The introduction of paid parental leave last year enables parents to claim a fortnightly allowance for their recently born child. David O’Connell explains the eligibility criteria, and compares the new scheme to the Baby Bonus.
The Federal Government recently introduced the Paid Parental Leave (PPL) scheme, which pays a fortnightly allowance to the primary carer of a newborn baby or recently adopted child where they have given up work to look after the child. The scheme is available for those parents whose child was born or adopted on or after 1 January, 2011.
To be eligible for the scheme, the carer making the claim must have an adjusted taxable income — including fringe benefits, reportable super contributions and total net investment losses — of less than $150,000 in the previous financial year.
The claimant must also meet the scheme work test, which requires them to have worked continuously for at least 295 days (approximately 10 months) in the 392 days (approximately 13 months) before the birth or adoption. “Working continuously” has been defined as not having a period of eight weeks where the claimant neither performed one hour of paid work in a day nor received one hour of paid leave in a day.
The carer need not have been employed full-time to be eligible for the scheme. Part-time and casual workers are also eligible as are self-employed persons and contractors.
In addition, the claimant must have substantially stopped working — either by leaving employment or going on leave to initially claim the benefit — and must remain off work to continue to receive it.
While they can “keep in touch” with their employment for up to 10 days and continue to receive the benefit, the activities that can be performed are limited to those which facilitate a return to that employment after the period of leave.
The examples quoted include an employee doing a short course and a self-employed person organising a repair.
The rate of payment is equivalent to the national minimum wage (currently $570 per week) and is paid for a maximum of 18 weeks, resulting in a potential total payment of $10,260.
If the carer returns to work before the 18 weeks are up, the entitlement will cease and will not restart if they subsequently go on leave again. Any unused portion of the 18 weeks may be used by the carer’s partner, provided they meet the relevant conditions.
Currently, these payments are made by the Family Assistance Office (FAO). However, from 1 July, 2011, the FAO will forward the payments to the claimant’s employer and the employer will pay it on to the employee as part of their normal payroll process.
An important point to note is the PPL payments are unaffected by any other paid leave the employer is entitled to. For example, an employee entitled to receive paid maternity leave from their employer would be able to receive that payment and the PPL payments.
Employees entitled to both should consider delaying the receipt of one of the payments, since doing so may result in a lower tax liability.
The PPL scheme was designed to replace the Baby Bonus, however due to differences in eligibility criteria and tax treatment, some parents would have been better off under the old scheme. To avoid this situation, the Baby Bonus is still available — and if a parent is eligible for both, they can choose which one to receive.
The Baby Bonus is paid to carers who have an adjusted taxable income of less than or equal to $75,000 in the six months after the birth or adoption of the child. If the carer is a member of a couple, the couple’s combined income is used.
The Baby Bonus is paid in 13 payments of $407.23 per fortnight ($5,294 in total).
When choosing whether to receive the PPL or the Baby Bobus, clients should consider the tax consequences and Family Tax Benefit consequences of each.
The PPL payments are taxable income, and as well as potentially increasing the parent’s tax liability, the payment will be assessed as income when calculating the Family Tax Benefit. In contrast, the Baby Bonus payments are not taxable.
While the PPL provides a much greater potential benefit (up to $10,260) than the Baby Bonus ($5,294), there are situations where a parent entitled to the maximum PPL would be better off taking the Baby Bonus, as the following case study illustrates.
Sharon leaves her employment late 2010 for the birth of her second child, who is born on 1 January, 2011. She plans to be a stay-at-home mum for the foreseeable future to look after her two young children. She expects her employment income to be $37,000 for the financial year and her husband, Tony, earns $65,000 per annum.
They are entitled to either the PPL or the Baby Bonus and the following table compares their tax situation under each payment.
Even after tax, the PPL provides the greater benefit, however the increase in the taxable income will also reduce their Family Tax Benefit entitlements. In this case, if Sharon and Tony took the Baby Bonus, they would receive a Family Tax Benefit Part A of $1,927. However, by taking the PPL, they would lose all entitlement.
Therefore, when everything is taken into account, they would be $603 better off by taking the Baby Bonus.
An interesting point is there is a situation where a carer can receive both payments (in the case of multiple births). For example, a parent of newborn twins could take the PPL for one twin and the Baby Bonus for the other.
In summary, while the higher payment from the PPL would appear initially to give the greater benefit, consideration should be given to taking the Baby Bonus, which in some situations results in a better net benefit.
David O’Connell is head of technical services at Fiducian Portfolio Services.