- Withdrawal of Family Tax Benefit Part A at $80,000 income should be tapered to avoid a ‘cliff’.
- Alternative proposal to cap ‘disincentive rate’ to an individual’s marginal tax rate plus 20%.
- Productivity Commission proposals would support some further reduction in disincentives.
- After-school care discount could be given up to 10 years of age.
Despite recent childcare reforms, a large slice of wages – up to 75% in some cases – earned by mothers and primary carers are still being lost to tax and withdrawal of benefits, a KPMG Australia report finds.
Measures to help parents back to work by tackling the disincentives which still exist within Australia’s tax and transfer systems have been proposed in the paper. For lower income households, the withdrawal of Family Tax Benefit Part A Supplement once a family’s income exceeds $80,000 has been identified as a particular problem to be addressed.
The paper – The cost of coming back 2.0 – is a timely updated analysis of the workforce disincentive rates (WDRs) previously identified by KPMG which discourage secondary earners – typically women – from working more hours or days. The WDR is the percentage of income from taking on an extra day’s work that a person loses to income tax and Medicare levy, withdrawn family tax benefit and reduced childcare subsidy. The new report is the 12th in KPMG’s series of gender equity policy papers.
Examples of very high WDRs
One example given in the paper is where a father earns $50,000 working full time and a mother working part time earns $24,000. The mother can experience a WDR of up to 75% if she increases her working days from two to three or more days per week. She would be working for as little as $58.20 per day, keeping only 25 cents of every extra dollar earned by working the extra days.
Alia Lum, KPMG Tax Policy Partner said: “The welcome series of changes to the childcare subsidy in recent years have helped reduce the disincentives to mothers and primary carers working more hours, if they wish to do so, but they still remain high. The key problem now, as also identified by the Productivity Commission, lies in the interaction of our tax and transfer systems rather than in childcare costs, following the raising of childcare subsidy and dropping of annual subsidy caps.”
“One of the key contributors to high WDRs for lower income households is the complete withdrawal of the Family Tax Benefit Part A Supplement, which is triggered once a family income reaches $80,000. To correct these high WDRs, KPMG recommends the government investigate tapering the loss of the Supplement as additional income is earned so that these families don’t face a ‘cliff’ from losing the benefit when working more hours.”
Productivity Commission model
KPMG has analysed the Productivity Commission’s recommended reforms and has found that while the proposals would result in some improvement to WDRs compared to the current rules, high WDRs remain. Using the same example, as above, where a father earns $50,000 and a mother earns $24,000 working two days a week, under the PC’s preferred model the woman incurs a WDR of 67% and keeps only 33 cents of every extra dollar earned by working an additional day. While this is an 8% reduction on the current system, it still remains uncomfortably high.
Alternative proposal
KPMG reaffirms its support for a more radical approach to overcome high WDRs which was proposed in one of our earlier gender series papers, which would provide a top-up payment to cap the WDR at a maximum threshold. The threshold would be the secondary earner’s – typically a woman – marginal income tax rate, plus 20 percentage points. The top-up payment would be made through the Childcare Subsidy system. This would be the most targeted and progressive approach, as it would ensure that secondary earners with a lower income would have a consistently lower WDR than those on higher incomes. It would benefit only those whose WDR exceeded the maximum threshold, with an additional capping so that the maximum payment allowable would be $10,000.
Alia Lum said: “The plan would benefit households across the income scale, but especially those at modest incomes who can least afford to be discouraged from working more hours.”
Other findings and suggestions
The paper finds that several of the problems identified in previous KPMG ‘gender equity’ papers have been largely addressed over the past three years, through government policy actions including the 2023 Cheaper Child Care reforms, the 2022 Higher Child Care Subsidy for additional children under 5, and the 2021 removal of annual caps on subsidies.
But KPMG believes that with some families continuing to experience high costs for after school care (which attracts Child Care Subsidy) consideration could be given to applying the ‘higher rate children’ discount to all those under 10 years old.
For further information
Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au
