Payment of the income-sharing tax credit

(Clause 15)

Summary of proposed amendment

When they apply for an income-sharing tax credit, couples must nominate who will receive the tax credit or whether it is to be equally shared. The Commissioner of Inland Revenue may retain some or all of the tax credit to offset other tax liabilities that the couple has, such as unpaid tax or overpayments of Working for Families tax credits.

Application date

The new provisions will apply from 1 April 2012.

Key features

Section MG 4 sets out that couples will be required to nominate if the full amount of the tax credit should be paid to one of the partners, or whether half the amount is to be paid to each of the partners.

The Commissioner of Inland Revenue may, under proposed section MG 7, also retain all or some of the tax credit under certain circumstances – for example, if the couple has an unpaid tax liability.

Background

People who qualify for Working for Families tax credits have the option of instalment payments during the year based on estimated combined family income, with an end-of-year square up process, or they can apply for an annual tax credit at the end of the tax year based on actual combined family income. Sections LA 2 to LA 7 of the Income Tax Act 2007 refer to the treatment of tax credits and the ability to use tax credits to meet unsatisfied income tax liabilities or for them to be transferred for another purpose.

The income-sharing tax credit will be available in one payment at the end of the tax year, rather than as an instalment payment throughout the year. Instalment payments are available for Working for Families tax credits because of their focus on income adequacy for low-income families. There are compliance and administration issues associated with estimating income, including incurring and repaying debt. This can be justified for Working for Families tax credits given the scheme’s focus on ensuring families have adequate income.

The Commissioner of Inland Revenue will have the ability to use the amount of the tax credit to meet unpaid obligations to Inland Revenue, such as recovering an overpayment of Working for Families tax credits, an overpayment of an income-sharing tax credit from a prior year, and meeting unpaid tax liabilities. A partner could also choose to transfer their portion of the tax credit for another purpose.