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Income sharing bill introduced

16 August 2010

A bill tabled in Parliament today sets out the criteria that would apply for couples caring for children to share their income for tax purposes. For more information see the Government’s media statement, the Taxation (Income-sharing Tax Credit) Bill, the Commentary on the bill and the Regulatory Impact Statement.


Hon Peter Dunne
Minister of Revenue

Media Statement

Dunne: Income Sharing could benefit up to 310,000 families

Up to 310,000 New Zealand families will be eligible to share their income for tax purposes through legislation tabled in Parliament today by Revenue Minister Peter Dunne under the Confidence and Supply Agreement with the National-led Government.

"This bill will give couples with children the option of having a parent work fewer or more flexible hours, be at home raising their children, and able to increase their combined after-tax income," Mr Dunne said.

"We constantly hear the term 'family-friendly' bandied about, but this bill will actually put money in the pockets of many families who choose to have a parent more actively involved in raising their children.

"It will empower and help families who see it as important to bring their children up that way, and that is a lot of New Zealand families," he said.

Income Sharing is a key part of UnitedFuture's tax policy and formed part of its Confidence and Supply agreement with the National-led Government.

"I am very proud of this Bill both as Revenue Minister and as leader of UnitedFuture - it is a key policy plank for us," Mr Dunne said.

"Couples who decide to have one parent at home looking after the children have to make a financial sacrifice to do that. It is a decision that really costs them, and we want to do something to ease that cost and recognise the importance of the choice they are making in a practical way," he said.

Under the Taxation (Income-sharing Tax Credit) Bill, couples with dependent children will be able to choose to be taxed on an equal share of their combined income and apply for a tax credit at the end of the tax year.

The bill proposes that each partner in a relationship caring for children under 18 be taxed on an equal share of their combined income. At the end of the tax year they would be able to apply to Inland Revenue for a tax credit based on the difference between the tax they would have paid on an individual basis and what they would pay based on half of their combined income.

"Because income tax rates rise according to the amount earned, many families could ultimately end up paying less tax if, for example, one parent works fulltime and the other chooses to remain home to care for their children," Mr Dunne said.

Parents would have to be spouses, civil union partners or de facto partners, and New Zealand tax residents for the whole tax year before they could claim a tax credit. One of the partners would also have to be the principal caregiver for the dependent child or children.

The tax credit would also be available to parents who have separated if they have entered a new relationship and are sharing responsibility for caring for their child for at least a third of the tax year, Mr Dunne said.

"This will benefit many couples with children, but it will depend on their personal income situation as a couple, and obviously it would not apply to sole parents who have no one to income share with, and have other mechanisms in place to support them," he said.

Mr Dunne said he was fully aware that some might view this aspect of income sharing as being contrary to the New Zealand Bill of Rights Act.

"The obvious point is that there is no single benefit that can fit every individual's circumstances. That is why we have targeted assistance for groups with particular social and financial needs, and sole parents who have an important job to do, have other support mechanisms available to them.

"Income Sharing is one that benefits two-parent families," he said. "Single parents, for example, have access to the childcare subsidy, the minimum family tax credit, the childcare rebate and the domestic purposes benefit," he said.

"Income Sharing recognises the financial choices many couples with children often have to make about whether they both work full-time and employ others to care for their children or whether one partner stays home to care for the children, possibly on a part-time basis.

"In this way income sharing would give parents greater choice about their work and caring roles," he said.

The credit would be optional so couples who wanted to claim it would have to apply to Inland Revenue, Mr Dunne said. If the bill passed through all stages, the credit would start from the tax year beginning 1 April 2012, he said.

Ends

Mark Stewart | Press Secretary | Office of Hon Peter Dunne
Cell +64 21 243 6985


Income Sharing - Questions and Answers

What is Income Sharing?

It is when a couple combine their individual incomes and pay tax as if they had earned half each. The income sharing is only for the purpose of this new tax credit, it will not affect PAYE, student loans, or child support.

How many families could potentially benefit from Income Sharing?

Up to 310,000 families are expected to be eligible to benefit from Income Sharing. Of this number, some families may choose not to apply for the credit, depending on how much they would benefit from it.. This number of families is determined on the basis of couples with a dependent child under 18.

Does the couple have to be caring for a child?

Yes, the tax credit is targeted to couples that are caring for a dependent child. It will not be available for couples without children, or where their children are over 17 years old and have left school (similar to Working for Families tax credit).

When will the income sharing tax credit be available?

If the legislation becomes law next year, it would be in effect for the 2012/13 tax year with tax credits paid after 31 March 2013.

What consultation has happened?

A government discussion document was published in 2008 seeking people's views on possible income sharing for families. The details of an income sharing proposal were considered in an issues paper in 2009. Most submissions supported the proposal.

What is the most someone could get?

The maximum that a couple could get from the tax credit is $9,080 (based on the tax rates and thresholds that will apply from 1 October 2010). This would be a single income household earning $140,000 or more.

How much will the new income sharing tax credit cost?

Depending on take-up, it could cost around $450 million a year.

Will anyone be worse off?

The tax credit will be voluntary, so if a couple do not believe they would be better off, they do not need to apply. One partner in a couple receiving the Income Sharing tax credit would not be able to receive the independent earner tax credit.

What about sole parents? Or couples that separated during the year?

They would not qualify for the Income Sharing tax credit. The tax credit is based on a couple sharing their income for the whole of the tax year and is targeted at those caring for dependent children. There may be other assistance available to groups who do not qualify for the income sharing tax credit (e.g. independent earner tax credit, domestic purposes benefit etc). It is not possible to design an income sharing tax credit that helps everyone.

Examples

A qualifying family with one income of $60,000 would be eligible for an income sharing tax credit of $2,480.

A qualifying family where one partner earns $80,000 and the other partner earns $40,000 would be eligible for an income sharing tax credit of $1,300.

A qualifying family where one partner earns $80,000 and the other partner earns $10,000 would be eligible for an income sharing tax credit of $4,580.

Table: Income-sharing tax credit per couple (per tax year*)

  Partner B's income ($000)
  $0 $10 $20 $30 $40 $50 $60 $70
Partner
A's
income
($000)
$0 0 0 420 980 980 1,230 2,480 3,730
$10 0 0 280 280 280 530 1,780 3,030
$20 420 280 0 0 0 250 1,500 2,750
$30 980 280 0 0 0 250 1,500 2,250
$40 980 280 0 0 0 250 1,000 1,000
$50 1,230 530 250 250 250 0 0 0
$60 2,480 1,780 1,500 1,500 1,000 0 0 0
$70 3,730 3,030 2,750 2,250 1,000 0 0 0
$80 5,280 4,580 3,800 2,550 1,300 300 300 0
$90 6,830 5,630 4,100 2,850 1,600 600 300 0
$100 7,880 5,930 4,400 3,150 1,900 600 300 0
$110 8,180 6,230 4,700 3,450 1,900 600 300 0
$120 8,480 6,530 5,000 3,450 1,900 600 300 0
$130 8,780 6,830 5,000 3,450 1,900 600 300 0
$140 9,080 6,830 5,000 3,450 1,900 600 300 0

* Based on the tax rates and threshold that apply from 1 October 2010.