Pregnancy, Birth and Beyond

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Smart financial strategies for families with young children

The arrival of a new child can present a whole range of financial challenges. Not only does the household income usually drop, costs generally go up. However, there are several Government benefits available to families with young children.

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The arrival of a new child can present a whole range of financial challenges. Not only does the household income usually drop, costs generally go up. However, there are several Government benefits available to families with young children which may assist:

Paid Parental Leave or the Baby Bonus?

After the birth or adoption of a child, many people will have the choice of claiming either Paid Parental Leave or the Baby Bonus. While the Government estimates that more than 85% of families will be better off claiming Paid Parental Leave, the best option will depend on factors including you and your partner’s income and how many children you have. 
 
To help parents make the best choice for them, an on-line estimator is available on the Department of Human Services website. This estimator can make it easy to quantify the best option, but there are some clever things you can do to receive more money. For example, unlike the Baby Bonus, Paid Parental Leave is a taxable payment. So the more you earn, the more tax you pay on the benefit.
 
But few people know you can defer receiving the payment and if you push it back to the next financial year when your income could be much lower, you may end up paying less tax on the payments. You need to ensure you don’t push it back too far as the payment, which is for a maximum of 18 weeks, must be paid in full within 52 weeks of the date of birth or adoption. Also, any unused Paid Parental Leave can be transferred to your partner, so long as they meet the eligibility rules. So, if you split the time you take off to look after your child, you could split the taxable benefit payments and possibly save tax as a family.

Contributing to super

Another smart strategy is to consider making super contributions while you are on parental leave. This could help make up for any reduction in super contributions while you are not working but because your income is likely to be lower when you are on parental leave, you may also qualify for Government benefits that wouldn’t normally be available to you.
 
For example, if you make a personal after-tax contribution and meet certain other criteria, you could be eligible to receive a super ‘co-contribution’ of up to $500 from the Government. Alternatively, if your spouse makes a contribution into your super account while your income is low, they may be eligible to claim a tax offset of up to $540 when they complete their tax return. While these benefits can be quite attractive you will need to find the money to make the contribution while on leave! However, don’t forget that you may get a significant refund of tax deducted by your employer while you were still working. 
 
It’s also possible to contribute some (or all) of the Paid Parental Leave benefit directly into super if allowed by your employer. This could be an attractive strategy for higher income earners who take leave from their employer to care for a child and their partner earns sufficient income to meet the family’s living expenses.

Child care payment options

If you send a child to an ‘approved’ childcare centre, you may be eligible for the Child Care Benefit if you qualify for Family Tax Benefit Part A and you meet certain other conditions. Also, regardless of your income, you may be eligible for the Child Care Rebate. This is where the Government pays or reimburses 50% of the ‘out-of-pocket’ costs of approved childcare, up to a maximum of $7,500 per year per eligible child. 
 
Out-of-pocket expenses are the total childcare fees you pay to an approved centre, less any Child Care Benefits and Jobs, Education and Training Child Care Fee Assistance you receive. When you combine the Child Care Benefit and the Child Care Rebate, you will usually get 50% or more of the fees back from the Government.
 
The exception is where you are not eligible for the Child Care Benefit and the fees total more than $15,000 for the year. This is because 50% of more than $15,000 would exceed the annual cap of $7,500. However, some employers provide child care at the workplace, where employees contribute towards the costs by sacrificing some pre-tax salary and no fringe benefits tax is payable. If this is an option, it’s worth considering from a convenience point of view. It could also be more cost-effective. This would be the case, for example, if you pay tax at a higher marginal rate (ie 38.5% or 46.5%) and the total fees payable over the year exceed $15,000.
 
Salary packaging fees could also be attractive if you are taxed at the highest marginal rate of 46.5% and the fees are less at the employer provided centre.
If you have a choice, the best financial option for you will depend on your marginal tax rate, the daily fees charged by the centre and the total net expenses you will pay over the year.