4.2.8.10 Dependent YA - parental income test

Summary

This topic covers the following matters:

• exemptions from the parental income test (1.1.P.40)
• determining whose income to include in the parental income test
• income assessed under the parental income test
• treatment of employer provided benefits under the parental income test
• treatment of amounts released from the First Home Super Savers (FHSS) scheme
• parental income free area (1.1.P.30), and
• calculating the 'parental income test result' using the family pool.

In order to calculate the 'reduction for parental income' (4.2.8.05) dependent YA recipients must have a parental income test result determined.

Exemptions from the parental income test

The parental income test does NOT apply to claimants/recipients whose parent/s:

• receive an income support payment, OR
• receive payment under the Farm Household Support Act 2014, OR
• receive ABSTUDY living allowance.

If the YA claimant/recipient is exempt from the parental income test then the parental income test result for the YA claimant/recipient is nil.

Note: If the parent/s are in an employment income nil rate period, the parental income test still applies.

Determining whose income to include in the parental income test

The parental income test is applied to the combined income of the parent/s or other relevant person/s on whom the claimant/recipient is wholly or substantially dependent.

If the dependent YA claimant/recipient normally lives with a parent, and that parent has re-partnered, the partner's (1.1.P.85) income is included in the combined parental income.

In shared care situations, and when parents are separated under the same roof, the parental income test is applied to the parent with primary care responsibility.

If the YA claimant/recipient does NOT normally live with either parent and the parents are separated, the income of the parent with whom the YA claimant/recipient LAST lived is assessed. If that parent has re-partnered since the YA claimant/recipient LAST lived with the parent, the new partner's income is NOT included in the combined parental income, as the YA claimant/recipient does not normally live with the parent's new partner.

Income assessed under the parental income test

Income assessed under the parental income test is combined parental income in the appropriate tax year (1.1.A.170), usually the base tax year (1.1.B.10). The base year is the tax year ending in the previous calendar year (that is, for the 2024 assessment period the base year is 2022-23). However in particular circumstances the tax year immediately following the base tax year may be used for assessing parental income.

The tax year immediately following the base tax year can be used when:

• the family's income is substantially less in the tax year immediately following the base tax year, than in the base tax year, and
• the decrease is likely to apply for AT LEAST 2 years from the date on which the event which led to the decrease occurred or first became apparent.

For the 2024 assessment period the tax year immediately following the base tax year is 2023-24.

The concept of what constitutes 'substantially less income' is flexible. If an applicant's parental income has, or will, decrease enough for them to attract YA, or a higher rate of YA, the decrease may be accepted as substantial.

The tax year immediately following the base tax year is also used for the period 1 October to 31 December of an assessment year in circumstances where parental income for the tax year following the base tax year, exceeds 125% of base tax year parental income and of the claimant's parental income free area.

The components of parental income are:

• taxable income, disregarding a parent's assessable FHSS scheme released amount (within the meaning of the Income Tax Assessment Act 1997) for that year, plus
• adjusted employer provided benefits (1.1.E.90) for the relevant tax year (see below Treatment of employer provided benefits under the parental income test), plus
• target foreign income (1.1.T.05) (see Note) based on the relevant Australian tax year, plus
• total net investment losses (1.1.T.105), plus
• tax free pensions and benefits (1.1.T.26), plus
• reportable superannuation contributions for the appropriate tax year (within the meaning of the Income Tax Assessment Act), less
• maintenance amounts paid out.

For the purposes of YA, a parent's taxable income for a tax year is the parent's most recent assessed taxable income for that year, which can be verified with an original or copy of the parent's taxation assessment made by the Commissioner of Taxation or amended by a tribunal or court.

If the parent does not have an assessed taxable income for that year, an estimate of taxable income may be accepted where it is considered reasonable, for example, a copy of estimated income included in a tax return as lodged with the ATO.

Where a reasonable estimate of parental income is being used to calculate the rate of YA, the parent’s assessed taxable income is used for the relevant tax year once it becomes available, instead of the estimate. This may affect the recipient’s payment.

In cases where a parent’s assessed taxable income is not provided as required, a recipient’s payment may be suspended. If assessed taxable income is subsequently provided, that is used in place of the estimate, including for the period of the suspension, for the relevant tax year.

For the purposes of YA, a parent's taxable income must be a positive figure or $0. It cannot be a negative figure even where a person's taxable income is a taxable loss.

Note: See SSAct sections 10A(2)-'target foreign income', 1067G-F10 and 1067G-F11(3)-'target foreign income'.

Treatment of employer provided benefits under the parental income test

An employer provided benefit, also known as a 'reportable fringe benefit', is a benefit an employer provides to, or on behalf of, an employee for the employee's, or in some cases their family's, private use (1.1.E.90).

The value of a person's adjusted employer provided benefits is included as a component of parental income and assessed under the parental income test.

From 1 January 2017 a person's adjusted employer provided benefits are calculated as follows:

• (Exempt employer reportable fringe benefits total × (1 − applicable fringe benefits tax rate)) + Non-exempt employer reportable fringe benefits total

Exempt employer reportable fringe benefits are those where the person's employer is considered an 'exempt employer' under the Fringe Benefits Tax Assessment Act 1986 section 57A. Exempt employers include:

• registered public benevolent institutions
• registered health promotion charities
• some hospitals, and
• some public ambulance services.

As at 1 April 2023, the applicable FBT rate is 47%. This means that reportable fringe benefits amounts derived from an exempt employer are not fully counted under the parental income test.

Note: The FBT year runs from 1 April to 31 March, with the FBT rate subject to change (refer to ATO FBT rates).

Non-exempt employer fringe benefits are those where an employer is not considered exempt under the Fringe Benefits Tax Assessment Act section 57A. The full amount of reportable fringe benefits from a non-exempt employer is assessed under the parental income test.

It is possible that a person may have both exempt and non-exempt employer fringe benefits where they are employed by both exempt and non-exempt employers.

Note: The formula used above is a de-grossing formula, which is applied to exempt employer reportable fringe benefits:

• (Exempt employer reportable fringe benefits total × (1 − applicable fringe benefits tax rate)) + Non-exempt employer reportable fringe benefits total

Once a person's non-grossed-up fringe benefits per employer exceed $2,000 they become reportable to the ATO. They are then grossed-up and recorded on the person's payment summary. The grossing up is described in the formula in the Fringe Benefits Tax Assessment Act 1986 section 135Q Reportable fringe benefits amount for some employees of certain institutions, which is:

• Reportable fringe benefits amount = Individual fringe benefits amount × 1 ÷ (1 − FBT rate)

The formula set out in the examples above effectively reverses this grossing up process. This allows Centrelink to calculate the non-grossed up amount of exempt employer fringe benefits. It is the non-grossed up amount of exempt employer fringe benefits, which are assessable under the parental income test.

Treatment of amounts released from the FHSS scheme

The FHSS scheme was announced in the 2017-18 Budget to allow first home buyers to save a deposit inside superannuation.

For taxation purposes, some amounts withdrawn from a saver's FHSS scheme superannuation account are considered to be taxable income. However, all amounts withdrawn are not assessed as part of a person's ATI for the parental income test.

Parental income free area

The parental income free area is the amount of income the parent can have without affecting the YA claimant/recipient's rate. If parental income is below or equal to the free area, parental income test result for the YA claimant/recipient is determined to be nil.

If parental income is ABOVE the parental income free area, the YA recipient's rate is reduced.

Calculating the parental income test result (using the family pool)

If combined parental income exceeds the parental income free area and the parents are not exempt from the parental income test then the parental income test result must be calculated.

The taper rate used to calculate the YA parental income test result is $0.20 for every $1.00 over the parental income test free area. However, to work out a claimant/recipient's individual parental income test result there is also a need to determine whether the claimant/recipient has parental income in common with another dependent young person aged under 22. This is so that the parental income test result for a claimant/recipient also takes into account that parental income would be used in the income tests for assistance provided to other members of the family (the family pool).

A claimant/recipient has parental income in common with another person where a parent of the recipient is also a parent of the other person/s and the YA, ABSTUDY or AIC Scheme parental income test applies to the other person/s. A claimant/recipient can have parental income in common with a person who:

• is a claimant/recipient of dependent YA
• is being paid dependent ABSTUDY living allowance
• is being paid dependent ABSTUDY Group 2 school fees allowance (means-tested component), or
• is being paid additional boarding allowance under AIC.

A YA claimant/recipient also has parental income in common with a relevant sibling, that is, an FTB child or regular care child as defined in the FAAct section 3, where a parent of the child is also a parent of the YA claimant/recipient.

Note: The definition of FTB child and regular care child relate to the qualifying circumstances of the child and do not require a parent to actually have received or be receiving FTB for the child to meet either definition.

Table 1: Calculating the parental income test result

The following table shows the steps involved in calculating the parental income test result for a YA claimant/recipient (using the family pool).

Note: The parental income test result is rounded to the nearest 10c.