Calculation of the income-sharing tax credit
(Clause 15)
Summary of proposed amendment
The amount of the tax credit is the difference between the combined amount of tax the couple pays on their income, and the combined amount of tax they would pay if they had each earned half the couple’s combined income.
Application date
The new provisions will apply from 1 April 2012.
Key features
Calculating of the tax credit amount is based on the couple sharing their income on a 50/50 basis and calculating the tax payable accordingly, as set out in section MG 3. If the tax they individually pay on their own income is greater than the tax they would pay on the notional sharing of their income, they can claim a tax credit for the difference. This notional sharing applies only for the purpose of the income-sharing tax credit – it will have no impact on any other tax requirements or payments such as child support payments or student loan repayments.
If a dependent child starts or stops being a dependent child during the tax year, then the level of the tax credit will be adjusted accordingly as outlined in section MG 5. For example, if a child turns 18 and leaves school at the end of December they will cease to be a dependent child at that point. As they qualified as a dependent child for 75% of the tax year (April to December) the couple would qualify for 75% of the tax credit.
Background
New Zealand has a progressive marginal tax rate system for income tax. This means that as an individual’s income increases, the rate of tax they pay increases.
The table below shows the tax rates for different income brackets for the tax year from 1 April 2011 to 31 March 2012.
| Income | Tax rate |
|---|---|
| 0 – 14,000 | 10.5% |
| 14,001 – 48,000 | 17.5% |
| 48,001 – 70,000 | 30% |
| 70,001 and over | 33% |
Not every eligible couple will receive an income-sharing tax credit. They will be eligible for a tax credit only if the partners face a different marginal tax rate on the income they earn. If the partners have different income levels but are still in the same tax bracket and face the same marginal tax rate, they will not benefit from the income-sharing tax credit.
Under the current tax rates and thresholds, the maximum amount of an income-sharing tax credit would be $9,080.
Special rules apply: if a partner has a tax loss, it will be ignored for the purpose of the calculation and they will be treated as if they earned no income. Other special rules apply for people who are in a transition year where the income they have earned and the tax they have paid is based on a period that is greater or less than a full 12 months – for example, when the income relates to an 18-month period.
Example 1
Stacey and Glen are eligible for an income-sharing tax credit as they have been a couple for the whole of a tax year and are both tax-residents. Glen is the principal caregiver of their four-year-old child.
Stacey earns $50,000 and pays income tax of $8,020. Stacey’s marginal tax rate is 30%. Glen has had no income for the year and has paid no tax.
Their combined income is therefore $50,000 and the combined tax they paid is $8,020. Under the proposed rules, sharing their income means they each have a notional income of $25,000 and would have paid $3,395 each in tax, a combined $6,790. They would qualify for an income-sharing tax credit of $1,230 ($8,020 less $6,790).
If instead Stacey earned $30,000 and Glen earned $20,000 they would pay income tax of $4,270 and $2,520 respectively. Their combined income would be $50,000 and their combined tax would be $6,790. While eligible for an income-sharing tax credit, they would not receive any benefit from the tax credit as they are already each paying tax at the same marginal tax rate (17.5%). Sharing their income equally would not reduce the amount of tax payable.
Example 2 – When both partners are entitled to an income-sharing tax credit in a shared-care arrangement
Andy and Catherine have six-year-old twins. The couple separate in December 2012 and each enters into a new relationship in March 2013. They will not be entitled to an income-sharing tax credit for the 2012–13 tax year, the year in which they separated.
For the whole of the following tax year, Andy and Catherine care for the children in alternate weeks. As they each meet the basic requirements and are caring for their children for at least one-third of the time, both are entitled to an income-sharing tax credit for the 2013–14 tax year.
Andy is in full-time employment and earns $100,000, on which $23,920 is paid in tax. His new partner is not employed. Catherine’s new partner earns $60,000, on which $11,020 is paid in tax, but she is not employed.
Splitting Andy’s and his new partner’s combined taxable income of $100,000 in half gives $50,000. Tax on taxable income of $50,000 is $8,020. If each were to pay this amount, their combined total would be $16,040 in tax paid.
The difference between both partners’ tax on combined taxable income and the tax they would pay under income sharing is: $23,920 – $16,040 = $7,880.
As for Catherine and her new partner, splitting their combined taxable income of $60,000 in half gives $30,000. Tax on taxable income of $30,000 is $4,270. If this was paid by each, they would pay a total of $8,540 in tax.
The difference between their tax on combined taxable income and the tax they would pay under income sharing is: $11,020 – $8,540 = $2,480.