A special report by the Policy Advice Division of Inland Revenue
15 March 2002
Paid parental leave bill: tax-related changes
The Social Services Committee has recommended three tax-related amendments to the Parental Leave and Employment Protection (Paid Parental Leave) Amendment Bill.
The parental tax credit and paid parental leave
The bill proposes an amendment to the Income Tax Act 1994 to provide that people will not be eligible for the parental tax credit if they have received paid parental leave for the same child. It makes a corresponding amendment to the Parental Leave and Employment Protection Act to provide that parents lose their entitlement to paid parental leave if either they or their spouse have received the parental tax credit for the child in question. However, as introduced, the bill allowed parents who chose to receive the parental tax credit but later decided that paid parental leave was the more beneficial payment to change their mind and elect to receive the parental leave payment. They could do this by offsetting the full amount of parental tax credit against their entitlement to paid parental leave.
The Social Services Committee has recommended that parents not be allowed to offset their parental tax credit against paid parental leave, as this would complicate the administration of the scheme. It also recommended that the matter be re-considered as part of the planned 12-month review of paid parental leave.
The committee has also recommended that the bill be amended to provide that the entitlement to paid parental leave is no greater for a multiple birth or adoption than for a single birth or adoption. It has recommended a corresponding change to the Income Tax Act to ensure that when paid parental leave is taken for a multiple birth or adoption, the parental tax credit cannot be claimed for any of the children of the birth or adoption. This ensures that parents will not be eligible for both the parental tax credit and paid parental leave for the same birth or adoption, irrespective of the number of children.
Tax codes
The bill proposes that paid parental leave be treated as gross income and therefore be subject to deductions for PAYE income tax, student loan repayments and child support. In most cases, the tax code that applied to the employment from which the parent is taking leave will also be the appropriate tax code for her or his parental leave payments. Therefore the committee has recommended that the Income Tax Act 1994 be amended to provide that the same tax code continue to apply when the employee takes paid parental leave, unless she or he elects to use a different code. This amendment will ensure that people do not have to incur the compliance costs of filing a new tax code declaration in respect of their parental leave payments and again when they return to their employment.