of family income

Equal to or above the second income threshold ($175,015) and below the third income threshold (currently $254,305)

50% 80%

Equal to or above the third income threshold ($254,305) and below the fourth income threshold (currently $344,305)

Decreasing from 50% to 20% Subsidy decreases by 1% for each $3,000 of family income

Decreasing from 80% to 50% Subsidy decreases by 1% for each $3,000 of family income

Equal to or above the fourth income threshold ($344,305) and below the upper income threshold (currently $354,305)

20% 50%

Equal to or above the upper income threshold ($354,305).

0% 0%

Source: Current income test thresholds from Source: SA, ‘Child Care Subsidy: How much you can get: Your income can affect it’, op. cit.

Proposed clause 3B sets out the criteria for who is considered a higher rate child:

• the child is aged under six years of age on the first Monday of the fortnight CCS is being claimed for

• the parent/carer or their partner is eligible to claim CCS for the child

• there is another child under six years of age whom the parent/carer or their partner is eligible to claim CCS for, and

• the other child is older, or was born on the same day (for example, twins) and is ranked higher under a determination made by the Secretary.

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Where an individual is claiming CCS for two or more children aged under six years who were born on the same day, the Secretary of the Department of Education, Skills and Employment (or a delegate such as Services Australia) must rank them to determine the higher rate child(ren). The Child Care Subsidy Minister’s Rules 2017 may provide a process for determining the ranking.

Phase 1: A New Tax System (Family Assistance) (Administration) Act 1999 Paragraph 67CC(2)(b) of the FA Admin Act currently provides that an individual is no longer eligible for CCS (via a fee reduction provided by the child care provider) if the Secretary has made determinations under subsection 67CD(8), for at least 52 weeks. Subsection 67CD(8) provides that the DESE Secretary (or a delegate such as Services Australia) must make a determination that an individual is not entitled to be paid CCS or ACCS if the Secretary is satisfied that they have not met the conditions of entitlement set out at subsections 67CD(2), (3), (4) and (6). Such conditions include being eligible for CCS or ACCS under the FA Act, meeting information reporting requirements and being eligible for a CCS rate more than nil. This essentially means that an individual’s eligibility for CCS expires if they have not met certain conditions for 52 consecutive weeks.

Item 10 repeals and substitutes paragraph 67CC(2)(b) of the FA Admin Act so that the relevant period is 52 weeks, or a different number of weeks prescribed by the Minister’s rules.

Item 11 adds proposed paragraphs 67CC(2)(d) and (e) which provide that an individual is no longer eligible for CCS via a fee reduction where

• there has been no report from a provider indicating that a session of care has been provided to a child for a period of at least 26 weeks or another period prescribed by the Minister’s rules or

• the DESE Secretary (or their delegate) is satisfied that the individual does not intend that the child be enrolled for care by a child care service or attend any sessions of care provided by the child care service.

It is unclear why paragraph 67CC(2)(b) is being amended to allow the Minister’s Rules to prescribe a period other than 52 weeks. The Explanatory Memorandum does not provide a reason other than the period of time in paragraph 67CC(2)(b) can ‘be aligned with any future changes to other cessation of CCS eligibility periods’.62

In relation to the 26-week period where no sessions of care have been reported (proposed paragraph 67CC(2)(d)), the Explanatory Memorandum states: ‘The ability to change the period of weeks under new paragraph 67CC(2)(d) is required to ensure any emerging issues following commencement of Schedule 2, Part 1 [the Phase 1 amendments], can be addressed. The appropriateness of the 26-week period will be considered as part of ongoing monitoring and compliance work for the measure’.63

It is unclear on what basis the Secretary will determine that an individual does not intend for a child to be enrolled or attend a service.

These amendments may be aimed at ensuring families cannot claim the higher rate CCS by claiming CCS for an older child but not actually intending for the older child to attend child care (or where the older child has not attended child care for a long time). However, this rationale is not explicitly set out in the explanatory materials.

62. Explanatory Memorandum, op. cit., p. 14. 63. Ibid.

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Family Assistance Legislation Amendment (Child Care Subsidy) Bill 2021 19

As discussed above, the Senate Scrutiny of Bills Committee raised concerns with these Henry VIII clauses and did not consider the Explanatory Memorandum provided sufficient justification for allowing delegated legislation to alter the operation of primary legislation.64

Phase 2: A New Tax System (Family Assistance) Act 1999 Item 13 is a Phase 2 amendment (commencing after the other amendments) and adds an additional higher rate child criterion. The criterion, at proposed paragraph 3B(1)(d) of Schedule 2 requires a session of care report to have been made by a child care provider in relation to the older child for at least one week in the period of 14 weeks ending at the end of the relevant CCS fortnight, or one week in a period to be prescribed by the Minister’s Rules.

The proposed criterion relates to the amendments to the FA Admin Act discussed in the previous section and appears to be aimed at stopping some families from claiming the higher CCS rate when an eligible older child is not or will not be attending child care. The Scrutiny of Bills Committee also raised concerns in relation to this amendment as it constitutes a Henry VIII clause.65

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64. Senate Scrutiny of Bills Committee, op. cit., p. 5. 65. Ibid., p. 4.