Background

The Family Tax Benefit (FTB) Programme was introduced on 1 July 2000, to help eligible Australian families with the cost of raising children. In 2004–05¹, the FTB Programme delivered a total of $13.9 billion to approximately 2.2 million FTB customers². The FTB Programme effectively replaced nine separate types of assistance to families, previously delivered through both the taxation and social security systems. FTB consists of two parts—FTB Part A and FTB Part B.³

FTB payments are means-tested, with the rate of payment affected by the family's actual income in a particular financial year and the number, age and income of children for whom FTB is claimed. FTB Part A is the most common payment and is paid per child. It includes a supplement, also paid per child, after the end of the financial year. FTB Part B provides extra assistance to single parent families and two parent families with one main income. It also includes a supplement, paid per family, after the end of the financial year.

The Family Assistance Office (FAO) was established to enable customers to access the full range of family assistance services, including FTB Part A and FTB Part B, Child Care Benefit, Maternity Payment and Maternity Immunisation Allowance. The FAO is a ‘virtual' agency resulting from a joint venture between Centrelink, the Australian Taxation Office (ATO) and Medicare Australia, with the Department of Families, Community Services and Indigenous Affairs (FaCSIA) responsible for overall policy and coordination.

Customers may lodge their FTB claim through any of the FAO agencies, and elect to have their FTB entitlements paid in a single annual payment or a series of fortnightly instalments⁴. On average, about 90 per cent of customers are paid through fortnightly instalments. When customers choose fortnightly instalments, the amount of FTB they receive is based upon an estimate of the family's adjusted taxable income for the relevant financial year. Fortnightly instalments are, therefore, prospective payments.

At the end of the financial year, when the customer, and their partner if applicable, has submitted their income tax return to the ATO⁵, the family's FTB entitlement is determined by the FAO and compared with the amount of FTB actually paid to the family during the year. This process is known as reconciliation. It involves an exchange of information between the ATO and Centrelink. Three outcomes are possible as a result of the reconciliation process—the customer has either been underpaid, paid the correct amount, or overpaid.

How FTB debts arise

Essentially FTB customers may incur a debt to the Commonwealth in one of four ways:

• qualification—where a family's circumstances change so that the family is no longer eligible for FTB, or no longer eligible for the rate of FTB paid;
• reconciliation—where the reconciliation process has determined that the customer has been overpaid, when compared to their correct entitlement;
• non-lodger—where the customer and/or partner have not lodged a tax return within the prescribed time, or have not informed the FAO that they are not required to lodge a tax return for the relevant financial year; and
• administrative processes—where a computer processing error, or human error on the part of a FAO staff member, causes the customer to receive more FTB than they are entitled to.

Once FTB debts are identified, through either an automated process such as reconciliation or the work of individual FAO staff, as is often the case for qualification debts, the debt is formally raised in Centrelink's Debt Management Information System (DMIS) and referred to Centrelink's debt recovery network, for recovery action. Some debts are recovered immediately by automatically offsetting available components of a customer's supplement payment and/or tax refund against the debt. Where this cannot occur, staff in Centrelink's debt recovery network seek to contact the customer and negotiate a repayment arrangement. Under certain conditions, debts may also be waived, temporarily written off or permanently written off.

Audit approach

The audit examined the effectiveness and efficiency of the FAO's management of overpayments, within the FTB Programme. In particular, the ANAO considered the FAO's activities in relation to FTB debt prevention, identification, raising and recovery. The audit also compared the FAO's policy documentation and guidance material for staff, against relevant sections of Family Assistance legislation.

Centrelink manages the majority of activity in relation to FTB debts, and has consolidated operations within six debt management centres. During this audit, the ANAO observed various debt management activities at Centrelink's Melbourne, Perth, Darwin, Brisbane, Sydney and Coffs Harbour debt management centres.

The ANAO also interviewed key FAO staff members at a number of Centrelink Customer Service Centres and Call Centres, across Australia. In addition, the ANAO discussed aspects of FTB Programme administration with programme specialists and information system staff in Centrelink, FaCSIA, Medicare Australia and ATO national offices. These are located in Canberra.

During the audit, the ANAO reviewed various departmental files, reports, statistical collections and data sets. The ANAO also examined a range of FTB claim forms, information booklets and agency Internet sites. Fieldwork for the audit was primarily undertaken during April 2006 to June 2006.

Overall audit conclusion

Through a series of debt prevention strategies and measures, the FAO has significantly reduced the incidence and extent of customer debt arising from the reconciliation of FTB entitlements. In the first two years of the FTB Programme, approximately 33 per cent of the FTB population incurred a reconciliation debt, whereas in the most recent two years⁶, the incidence of reconciliation debt has fallen to under 10 per cent of customers.

In contrast with the range of activities targeting reconciliation debt, the ANAO noted that less attention had been paid to reducing the incidence of non-lodger debt—that is, debt arising from the failure to lodge a tax return (where required) in support of an FTB claim. The amount of non-lodger debt incurred each year has remained relatively stable. However, due to the reduced incidence of reconciliation debt, non-lodger debt now accounts for a greater proportion of the outstanding FTB debt stock than reconciliation debt.

The FAO has improved the rate at which FTB reconciliation debts are recovered from customers. Increased standard withholding rates, together with a FAO large debt initiative, announced in the 2005–06 Federal Budget, have contributed to this improvement. The ANAO noted that the recovery rate for non-lodger debt is significantly lower than that for reconciliation debt and that action regarding non-lodger debt was not included in the FAO large debt initiative.

Key findings

Preventing FTB debt (Chapter 2)

The FAO provides comprehensive advice to customers about eligibility requirements, payment rates, payment options, and strategies to avoid a reconciliation debt. The risks associated with incorrectly estimating family income are clearly presented in a series of information booklets. Together with information and income estimation tools on the FAO and ATO websites, the published material assists customers to accurately estimate their annual income and aims to reduce the risk of incurring a reconciliation debt. In addition, the FAO and Centrelink websites provide customers with the facility to update their income estimate online, throughout the financial year.

However, the ANAO found that neither the information booklets nor the websites emphasised the importance of FTB customers' obligation to lodge an income tax return in support of their FTB claim⁷. Where the materials refer to tax returns it is often to help explain their role in the reconciliation process, rather than to present a strong message to customers that lodging a tax return is a basic requirement to demonstrate eligibility for FTB.

The FAO lump sum claim form collects extensive information about customers' circumstances and includes a checklist of documentary evidence required to support a claim. However, the new four-page FAO fortnightly instalment claim form, replacing a 26-page form at the beginning of 2006, collects significantly less information. In fact, the new form does not collect sufficient information to process a new FTB claim, although it can be used to add a newborn child to an existing customer record. As a result, FAO staff are often required to contact the prospective customer and gather additional information in order to process the claim. At the time of conducting the audit, the extent of any additional administrative workload, associated with the introduction of the new form, was not clear. The ANAO noted that the ATO claim forms collect comprehensive information from customers and highlight the need to submit a tax return in support of FTB claims.

The ANAO found that, over the course of the FTB Programme, the FAO has developed and implemented a range of strategies and measures to successfully reduce the incidence of reconciliation debt for FTB customers. The Assistance to Families at Risk of Overpayment (AFRO) initiative directly targets customers at higher risk of incurring reconciliation debts and provides advice and assistance to those customers. The ANAO also noted that Centrelink's policy of inviting customers, at every contact with the agency, to update their income estimate, also helps to reduce the likelihood of customers incurring a debt.

A number of regional debt prevention projects seek to improve communication between the FAO and selected target groups—such as refugees and migrants, Indigenous customers and customers with volatile and/or low incomes.

Over the course of the FTB Programme the FAO has implemented a series of policy and legislative measures to address the level of reconciliation and qualification debt in the FTB Programme. Some changes, such as the More Choice for Families initiative and Negotiated Payment Rate measure, afford FTB customers greater choice in receiving FTB payments. Other measures, such as the supplement payments, quarantining FTB Part B⁸, automatic income uplift and maintenance income credit⁹, represent enhancements to the FTB Programme, specifically designed to reduce the likelihood of FTB customers incurring a reconciliation debt.

In contrast to the efforts directed toward reducing the incidence and extent of reconciliation debt, the ANAO found that the FAO had not addressed the matter of non-lodger debt in a focussed or targeted manner.

Debt raising and recovery (Chapter 3)

Centrelink's national training package for debt recovery staff and its provision of uniform resource material is designed to achieve a consistent approach to debt recovery within the network. In addition, the ANAO noted that FaCSIA maintained a valuable source of policy advice and legislative interpretation in the Family Assistance Guide, available through FaCSIA's website. Collectively, the Family Assistance Guide and Centrelink's e-Reference library provide debt recovery staff with a comprehensive suite of policy guidance on debt raising and recovery activities.

The ANAO examined Centrelink's debt raising and recovery procedures and observed these in operation in Centrelink's six debt recovery centres and a selection of Customer Service Centres and Call Centres across Australia. The ANAO concluded that Centrelink's debt raising and recovery procedures are consistent with the Family Assistance legislation and noted that these procedures are designed to ensure consistent treatment of FTB debtors across Centrelink's network.

The FAO policy in relation to raising FTB debts has regard to the difficulties associated with changing family circumstances. For example, the process of raising reconciliation or non-lodger debt, in cases where an FTB customer and their partner separate, can be complex. The timing of a couple's separation—either during the financial year in which FTB is paid, or after the end of the financial year—impacts on the debt raising process. The ANAO noted that the legislation limits the effect of an ex-partner's income on reconciliation to either a top-up or nil adjustment. The FAO policy also attempts to minimise the negative impact of an ex-partner failing to lodge a tax return for an income year prior to the couple's separation.

Consistent with legislative provisions and the FAO policy framework, Centrelink's debt recovery network employs a variety of means to recover FTB debts. The Family Assistance Guide supports debt recovery staff in choosing an appropriate debt recovery mechanism and helps to assure consistent treatment of FTB debtors. Some debt recovery mechanisms are automated, while others require a manual intervention on the part of debt recovery staff. FTB debts are recovered through:

• deductions from the debtor's (or another consenting person's) ongoing FTB fortnightly instalments;
• setting off debt against an income tax refund of the debtor or another consenting person;
• setting off debt against arrears of Family Assistance payments owed to a debtor or another consenting person;
• entering into an arrangement with the debtor to repay the debt by instalments (know as a cash arrangement);
• garnishee notice issued to an employer, bank or solicitor; and
• legal proceedings.

The ANAO noted that the FTB Programme recognises many Family Assistance debts arise because of a customer's inability to accurately estimate their income, rather than as a direct result of fraud or misinformation. Therefore, under the FAO's policy, FTB debts are treated more generously than income support debts.

The Family Assistance legislation provides for the Secretary of the Department of Families, Community Services and Indigenous Affairs to waive a class of debts specified by Ministerial determination. This provision was invoked through the Family Assistance Estimate Tolerance (Transition) Determination 2001, of 3 October 2001. As a result, the first $1 000 of certain FTB and Child Care Benefit debts for 2000–01 were waived. This measure saw $359 million of FTB debt waived for 591 941 FTB customers.

The Family Assistance legislation incorporates other provisions for waiving and writing off FTB debts. For example, where a customer's net reconciliation debt (after the application of supplement payments and tax refund offsetting) is less than $50, the debt is deemed to be not cost effective to recover, and is automatically waived. Debts arising from administrative error are also able to be waived in certain circumstances.¹⁰

Managing the stock of FTB debt (Chapter 4)

The stock of FTB debt represents a dynamic equilibrium. Amounts are constantly being added to the stock of debt—as customer debt is identified and raised—and other amounts being subtracted from it—as debts are recovered from customers or are otherwise removed from the debt stock¹¹. Over the course of the FTB Programme to November 2005, approximately $5.63 billion of FTB debt has been raised or added to the debt stock, while approximately $4.82 billion has been recovered, waived or otherwise removed from the debt stock. At March 2006, the total amount of outstanding FTB debt was $765.7 million. ¹²

The ANAO found that, up until December 2005, reconciliation debt was the major contributor to the stock of FTB debt, and at March 2006 accounted for $340.4 million or 44.5 per cent of the FTB debt stock. The ANAO also found that, at December 2005, non-lodger debt overtook reconciliation debt as the major contributor to the stock. At March 2006, non-lodger debt accounted for $377.3 million, or 49.3 per cent of outstanding FTB debt. ¹³

In terms of the amount of debt added each year, the value of outstanding reconciliation debt has steadily decreased over the five entitlement years 2000–01 through 2004–05. However, the value of outstanding non-lodger debt added each year was found to be relatively stable over the four entitlement years 2000–01 to 2003–04. The outstanding stock of FTB debt has oscillated within the range of approximately $700 million to $900 million, over the period March 2004 to March 2006.

The ANAO found that the incidence of reconciliation debt had reduced from approximately 33 per cent of the FTB population during the first two years of the programme to under 10 per cent of the FTB population in the most recent two years. The ANAO also found that the introduction of the FTB Part A supplement in 2003–04 and the FTB Part B supplement in 2004–05 significantly reduced the number of FTB customers who incurred a reconciliation debt. Without the Part A supplement, 27 per cent of customers would have incurred a reconciliation debt in 2003–04. However, with the supplement only 10 per cent actually incurred a reconciliation debt for that FTB year. In 2004–05, 15 per cent would have incurred a reconciliation debt but for the Part A and B supplements—only five per cent actually incurred a reconciliation debt for that year.

Despite the significant reduction achieved in respect of reconciliation debt, the management of non-lodger debt represents an ongoing challenge for the FAO. The ANAO considers that unnecessary administrative work is attached to raising non-lodger debt, which eventually has to be reversed when a customer lodges a tax return. Within the 12 month period October 2004 to September 2005, the FAO raised $484 million of new non-lodger debt. However, during the same period, FAO reversed some $380 million, or 75 per cent of the amount raised in that period.

The ANAO noted a particular challenge for the FAO was that of managing customers with multiple non-lodger debts. The ANAO found that, at June 2006, over 26 000 FTB customers had incurred non-lodger debts for two or more years. In addition, almost 5 700 customers had never submitted a tax return for any of the four years in which they received FTB. Under the current FAO policy, customers continue to receive fortnightly FTB payments even though they have not lodged tax returns for a number of years and, as a result, incurred non-lodger debts for some of those years. The ANAO found that these customers may accumulate FTB debt at a rapid rate—far faster than the majority of customers incurring reconciliation debts.¹⁴

Although standard withholding rates for customers repaying non-lodger debts are higher than those for reconciliation debts¹⁵, the ANAO found that the average time taken to repay non-lodger debts is significantly greater than that taken to repay reconciliation debts. For example, the ANAO found that at least 80 per cent of recoverable reconciliation debt was recovered within three years, while less than 20 per cent of recoverable non-lodger debt was recovered within three years.

The FAO large debt initiative, which commenced in January 2006, was targeted at customers repaying FTB reconciliation debts that were greater than $3 000 in value and more than 12 months old. The ANAO found that the initiative had been successful in almost doubling the average fortnightly debt recovery rate for the 13 900 customers involved¹⁶, and had reduced outstanding FTB debt by over $9 million in the six months between January and June 2006. The ANAO noted that the FAO large debt initiative did not include customers with non-lodger debts.

While a number of other measures aimed at improving debt recovery were also introduced in the 2005–06 Federal Budget, no definitive information on the success of these measures was available at the time of conducting the audit. The ANAO noted that the measures included an increase in the standard withholding rates and the ability to offset a customer's top-up payment and/or tax refunds against FTB debts incurred in previous years. Based on the ANAO's examination of the effect of offsetting available supplement payments (following reconciliation) against debts incurred in previous years, the ANAO considers that these new measures will have a positive effect on reducing the FTB debt stock.

Recommendations

The ANAO made two recommendations in relation to the FAO's management of FTB overpayments. Firstly, the ANAO recommended that the FAO evaluate the introduction of a revised FTB claim form, for its impact on administrative workloads. Secondly, the ANAO recommended that, building on the success of measures employed to reduce the incidence of reconciliation debt, the FAO develop measures to address the prevention of non-lodger debt.

Agency responses

Australian Taxation Office

The Tax Office has no issue with the audit findings and supports the two consequential recommendations. It also notes the importance of developing a deeper understanding of the circumstances surrounding non-lodger debt so as to provide a reliable platform from which to develop administrative measures targeted at reducing the incidence of this debt, thereby ensuring any awareness strategies and lodgement enforcement activities are appropriately scoped.

Centrelink

Centrelink accepts the findings and recommendations of this audit. Centrelink would also like to thank the Australian National Audit Office for the way in which this audit was conducted. Centrelink appreciates the auditor's efforts and willingness to foster a positive working relationship with its officers. This audit will greatly assist Centrelink to focus its attention and work with its Family Assistance Office partners to develop measures to address the key findings and recommendations.

Department of Human Services

Noting that one of the key factors driving the creation of the Department of Human Services was the need to improve customer service and both of ANAO's recommendations provide opportunities to do this, the Department agrees to both of the recommendations. Initiatives recently announced by the Australian Government means that the Child Support Agency will be undertaking compliance activity to reduce the numbers of parents not lodging their tax returns. This then means flow-on benefits to the administration of the Family Tax Benefit Scheme.

Department of Families, Community Services and Indigenous Affairs

FaCSIA agrees with both recommendations of the audit report, and with the ANAO's conclusion that a range of strategies and measures introduced over the life of the programme are successfully reducing the level of reconciliation debt for FTB customers. There is also evidence that these strategies and measures are helping to contain non-lodger debt. The level of non-lodger debt raised in November 2005 was around 29 per cent lower than that raised in November 2004. FaCSIA believes that the stock of FTB debt is currently in decline. The stock of FTB debt at the end of September 2006 was $640 million. This is the lowest level since the end of 2003 and less than 1 per cent of total FTB outlays since July 2000.

Medicare Australia

Medicare Australia supports the findings of the ANAO report. Medicare Australia is nearing the completion of an ambitious expansion of our family assistance services. All Medicare offices will provide full family assistance services from 6 November 2006. Over the next twelve months we will be closely monitoring our performance and the recommendations of the ANAO report provides useful further guidance about the role we can play to assist customers to avoid FTB debt. Medicare Australia will continue to work closely with Centrelink to ensure consistent advice is given to customers and to implement findings arising from the evaluation to be undertaken in response to recommendation No. 1 of the ANAO report.

Footnotes

1 The latest, full financial year for which expenditure figures were available at the time of preparing this report. The matter of how FTB statistics ‘mature over time' is discussed in Chapter 1. Due to the time allowed for past-period claims and the tax return lodgement and reconciliation processes, some statistics for a given FTB entitlement year may not stabilise until some 24 months after the end of the entitlement year.

2 The Family Assistance Office uses the term ‘customers' to refer to eligible recipients of FTB payments.

3 FTB Part A replaced Family Allowance, Family Tax Payment (Part A) and Family Tax Assistance (Part A); and FTB Part B replaced Basic Parenting Payment, Guardian Allowance, Family Tax Payment (Part B), Family Tax Assistance (Part B), the ‘with children' rate of the Dependent Spouse Rebate and the Sole Parent Rebate.

4 There are other payment options for customers that involve a combination of fortnightly instalments and a lump sum payment after the end of the relevant financial year.

5 Alternatively, customers who are not required to submit an income tax return in a particular financial year, are required to notify the FAO of this fact.

6 Latest figures available at the time of the audit were for the 2003–04 and 2004–05 FTB entitlement years.

7 Some customers are not obliged to lodge a tax return each year, however, these customers are required to inform the FAO of their situation.

8 Normally, FTB Part B entitlements are calculated for an entire financial year—that is, the income limit for the lower earner applies to a full 12 month period. However, this measure allows FTB Part B payments to be quarantined for part of a financial year. See discussion in Chapter 2.

9 The Maintenance Income Free Area is the amount of maintenance a customer can receive before the customer's FTB A payments are reduced. Previously this provision was only available for the current financial year. The new measure enables customers to use their Maintenance Income Free Areas from previous years to offset late payments of maintenance income.

10 If the debt arises from administrative error, the person received the payment in good faith and recovery of the debt would cause the debtor severe financial hardship; OR the payment was received in good faith, AND the debt has been raised during whichever of the periods below ends last:

• after the end of the next income year following the income year in which the eligibility period or event which gave rise to the payment of family assistance, OR
• more than 13 weeks from the day the family assistance payment was made that gave rise to the debt.

11 Debts may be waived, temporarily written off, permanently written off or reduced.

12 The latest figures available at the time the ANAO conducted its analyses for this audit, where those up to March 2006. In November 2006, FaCSIA advised the ANAO that the total amount of outstanding FTB debt, at June 2006, was $718.1 million.

13 In November 2006, FaCSIA advised the ANAO that the relevant figures, at June 2006, were:

• Reconciliation debt - $331 million or 46.2 per cent of the FTB debt stock;
• Non-lodger debt - $336 million or 46.8 per cent of the FTB debt stock.

14 This is because, if a customer fails to lodge a tax return or inform the FAO that they are not required to lodge a tax return, and is identified by the FAO as a non-lodger, the entire amount of FTB payments received during the relevant FTB year is raised as a debt.

15 Standard withholding rates for non-lodgers are as follows. For customers on the base rate of FTB Part A, 95 per cent of fortnightly entitlement, and for customers above the base rate, 25 per cent of fortnightly entitlement. Standard withholding rates for reconciliation debt are: $30 per fortnight for debts under $750 and $60 per fortnight for debts greater than $750.

16 The initiative had a target of 13 900 customer contacts within the first six months.