- spouses, civil union partners, or de facto partners;
- New Zealand residents; and
- primarily responsible for the day-to-day care of a dependent child or a child aged 18 years or under.
3.3 Eligible couples would need to register online with Inland Revenue for an income splitting tax credit. The registration process would link in with the current system for registering for Working for Families tax credits.
The “whole-year” requirement
3.4 To qualify for an income splitting tax credit, the couple, whose combined income would determine the amount of the income splitting tax credit, would need to have been spouses or civil union or de facto partners for the whole of the relevant tax year. This whole-year requirement would reduce the complexity of the system by removing any need for apportionment if the status of a couple’s relationship changed during the tax year.
Residence
3.5 For the whole of the relevant tax year, the couple and the dependent child or children being cared for would need to be resident in New Zealand for both immigration and tax purposes. In the case of a dependent child born or adopted during a tax year this requirement would apply from the date of birth or adoption. This requirement is similar to those for receiving Working for Families tax credits.
Dependent child
3.6 A dependent child is a child whose care is primarily the responsibility of the couple and is:
- 18 years of age or younger; and
- financially dependent on the couple.
3.7 Children aged 18 would need to be attending secondary school or tertiary education and not be financially independent. Children that the couple support financially and who work more than 30 hours a week, or receive a student allowance, a benefit or other government assistance would not be considered “dependent” for purposes of the tax credit.
Change in status of dependent child
3.8 The income splitting tax credit would be reduced in years in which the status of the youngest dependent child changed. This means that the couple would be eligible for an income splitting tax credit up until the end of the calendar year (31 December) in which the child turns 18 or until the child becomes financially independent, whichever is the earlier. Likewise, a couple would become eligible for a tax credit on the day their first dependent child is born or adopted.
3.9 Treating children as independent from the end of the calendar year they turn 18 is in line with similar rules for receiving Working for Families tax credits.
Example 1 – a child who turns 18 during the calendar year
Joanna and Paul have a daughter, Sophie, who is 17 when she starts university in February 2013 and is financially dependent on her parents. They will be eligible for an income splitting tax credit (provided they meet the other eligibility criteria) for part of the 2013–14 tax year (which begins on 1 April 2013). Sophie turns 18 in May 2013, so their eligibility will cease at 31 December 2013.
Example 2 – a child who becomes financially independent during the year
Simon and Clare have one child, Robert, aged 16, who begins a full-time job on 5 July 2012 and moves away from home. Simon and Clare will be eligible for an income splitting tax credit for the 2012–13 tax year from 1 April until 5 July, the day Robert started working.
Shared care arrangements
3.10 When a shared care arrangement is in place between parents who have separated, both parents (if in new relationships) could be entitled to receive an income splitting tax credit. This entitlement would arise if the shared care arrangement was intended to be in place for four months or more and the child was in both parents’ care for at least one-third of the tax year. Over a year, this is at least 122 days a year or five days every fortnight.
3.11 The amount of the income splitting tax credit in the case of shared care would be reduced in proportion to the amount of time each parent cares for the child.
3.12 This feature of the proposed tax credit links in with the Working for Families rules around shared care arrangements. It relies on the family providing Inland Revenue with the correct information on their shared care arrangement.
Example 3 – when both partners are entitled to an income splitting tax credit in a shared-care arrangement
Andy and Catherine have six-year-old twins and then separate. They will not be entitled to an income splitting tax credit for the tax year in which they separated.
Each then enters into a relationship with another person. For the whole of the following tax year, Andy and Catherine care for the children in alternate weeks. As they each care for their children for at least one-third of the time, they will each be entitled to an income splitting tax credit based on the proportion of the time that they look after the twins (in this case, 50 percent of the time). The calculation of the tax credit when there is a shared-care arrangement is set out in example 5 in chapter 4.
Example 4 – when one partner is entitled to an income splitting tax credit in a shared-care arrangement
Julie and Scott, who have a 10-year-old child, have separated, and each has a new partner. Scott picks up the child from Julie’s place at 9am each Saturday morning and drops him back at 7pm on the Sunday evening.
As Scott is not caring for the child for at least one-third of the time, he will not be entitled to an income splitting tax credit.
Registration
3.13 Couples would need to be registered for an income splitting tax credit so that Inland Revenue knows who they are and whether they are eligible for the tax credit. Couples would need to provide the following information to Inland Revenue:
- details of both partners or spouses, including IRD numbers and residence details;
- details of a child in the primary care of the couple, aged 18 years or under during the tax year, and any shared care arrangements; and
- confirmation that the couple’s relationship existed for the entire tax year.
3.14 As the income splitting tax credit would build on the rules and systems developed for the Working for Families tax credits, the couple would need to be registered online through the Working for Families system. However, paper forms would be available if a family did not have access to a computer or reliable internet.
3.15 A large number of families are currently registered either through Inland Revenue or the Ministry of Social Development for Working for Families. These families would be automatically registered for an income splitting tax credit (but could opt out if they wished). Inland Revenue generally has sufficient information about these couples and their children to assess their eligibility.
3.16 Other couples who are eligible for an income splitting tax credit, although not entitled to Working for Families assistance, would need to register online using the system Inland Revenue uses to deliver Working for Families tax credits.
3.17 Registration would be permitted up to 18 months after the end of the relevant tax year. Registration would remain in place for the following year, provided that Inland Revenue’s information indicates that the couple remains eligible. Couples would be required to notify Inland Revenue of any change that could affect their eligibility, such as the end of their relationship.
Submission points
3.18 We welcome submissions on:
- requiring registration for income splitting online through the system used to provide Working for Families tax credits;
- whether the rules that would be used to determine eligibility for income splitting are appropriate;
- whether couples should be required to confirm their eligibility for an income splitting tax credit through an annual declaration;
- whether a couple should be ineligible for the tax credit if they or their child do not meet the residence requirement for the full tax year, or if the couple's marriage, or de facto or civil union relationship does not exist for the full tax year;
- whether a couple with shared care of a child should be eligible for income splitting if they have care of a child for at least one-third of the tax year;
- whether a couple’s entitlement to an income splitting tax credit should, as proposed, end at 31 December in the calendar year the child turns 18 or when the child becomes financially independent (whichever occurs earlier); and
- alternative rules for determining a couple’s eligibility for an income splitting tax credit.