4.2.9.10 Family Actual Means Test - Designated Parents

Summary

The FAMT assesses a family's financial resources by determining their spending and savings for the appropriate tax year. The FAMT is directed towards designated parents who may receive income from sources other than a wage or salary, or have an assessable income under the YA income test which may not accurately reflect their capacity to pay the costs of education because of their ability to legitimately minimise their taxable income. The FAMT is ONLY applied to dependent YA recipients when either one or both of their parent's meet one or more of the FAMT categories.

Act reference: SSAct section 1067G Module G Submodule 2-Persons to whom family actual means test applies

The FAMT categories

The first 5 categories of designated parent/s relate to the base tax year (1.1.B.10) and parent/s only need to be involved for a day or more in this period in order to be in a FAMT category. It should be noted that the last 2 FAMT categories in relation to overseas assets and a migrant under a business skills category relate to the current situation and NOT the base tax year.

A YA recipient's parent/s are designated parent/s for the purposes of the FAMT if they:

• in the base tax year had an interest in a trust (1.1.T.180), private company or unlisted public company (1.1.C.220), OR
• in the base tax year were self-employed, except as a sole trader who was mainly or wholly engaged in a primary production (1.1.P.389) owned by the person, OR
• in the base tax year were a partner in a partnership (1.1.P.85), OR
• in the base tax year derived $A2,500 of income, or more, that does not consist only of income from a pension or similar payment from a source in Norfolk Island or overseas, OR
• in the base tax year derived income from a salary or wage and has claimed a tax deduction for a business loss (for that year or previous year) that does not consist only of a total net investment loss (1.1.T.105) or net passive business loss, OR
• have a current interest of $A2,500 or more in any assets (1.1.A.290) located outside Australia and its external territories, OR
• entered Australia under a permanent visa or entry permit visa in a business skills category in the last 10 years before 1 January in the calendar year in which YA payment period ends.

Note: In 2010, total net investment losses will apply as a component of parental income for all current tax year assessments. Net passive business losses will continue to be included as a component of parental income for all base tax year assessments until 2011. From 2011, total net investment losses will form part of the parental income test for both current and base tax year assessments.

Exception: FAMT does not apply to a person while a family member (1.1.F.60) of the person is receiving ECRP until 31 December of the calendar year in which the ECRP ceases.

Example: If the family member/s receives the ECRP from 1 April in the calendar year, they are exempt from the FAMT for that day for the remainder of the calendar year.

The FAMT does NOT apply to dependent YA recipients, or any related siblings, if they are in one of the FAMT categories and their parent/s are not.

The following information explains each FAMT category in detail.

Interest in a trust

A person holds an interest in a trust if they are the trustee, beneficiary, or unit holder but NOT an agent creditor or employee (1.1.E.87) of a trust. All trusts are included in assessing FAMT categories EXCEPT the following:

• a parent's account held in trust for a child,
• deceased estate trusts,
• assets held in trust by an insolvency administrator,
• a trust in relation to a superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993 that is not an excluded fund within the meaning of that Act (i.e. involvement in a trust created by a resident, complying superannuation fund),
• public unit trusts in which 50 or more people are not family members of the trustee, or they are offered for subscription or purchase by the public (body corporate trusts and most managed investment funds through institutions such as Banker's Trust, Citibank, AMP etc),
• charitable trusts, AND
• trusts created by operation of law.

Example: Temporary trusts created during property settlements.

Explanation: A trust is a vehicle for a person to give property to another person or persons, usually on terms in a trust deed. A trust deed will set out the conditions of the trusts and will also state whether the trust is discretionary or non-discretionary.

Interest in a private company or unlisted public company

The most common type of company an assessor will encounter is a private or family company, normally identified by 'Proprietary Limited', 'Pty Limited' or 'Pty Ltd' after its name. A private company has shares issued to family members and office holders are usually family members. Whether or not the company does any type of business is irrelevant, as its mere existence will include parent/s in the FAMT. Under corporation law, ALL companies are required to register for the Australian Securities Commission (ASC) whether listed or unlisted, private or public.

An unlisted public company is not listed on the ASX.

Self-employment

A self-employed person is defined as someone who works with a view to making a profit or for gain or reward other than under a contract of employment or apprenticeship, whether or not the person employs one or more employees.

Examples: Indications that parent/s are self-employed are:

• maintaining their own financial accounting records,
• not receiving a group certificate from an employer at the end of the financial year,
• not having compulsory superannuation or Workcover payments paid by an employer on their behalf. Instead, they pay their own superannuation and can claim it as a tax deduction or business expense, or
• paying tax on a monthly basis through the Prescribed Payments System or the Reportable Payments System. If necessary check tax returns submitted to the ATO.

Exception: Self-employed primary producers who are wholly or mainly engaged in a primary production business that they own in the base tax year are NOT included in this category. Wholly or mainly means more than 50% of their work time.

Examples: Primary production includes activities like farming cattle, sheep, llama and fish, and horticulture. Activities such as stock agent, shearing and fencing are NOT defined as primary production.

Partner in a partnership

A partnership does not need a written agreement to exist. Sharing profits and losses may be enough to indicate a partnership exists. A joint owner of an asset is not necessarily in a partnership for the purposes of the FAMT. This may even be the case where income is being derived from the joint ownership of the asset.

Parent/s involved in a partnership MUST:

• provide evidence and supporting documents to show a partnership has been dissolved. However, if the parent/s were involved in the partnership for at least a day or more in the base tax year, then they are subject to the FAMT. If however the dissolution of the partnership causes a decline in the family's actual means there may be a case for a current FAMT assessment, and
• declare income or losses in their individual income tax return (see explanation).

Explanation: Under taxation law, a partnership must ALSO lodge its own return.

Overseas income above or at $A2,500

The $A2,500 threshold relates to ANY income in the base tax year that parent/s receive from overseas which does not consist only of income from a pension or similar such payment. Where a person derived pension type income and other income (such as rent or interest), the pension must be included in determining whether the $A2,500 threshold is exceeded. Income also from a taxable overseas pension should be shown as overseas income under the YA parental income test. Parent/s who also worked overseas and earned $A2,500 or more in the base tax year are also included in this category.

Examples of overseas income are pension income, rent, interest, etc.

Salary or wage earner with a business loss

Parent/s are a salary or wage earner if they earn income on a regular basis under a contract of employment, whether implied or expressed. It should be noted that if parent/s have a total net investment loss or net passive business loss only, they are NOT subject to this category. However, the value of such total net investment loss is added to the combined parental income for the purposes of the YA parental income test, and is also added to the family's actual means for the purposes of the FAMT, if the FAMT applies.

Note: In 2010, total net investment losses will apply as a component of parental income for all current tax year assessments. Net passive business losses will continue to be included as a component of parental income for all base tax year assessments until 2011. From 2011, total net investment losses will form part of the parental income test for both current and base tax year assessments.

Overseas assets above $A2,500

Parent/s are designated for the purposes of the FAMT if they currently have an interest (the value of which is $A2,500 or more) in any assets located outside Australia and its external territories (including Norfolk Island). An asset is an overseas asset if:

• a parent would normally be obliged to declare it under the YA assets test, and
• it is normally located outside Australia (see explanation).

Explanation: This includes the principal family home if it is located overseas, even though the value of that home is exempt from the YA assets test.

A parent may move in and out of this category as the value of their overseas assets changes during the year. ONLY the value of the PARENT/S interest in the asset must be or exceed $A2,500. If parent/s move out of this category they MUST provide evidence of the disposal of the asset OR the value of their interest reducing below the $A2,500. The FAMT may cease to apply from the date the parent/s ceased to hold assets overseas worth $A2,500, if they are not in any other FAMT category.

Documentary evidence must be supplied in these cases (statutory declaration and copy of deed of transfer of sale). It is important to note that a parent may at any time during the calendar year become subject to this FAMT category, as their involvement in assets may increase over or at the $A2,500 threshold during the year. It is the obligation of the recipient to inform Centrelink of any change in events or circumstances.

An asset is EXEMPT if:

• it is normally held in Australia, but is temporarily overseas, OR
• an Australian resident (section 7(1)-'Australian resident') invests in a company in Australia, independent of their family, AND the company invests the money in overseas investments (see example).

Example: Personal items, including spending money, that an assessable family member may take with them if travelling overseas.

Act reference: SSAct section 7(1)-'Australian resident'

Business migrant

A parent in the business migrant category is assessed under the FAMT on a full calendar year. This INCLUDES the year they arrived in Australia. A parent is in this category if within 10 years before 1 January in the calendar year in which YA is payable the parent first entered Australia under a permanent visa or entry permit. A parent remains in the business migrant category for 10 years from their arrival in Australia. Recipients can check with DIAC for the correct date of their entry into Australia. The visa codes for people entering Australia under these conditions include 127, 128, 129, and 130.

Act reference: SSAct section 10B(3) Designated parent

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Last reviewed: 2 November 2009