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Self Managed Super Fund (SMSF) Article
Using the Family Tax Benefit
By Tony Negline.
This article may be out of date.
13th May 2006
A key plank of the Federal Government’s taxation policy is the Family Tax Benefit (FTB).
FTB is designed to assist families with the cost of raising children under 18 and children aged between 18 and 24 who are studying full-time.
FTB has the ability to effectively and dramatically reduce a family’s tax bill. A family that receives FTB pays less tax and gets to increase their spending budget.
Families on low to middle incomes can potentially receive a lot more money from the government than they have actually paid in income tax (refer to the table for details of how much more you can receive after this week’s Federal Budget). Middle to high income earners often find that they miss out on FTB. However if they know how the system works, they can use clever strategies to increase this government hand out or become eligible for it.
There are two parts to FTB – Part A and Part B. Part A is worked out using family income. Part B only looks at how much a low income earning spouse earns.
The definition of income is very important. Income includes taxable income as detailed on your tax return, reportable fringe benefits – that is employer provided benefits that have a value of more than $2000 and net rental losses on any investment properties.
The amount of FTB will go up if the amount an employer super contributions or personal deductible super contribution or the value of their tax deductions or more taxable fringe benefits that are valued at less than $2000 are increased.
Bob and Jane McCulloch have three children aged 4, 6 and 9. Jane is currently a full-time Mum but would be interested in getting some part-time work if it fitted neatly around her home responsibilities. The family’s income for FTB will be $120,000 in the 2006/07 year.
Under the new rules and income tax rates that will apply from July 2006 they will receive no FTB A. Jane will receive the maximum FTB B possible – that is $3370. Their total after tax remuneration would be about $87,500.
So is it worth Jane’s while taking a part-time job? If her part-time job paid $10,000 over the financial year her FTB B would reduce to $2190. Their after-tax pay would increase to $96,340 or an extra $8,840.
If Jane’s part-time job paid $20,000 they would receive less than $200 in FTB B and their after-tax pay would be $102,840. Under this scenario Jane would have to pay $4660 tax.
Given the above Jane may well decide it is not worth her while rejoining the workforce.
Instead Bob asks his employer to salary sacrifice $20,000 in his super. This would reduce their FTB income to $100,000 which would mean the McCulloch’s would receive $3250 in FTB A and Jane’s FTB B of $3370. That is their tax bill would be reduced by a total of $6620. This produces an after tax remuneration of $79,030. In effect the $20,000 additional super contribution has cost them $8,470.
If the McCulloch’s were able to reduce their FTB income to $80,000 they would receive over $8700 in Family Tax Benefit. Their net remuneration would be $69,100. The $40,000 super contribution has only cost them $18,400 in after-tax remuneration.
These are very significant benefits in anyone’s language.
The amount of FTB is also based on the number of children you have. To understand this point let’s look at another example. Mark and Sally Robinson have one child aged 17. Sally has FTB income of $85,000 and Mark has FTB income of $20,000. As a result they are not eligible for any FTB.
The FTB is a very complex beast. Weaving your way around it can be quite daunting. The amount paid under FTB A varies depending on the age of children. The amount of FTB you receive can be different for a number of reasons including receipt of child maintenance or not caring for children full-time.
There are four ways to apply for FTB:
- Ask your employer to reduce the amount of tax they take out of your salary
- Claim annually from the tax office when you put in your income tax return
- Receive regular payments from the Family Assistance Office (most people choose this option)
- Receive an annual payment from the FAO
Big problems can arise with getting FTB on a regular basis if you under-estimate your income. This might mean you have overpaid the benefit and have to re-pay it.
In many cases the FTB effectively represents a return of taxes already paid. This is a rather unwieldily approach which some people have argued could be redesigned to achieve the same result but would be cheaper to administer.
Surprisingly very few financial planners or accountants seem to have spent much time understanding how the rules work so that they can maximise their clients’ after-tax income.
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