11 March 2014

March 20 Newstart changes- more than just a rate increase

The rate of Newstart allowance (NSA) is adjusted twice a year - on 20 March and 20 September - in line with upward movements in the consumer price index (CPI).  This time round, the various NSA rates (and some associated payments) will increase by 1.9%.  Coinciding with these changes, the amount of private income a person can have before NSA is reduced under the income test is also being increased, from $62 a fortnight to $100 a fortnight.  This will be the first increase in the "income free area" or "allowable income" since 1 July 2000 when it was increased by $2 a fortnight as part of a range of measures intended to compensate for the introduction of the goods and services tax.
While the CPI based rate increases have received some coverage (go here for the press release and here for a detailed list of the changes), the increase in the income free area hasn't had much at all.  So, herewith, a few charts showing the combined effect of the CPI rate increases and the changed income test free area!

The charts show the increase on a yearly basis.  I do that because, as you'll see, some of the increases in NSA get "clawed back" by the Federal Government by way of higher income tax and medicare levy.  That's not really evident on a fortnightly basis as the tax calculations involved tend to be done when tax returns are eventually lodged.  But happen they do, and in these charts you'll be able to see which payments go up, which go down, and the effect on tax and medicare.
There are lots of possible combinations of household types and circumstances to which the March changes apply, and so this is just going to be a selection.  Apologies if a household you were particularly interested in hasn't been included.  (If you are really keen, ask in the comments and I'll see if I can add yours on.)
First up, single NSA.

Chart 1

The increase at maximum rate (ie, for those with zero private income) comes from two sources.  NSA itself increases by $252 a year (including the increase in the clean energy supplement component of the NSA rate), but there is also an increase in the income support supplement of $4 a year (barely discernable on the chart).  Note, however, that the increase in assistance then starts to rise once private income exceeds $1612 a year, peaking when private income reaches $2600.  This is the effect of the relaxation of the NSA income test, which on its own gives a maximum gain of $494 a year.  When the CPI rate increases and the income test relaxation are combined, recipients with private incomes of at least $2600 a year have a total increase in assistance of $750.

Once private income exceeds around $13,250 a year the chart shows that the total (or net) assistance package starts to reduce due to the impact of the medicare levy and income tax.  These two items are shown as (negative) green and red components, pulling down the overall increase.  Why does the medicare and tax liability change this way?  It's because NSA is income for tax purposes, and so an increase in the taxable part of NSA also increases overall taxable income.  Higher taxable income means more tax/medicare is payable - in this case around $215 more.

You might be wondering how the combined tax and medicare liability is managing to claw back nearly 30% of the increase in assistance when income tax rates at this level of income are 19%.  It's because under the medicare shade-in rules, the levy is being imposed at a rate of 10%, not the 1.5% you might be expecting.

The final item of note occurs right at the end of the income range shown in the chart - a sudden increase in the income support bonus.  Up to that point the bonus shows up as a tiny sliver on the top of each column, reflecting the $4 a year increase in its rate.  Right at the tail end though, the full amount of the bonus suddenly pops up.  This is because the CPI increase and the income test change also push out the income at which NSA ceases to be payable (the cutout point).  Those in the income range between the old and new cutouts become newly eligible for NSA under the income test and in doing so newly attract the income support bonus.
The above represents the changes for those getting the lower single rate of NSA.  The other main single NSA rate is a little higher and is paid to sole parents, long term income support recipients aged 60+, people whose partner is imprisoned and "illness separated" couples.  Given that the difference in the increases for the two single rates is slight I've not bothered producing an essentially duplicate chart for them.
That's the more-or-less baseline version of what happens on 20 March.  Now let's see how this applies to some other household types, starting with some couples.
Chart 2
At first glance this is very similar to the result for single NSA, and that's pretty much true.  The initial increase is larger (there are two adults after all) at around $459 (including the small bonus change), but the income test gain is even more substantial.  Where both members of the couple have private income (as in this example) both benefit from the income test relaxation, effectively providing twice the gain from this source.  In this case the overall gain from the CPI rate increase and income test relaxation peaks at $1447 a year.
As with the single case, toward the tail end of the payment range income tax and the medicare levy reduce the overall gain.  At the extreme end the extension to the payment range discussed earlier has also added income support bonus payments - in this case two lots (one each).
If the couple household only manages one earner, the results are rather different, as per Chart 3.
Chart 3
At zero private income the rate increase is (obviously) the same as for the two-income couple.  However, a single earner couple will get the same gain from the income test change as a single person, giving a peak gain of $953.  Given the presence of two adults rather than one, this is proportionately the smallest gain of the three household types so far examined.  The message (if there is one) to the second adult is "get a job".
Due to an attack of slackness I haven't separated out the income support bonus from the NSA payments in this chart.  However, as with the other households, it's the cause of the spiky appearance at the extreme tail end of each partner's payment range.
The tax and medicare effects look rather different to those in the first two households.  This is because the income level at which the medicare levy starts to apply takes into account household composition (ie, it's family based), whereas, following the abolition of the dependent spouse tax offset, the income tax is calculated as if the person was single.
The final mystery item is the dark green negative amounts at the tail end of the payment range, which I've perhaps not so helpfully labelled P2 LIS.  This is the (somewhat obscure) low income supplement (hence LIS) that partner 2 (the non-earner) is entitled to under the household assistance arrangements put in place when carbon pricing was introduced.  It's not available to those on income support (simply because income support payments, like NSA, already include similar assistance in the form of the clean energy supplement) and so the extension of the income range over which NSA is payable has the flow on effect of removing entitlement to the LIS.
Now lets add some children.
Chart 4
Actually, this isn't much more complex.  The most substantial change is the effect on Family Tax Benefit Part B (FTB B).  We've already seen that increased income support can lead to higher tax and medicare liabilities - what we see here is that it also can cause reductions in other transfer payments.
FTB B is being reduced because the amount payable is based on the income of the lower income partner - in this case, partner 2.  The extra income support (in this case, parenting payment) coming from the CPI rate increase leads to a reduction in the amount of FTB B.  This reduction means that single income couples with young children get proportionally the lowest overall increase of all the household types.  However, come July this situation will partially right itself because that's when FTB B has its turn at indexation (and no, increases in FTB B don't change the rate of income support).
As with the earlier single income couple, there's a gap between when increased income tax and an increased medicare levy appear.  However, it's wider this time because the medicare liability is calculated taking into account the fact that there are 4 people in this household.
And that's basically it - the above charts cover singles and couples.  But there is one interesting effect left which I'll finish off with.  While the increase in the income free area is for NSA recipients (and similar payments, like partnered parenting payment), the way the income test for most couples works means that some other income support recipients pick up an increase too.  The prime example is Austudy payment (income support for students).
Austudy has its CPI based increases on 1 January each year, so ostensibly there's nothing for Austudy recipients on 20 March.  But as I 've discussed in earlier posts, the effect of an Austudy recipient's partner's income on the Austudy rate is worked out using NSA rules.  So even though there's no actual NSA involved, there's still a ghostly (perhaps ghastly given this) presence exerting its influence.  This time round the ghost of NSA causes an increase in Austudy for a non-working partner in some cases.  Here's the chart.
Chart 5
 How about that eh?  Nothing (except an invisible-at-this-scale increase in the income support bonus) until private income reaches almost $30,000 and then the sudden appearance of extra money for partner 2.  And right at the tail end there's an even bigger bonus - the higher Austudy payment increases the range of income over which Austudy is payable, triggering an entitlement to the student startup scholarship in the newly extended range.
As with the case in Chart 3, the extension of Austudy eligibility up the income range brings with it a loss of entitlement to the Low Income Supplement.  And in truth, the seeming good news story about the scholarship may not be so good given that the scholarship scheme is being turned into a loan.  Still, even without the scholarship, the ghost of NSA will deliver around $660 a year to some students - it's a ghost that does good deeds after all. 
And that's that, unless you want to take up my earlier offer to add in an extra household type.


  1. Hi Dave,

    Tim cameron (from twitter) here. I'd love to chat to you a bit more about some of this stuff and how I might be able to use some of it in my role as an Australian delegate at the Y20 (youth G20 summit). Could you please email me at timothy.cameron2 at gmail dot com if you get a chance?

  2. Hey there,
    I like your graphs. If you're interested, I could help you make them interactive ( for example http://stevethomas.org.nz/calculator/calculator.html ). I live in Canberra. michael.james.asher@gmail.com