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Chapter 6 – Aligning and updating key definitions


This chapter discusses proposed changes to:

  • Working for Families Tax Credits;
  • child support;
  • KiwiSaver; and
  • student loans.

Summary of proposals in this chapter

  • Align the wording of key definitions when they relate to the same concept across different social policies.
  • Align the rules for shared care of a dependent child at a minimum of 35 percent of ongoing care with reference to any care orders, and a default measure of number of nights in care for the period of the shared arrangement or what is most appropriate in the circumstances.
  • Align the maximum age of a child to be at the end of the calendar year they turn 18.
  • Change the definition of "financially independent" to refer to a set dollar amount rather than 30 hours of work a week and ensure the benefit reference is to being on a benefit or receiving a full-rate student allowance.
  • Align the minimum age of a financially independent child to 16 years.
  • Align the residence definition, with a person no longer resident once they are out of the country for more than 183 days, unless specific exemptions apply.
  • Require a dependent child to meet the "physically present in New Zealand" test to qualify for Working for Families Tax Credits, or meet one of the exemptions that deem a person to be New Zealand-based.
  • More closely align the definition of income used for child support with the definition used for Working for Families Tax Credits so that:
    • tax losses brought forward from past years are ignored; and
    • more types of income are included in the definition.
  • Make minor wording changes to align the definitions of income across Working for Families Tax Credits and student loans, when appropriate.

Inconsistent definitions make the payments harder to understand

Common definitions, such as "resident" or "carer" are used across the different social policy payments that Inland Revenue administers. Sometimes the same term is used and it means the same thing. In other cases the same term is used but the meaning is different, and occasionally different terms are used when referring to the same thing. This can cause confusion and increase the chance of something going wrong.

Some definitions also seem overly complicated or out of date. Feedback on the Green Paper has indicated that customers struggle to comply with the rules when they don’t understand what they mean or they don’t fit naturally with what is going on in their lives.

Some common definitions have been reviewed to see if they can be simplified, updated and aligned to make the whole system easier to understand and use.

The general approach is to align definitions when they refer to the same thing. It is only when there is a significant reason to justify a difference that definitions would not be aligned. An example would be the definitions of "principal caregiver" in Working for Families Tax Credits and "primary carer" in the Parental Leave and Employment Act, as the paid parental leave definition is intended to cover a much wider group of carers, including pregnant women.

Family circumstances definitions

Dependent or qualifying child

Shared care of child

Both child support and Working for Families Tax Credits can be paid when the care of a child is shared between carers, as long as a minimum amount of care is provided. What that minimum amount is and how it is measured differs between the two schemes. So it is possible that a person could be receiving payments for having shared care of a child for Working for Families Tax Credits but not for child support.

A person must provide at least 35 percent of ongoing care of the child to receive child support payments. The proportion of ongoing care is measured primarily by the number of nights in care, although daytime care can also be considered. Inland Revenue can also rely on what is set out in care orders and agreements.

The Working for Families Tax Credits requirement is for a person to have 33.3 percent of care over either a four-month period or a tax year to be a principal caregiver and therefore entitled to receive payments of tax credits.[23] The legislation does not set out how the percentage of time is measured – Inland Revenue currently measures how many hours of care a parent has (both day and night).

The Government proposes to align the way shared care is determined. The child support shared care legislation was amended in 2013 and shared care was given specific attention in Parliament. The Government proposes that the Working for Families Tax Credits rules be aligned to the existing child support rules for determining shared care by changing the Working for Families Tax Credits principal caregiver eligibility rules. This would mean a minimum level of 35 percent of ongoing care.

The basis of measuring ongoing care would also be aligned. Inland Revenue would be able to rely on care orders and use nights of care. However, in some cases these may not be appropriate, and Inland Revenue would be given discretion to use the most appropriate measure for the circumstances.

The Working for Families Tax Credits four-month/tax year rule for determining shared care would also be replaced by a rule that determines the percentage based on the period of time that the shared care arrangement applies.[24]

This technically could result in some customers qualifying for Working for Families Tax Credits for very short periods. However, the definition of "principal caregiver" excludes carers when care is provided on a temporary basis.

Maximum age of child

The United Nations Convention on the Rights of the Child defines a child as someone under 18 years-old. Legislation for Working for Families Tax Credits and child support generally supports this maximum age but has provisions that allow the maximum age of a child to be extended when the 18 year-old is still in school.

The criteria are slightly different in that the Working for Families Tax Credits extension applies to the end of the calendar year in which the child in school or tertiary education turns 18. For child support the education extension ends when the child in school turns 19. In both definitions the child must still be attending an educational institution. The Government proposes to remove the educational requirement and to end the extension at the end of the calendar year the child turns 18. This would have an impact on child support parents and carers with a child aged 18 who turns 19 after the end of the calendar year and is continuing in school.

The Government is interested in views about whether the requirement to be in education should be retained or dropped – that is, the age is extended to the end of the calendar year the child turns 18 regardless of whether they are in school, as long as they remain financially dependent on the carer. Dropping the schooling requirement would simplify the administration of the scheme.

Financially independent child

As part of the definition of "dependent child", there is a definition of "financially independent". A child is considered financially independent if they are:

  • working 30 hours or more a week, or working in what is considered full-time work under an employment contract; or
  • receiving a main benefit from Work and Income or a student allowance.

This definition is used in both Working for Families Tax Credits and child support.[25]

A problem with referring to hours is that the amount of money a person can receive while working 30 hours can vary. This can lead to situations when a teenager working 30 hours at $15.75 an hour ($472.50 a week) is considered financially independent while another working 20 hours at $30 per hour ($600 per week) is treated as not financially independent.

Another issue is that employers do not automatically tell Inland Revenue the number of hours each employee works, so financial independence based on work hours is self-declared or manually checked with employers. Additionally, a parent may not know each week how many hours the child is working, especially if the child is paid a fixed amount rather than an hourly rate.

The Government proposes to replace the current hours criteria with a dollar amount. This would be easier to understand and administer, and would address the current inequity with an hours definition. The preference at this stage is an amount equivalent to 30 hours a week at the minimum wage. As with the current hours rule, there would continue to be a requirement for the period of time the income is above the threshold to be "more than temporary". For example, children who earn income above the threshold only in one week in school holidays are not treated as financially independent. Submissions are invited on what is an appropriate dollar amount for a child to be considered financially independent and the period of time for a job to be more than temporary.

The other criterion refers to receiving a main benefit or a student allowance. A concern with the current wording is that it does not distinguish between a person who receives a full rate of payment and one who receives a reduced rate because of ongoing assistance from their parents. Specifically, the student allowance can be reduced as a result of a parental income test.

Feedback is sought on whether the criteria of receiving a main benefit or a student allowance should be retained, including when a child is receiving a reduced student allowance as a result of a parental income test.

Minimum age of financially independent child

The Child Support Act has no minimum age when considering whether a child is financially independent – in theory if a one-year-old was financially independent, under the formula assessment no child support would be payable. For Working for Families Tax Credits and main benefits, a child has to be at least 16 years old before the financially independent test applies. This minimum age makes sense when the financially independent test is based on full-time work and receipt of a main benefit – as children under 16 are required to be in full-time schooling and cannot apply for a main benefit.

Even if the financially independent test is changed to a dollar amount the main sources of income for most customers are work or benefit. It would be rare for younger children to have significant amounts of income in their own name from interest and dividends or part-time employment.

The Government proposes that the minimum age at which the financial independence test is applied be 16 years for child support as well.

Resident and residency

While governments negotiate double tax agreements to determine the country that has the right to impose and collect tax, there tend not to be similar agreements for social payments and loans.

The definition of resident is different between the various social policy payments. It generally refers to the tax definition of residence (which includes a permanent place of abode test) or common law concepts of ordinarily resident. For KiwiSaver, member tax credits are paid to help improve the adequacy of members’ retirement income. They are paid to members who have "mainly" resided in New Zealand in the year the tax credit relates to. This can make it difficult for customers to know when they no longer qualify for a member tax credit.

The distinction between being resident and not resident is important. For example, Working for Families Tax Credits are intended to be paid for children in New Zealand, student loan borrowers are not charged interest when they are based in New Zealand, and KiwiSaver member tax credits are paid to members who reside mainly in New Zealand.

For student loans, a person is treated as being New Zealand based if they have been living in New Zealand for 183 or more consecutive days, or have approval to be treated as New Zealand based while overseas. This means they are no longer New Zealand based once they have been outside of New Zealand for 184 consecutive days unless an exemption applies. The rule is clear and easy to understand, and the Government does not intend to change this definition.

The Government proposes introducing this "day count" for KiwiSaver, child support and Working for Families Tax Credits. The proposal for 183 days presence in New Zealand will be a "bright line" test that customers can easily understand and measure. The period would be sufficient to cover most short-term overseas holidays or travel.

Similarly, the Government proposes to include some of the student loan "deemed New Zealand based" tests in other definitions. These treat some borrowers overseas as if they were still in New Zealand and covers people such as New Zealand diplomats. The requirement that people in New Zealand are lawfully present will also be retained and applied consistently. Working for Families Tax Credits and KiwiSaver will also retain their own additional requirements. For example, Working for Families Tax Credits require a person to be a permanent resident, so those on work or study visas are not eligible.

In addition, each of the social policy payments has additional criteria, such as requiring permanent residency for a period of time or a physical presence in the country. These other criteria would remain.

Child support

The child support residency requirements are wider and refer to New Zealand citizens as well as residents. This means New Zealanders who permanently reside overseas can still use the New Zealand child support system if required. The Government is not proposing to change these rules.

However, if all parents and children reside overseas there is very limited ability for Inland Revenue to administer any request to collect child support. The Government is considering whether a discretion should be introduced to allow the Commissioner to suspend the child support assessment in such cases.

Some parents who are not New Zealand citizens are still part of the child support scheme as they are ordinarily resident in New Zealand. The ordinarily resident test is met if they have a permanent place of abode in New Zealand or they meet a "day count" test. The test is 183 days in New Zealand to be eligible and 325 days out of New Zealand to lose resident status. The definition of resident for these parents who are not citizens would be aligned to the "day count" approach.

Working for Families Tax Credits: child or caregiver is resident

To qualify for Working for Families Tax Credits either the principal caregiver or the child must be resident. There is no requirement for them both to be resident. It seems unusual for New Zealand to pay a child-based tax credit for a child who is not resident or physically present in New Zealand. The Government proposes to change the residency requirements for Working for Families Tax Credits so that the qualifying child must meet the "physically present in New Zealand" test or one of the exemptions that deem a person to be New Zealand based.

The Government is interested in views on whether the child should also have to meet the New Zealand permanent residence test or whether it is sufficient for either the child or the caregiver to be a New Zealand permanent resident. In particular, Inland Revenue is aware of situations when a caregiver is a citizen or a permanent resident and they have the ongoing care of a child present in New Zealand who is not yet a permanent resident.

Other definitions

The Government is also looking at making minor changes to the following definitions:

  • Principal caregiver/carer – the Working for Families Tax Credits and child support definitions are slightly different and would be aligned.
  • Dependent child/qualifying child – both definitions refer to the same child in Working for Families Tax Credits and child support, so it is intended to use the same term.
  • Main benefits/income-tested benefits – some parts of Inland Revenue legislation have not been updated to reflect changes in terminology for main benefits.

Definition of income

The definition of "income" has a big impact on the amount of support or extent of liability for payments. Determining what is included as income for income-tested payments is a significant policy decision. The current approach for social policy is to use a common definition of income, such as the Income Tax Act definition of "net income", and to make adjustments to include or exclude other specific types of income as appropriate. This takes advantage of information received through the tax system and recognises that not everyone receives or need worry about all types of income.

This discussion document is not reviewing what makes up the breadth of the definition of income. Instead, the focus is on where the income definitions across the social policy payments differ and whether those differences are due to policy decisions or because the definitions were developed at separate times in different environments.

Child support income definition

Most of the income definitions are already similar as a result of legislative changes since 2011. The definition now in place for Working for Families Tax Credits and student loan repayments is consistent with the definition used for main benefit payments, and almost identical to the definitions for community services cards and the parental income tests for student allowances. The exception is the income definition used for child support formula assessments. Child support is based on taxable income only, and other sources of income are only considered if they are recognised through an administrative review.

For most Inland Revenue customers the income used for their social policies is very simple. They only earn salary and wages (including a main benefit or ACC), interest or dividends. It is effectively the same income used for tax purposes. The only difference is whether tax losses from previous years are included. They are for calculating taxable income but are generally excluded or ignored for social policy. Again, most customers do not have tax losses so there is no difference in effect.

Ignoring past tax losses brought forward for child support

Currently, the definition of income used in the child support scheme uses the "taxable income" definition and therefore includes tax losses carried forward from previous years. In contrast, Working for Families Tax Credits and student loan repayments use "net income" as the base, which excludes tax losses carried forward. One of the objectives of child support is that the level of financial support parents provide for their children in that year is determined according to their relative capacity to do this. It would be at odds with that objective to reduce one parent’s relative capacity to support a child in that year due to tax losses that occurred in an earlier year. This suggests that tax losses from previous years should not be used to reduce the amount of child support payable in the current child support year.

The Government proposes to align the base of the social policy income definitions to refer to net income, which means changing the child support definition to exclude tax losses carried forward from previous years. Fewer than 600 child support parents had tax losses in the 2015 tax year.

Other adjustments to child support income definition

During the 2013 child support reforms it was agreed to widen the definition of income for child support to include most of the other adjustments used in the Working for Families Tax Credits and student loan definitions of income.[26] However, this was not implemented, partly due to issues with Inland Revenue’s FIRST system.

For the group of customers who have other types of income, and who claim Working for Families Tax Credits or repay student loans, alignment with other social policy payments delivered by Inland Revenue would simplify processes and obligations as income would need only be reported once for all social policies.

The modernisation of Inland Revenue’s systems provides the opportunity to reintroduce the wider definition of income for child support. The Government proposes to do this to better align with the definition used for Working for Families Tax Credits, as originally legislated in the Child Support Amendment Act 2013 and subsequently repealed.

In re-introducing the wider definition of income for child support, the Working for Families Tax Credits deduction allowed for maintenance payments (including, child support) in the definition of income would be excluded to avoid circularity in calculations. The child support formula already takes into account any other child support obligations when determining liabilities.

Other technical changes to align income definitions

The Government has identified other minor areas where the definitions are not aligned or when wording changes would improve clarity and reduce misunderstanding. These are set out on the following page.

Social policy payment Changes to definitions
Working for Families Tax Credits Currently the definition of income includes a general "catch-all" provision. Under this provision non-beneficiary income distributed from a trust (when a person is not the settlor) is included as income. The Government is considering introducing a specific legislative provision covering such income. Such a provision would clarify the current definition and align the Working for Families Tax Credits legislation with the current student loan income definition.
Student loans

For the undistributed income from close companies adjustment, the Government is proposing to align the voting interest percentage with the percentage used for Working for Families Tax Credits income. This will include an associated persons test to prevent opportunities to structure shareholdings in close companies to reduce student loan repayment obligations.

For the specific retirement savings contributions adjustment the Government is proposing to align the adjustment with the other social policy payments. This brings in a previously approved policy which was not implemented at the time.

There would also be alignment for depreciation loss allowed on the sale of a building.

A list of the various components of the definition of income is included in Appendix 2.

Some differences in the definitions would still remain after these changes – there are good policy reasons for these differences that reflect the underlying purpose of the product or the nature of the group being tested. For example, some definitions apply to individual income only, such as student loan repayments, and others to family income.

QUESTIONS FOR READERS

6.1 For the maximum age of a child, should the requirement that they be in school be retained or removed?

6.2 What is the minimum amount of money for a child to be considered financially independent for Working for Families Tax Credits and child support purposes? What factors should be considered when determining the amount? Should the amount be regularly updated?

6.3 Do you agree that a child receiving a reduced level of student allowance due to parental support should continue to be a dependent child?

6.4 Is a 183 day count a suitable period of time for determining eligibility to social policy payments administered by Inland Revenue? In what situations should a person overseas for a longer period still be deemed to be New Zealand resident?

6.5 Should Inland Revenue have the ability to cease child support assessments when all parents, carers and children reside overseas?

6.6 Should a dependent child have to meet the permanent resident test before Working for Families Tax Credits are paid, or is it sufficient that the principal caregiver is a permanent resident and the child is physically present in New Zealand?

6.7 Do you agree that the child support income definition should be extended to more closely align with the definition for Working for Families Tax Credits and student loans? Are there any components of the definition of income that you consider should not be aligned and why?

 

23 There is a specific rule for parental tax credit given it is paid out over 10 weeks only.

24 For example, if there was an agreement for care to be shared over an eight-month period, the percentage of care for each carer would be measured over that eight months rather than a four-month period or tax year.

25 It is also used in the Social Security Act and a similar concept (independent circumstances) is used for student allowances.

26 Supporting children - A summary of feedback on the discussion document (July 2011), available at http://taxpolicy.ird.govt.nz/publications/2011-other-supporting-children...