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Working for families tax credits

(Clauses 63, 89−98 and 118)

Summary of proposed amendments

Amendments to the provisions for Working for Families (WFF) tax credits seek to clarify and improve the provisions to ensure they operate as intended. The proposed amendments are consistent with the policy behind previous amendments, including the broadening of the definition of family scheme income to prevent people structuring their income to inflate their entitlements.

Application date

The amendments will generally apply for the 2014−15 and later tax years, with some applying from the date of Royal assent.

Key features

A number of specific changes to the WFF tax credit provisions are proposed:

  • Sections MD 1, 2 and 16 are being amended to ensure that the formula for calculating the family credit abatement produces the correct result in all cases, when it relates to a family that receives a parental tax credit in a lump sum for a child born within 56 days of the end of the tax year.
  • Section MB 4 provides that income attributable to shares in a close company held by dependent children will be included in family scheme income. This addresses a situation where a person could reduce their income by allocating shares in a close company to their dependent children. It also clarifies how dividends from close companies are treated.
  • Section MB 7 ensures that when calculating family scheme income the attribution of trust income takes into account only settlors who were alive in the income year.
  • Sections MA 8 and MB 1 clarify that family scheme income is based on a person’s net income and is further adjusted as provided by subpart MB.
  • Section GB 44, the anti-avoidance provision, is being clarified to ensure that all arrangements that have a purpose of favourably affecting an entitlement to WWF tax credits are covered by the provision.
  • Section MD 12 clarifies the days when a person is entitled to a parental tax credit by reference to the criteria in section MD 11.
  • The reference to “fortnightly instalments” is being removed from section MD 13 and regulation 8 of the Health Entitlement Cards Regulations 1993, as instalments can be paid weekly as well as fortnightly.
  • The list of defined terms in section MC 6 is being updated.

Background

WFF tax credits are provided to the principal caregiver of dependent children based, among other things, on their level of family scheme income for a tax year. WFF tax credits are abated when family scheme income exceeds $36,350 and are abated at the rate of 21.25 cents per dollar. The tax credits can be received as a lump sum at the end of the tax year or in weekly or fortnightly instalments throughout the year.

The WFF tax credits are:

  • Family tax credit − for principal caregivers of dependent children.
  • In-work tax credit − for principal caregivers of dependent children who are not receiving an income-tested benefit and who meet the full-time earner requirements.
  • Parental tax credit − for principal caregivers of a newborn child who are not receiving a social assistance payment and not receiving paid parental leave.
  • Minimum family tax credit − for principal caregivers of dependent children who meet the full-time earner requirement and do not receive income from certain sources such as an income-tested benefit.

The provisions have been amended a number of times over the last decade including as part of the rewrite of the Income Tax Act. The names of WFF tax credits and some criteria were amended in 2004. The parental tax credit abatement formula was introduced in 2007 (with effect from 1 April 2008). The definition of family scheme income was broadened as part of Budget 2010, with effect from 1 April 2011. This included a new provision for attributing the income of a trust and trust-owned companies to the settlors of a trust.

Detailed analysis

Calculation of parental tax credit and abatement

The parental tax credit is a payment covering the first eight weeks (56 days) after a child is born (the parental entitlement period). Section MD 11 indicates that a person is entitled to the parental tax credit if they meet the requirements in section MC 2, and for any day within the parental entitlement period they or their spouse are not in receipt of a social assistance payment. They must also not receive paid parental leave for that child. Section MD 12 calculates the amount of parental tax credit and is being amended to clarify that the number of days is based on the days a person meets the entitlement criteria in section MD 11.

The maximum amount a person is entitled to is then abated by family scheme income using the main abatement formula in section MD 13.

If a principal caregiver has a child born within the last 56 days of the tax year, and receives the parental tax credit as a lump sum in the tax year the child is born, there is an additional abatement calculation reflecting that part of the parental entitlement period falls in the next tax year. For example, for a child born on 1 March, the main abatement formula would calculate abatement for the month of March only but the parental tax credit is based on entitlement for the period 1 March to 25 April. The formula in section MD 16 is required to calculate abatement for the period 1 March to 25 April in this situation.

The formula in section MD 16 is being replaced to clarify how it operates in calculating an additional abatement (in the above example for the period 1 April to 25 April). It also improves how the formula works in very unusual circumstances. The formula calculates additional abatement for the parental tax credit based on the rate of abatement that applied on the last day of the last entitlement period in the tax year the child was born. If there was no entitlement period in the tax year the child was born, the rate of abatement is based on the first day of the first entitlement period in the following tax year. The result of the proposed formula in section MD 16 is that the same amount of abated parental tax credit is received regardless of when in the year a child is born.

Family scheme income of major shareholders in close companies

Section MB 4 is being replaced with an expanded formula and additional definitions. The current formula determines the amount that is included in family scheme income when a person is a major shareholder in a close company on the last day of the company’s balance date for financial purposes. The amount is based on the proportion of the company’s income for the accounting year that reflects the person’s proportional holding of company shares, and reduced to reflect dividends paid.

A major shareholder is someone who owns or controls, directly or indirectly, at least 10 percent of the shares of a close company. While a major shareholder includes a person who controls, including indirectly, at least 10 percent of the shares, the formula in section MB 4 only refers to shares held by the person. When shares are held by a dependent child of a principal caregiver or their spouse, the current formula would attribute the relative share of the income of the company to the dependent child. Section MB 11 includes resident passive income derived by a dependent child in family scheme income, including dividends received from a close company, but not attributed income under section MB 4.

The replacement formula continues to apply only when a person is a major shareholder in a close company on the last day of the company’s balance date. However, a person who is a major shareholder in a close company will be unable to reduce their attributed income under section MB 4 by transferring ownership of the shares to their dependent child, or dependent child of their spouse, while still retaining control of the shares.

The income attributed under section MB 4 will be the greater of zero or the amount given by the formula. This clarifies that the result under section MB 4 cannot be a negative amount (in situations when dividends exceed attributed income).

The formula allocates the amount of company income, less total dividends paid by the company, to shareholders based on their proportional holding. Dividends are deducted from the amount of company income as dividends received are already included in family scheme income through section MB 1 (net income of a person) or section MB 11 (resident passive income of a dependent child). The proportion of shares for a person is based on the number of shares held directly and the number of shares attributed to them. Attributed shares are shares held by a dependent child of the person or the person’s spouse, and they are shared among the relevant number of major shareholders connected to the dependent child.

Family scheme income of settlors of trust

Section MB 7 attributes income where a person is a settlor of a trust. Under this section the income of the trust (and trust owned companies) is allocated in equal portions to the settlors of the trust when calculating family scheme income. A settlor is a person who, at any time, transfers value to the trust or for the benefit of the trust. Settlors can include people who have gifted property to the trust and since died. The formula is amended so that the attribution of income takes into account only settlors who are alive during the income year. This includes people who were alive for only part of the income year, including the person for whom family scheme income is being calculated.

Arrangements involving tax credits for families

Section GB 44 currently refers to a person (a claimant) entering into an arrangement and the Commissioner’s ability to reduce the claimant’s tax credit. It is unclear from the wording whether the section would cover an arrangement entered into by a spouse of a principal caregiver, if the principal caregiver was not a party to the arrangement, yet benefited from an increased entitlement to WFF tax credits. For example, a spouse is a major shareholder in a close company and the principal caregiver is not, and the spouse enters into an arrangement with the company to reduce the amount of family scheme income attributed to them in that year. The amended drafting of the section is more closely aligned with the style of other anti-avoidance provisions.

Definition of family scheme income

Both the change in section MA 8 and the change in section MB 1(1) highlight that a person’s entitlement to a WFF tax credit is based on a person’s family scheme income. Furthermore, family scheme income is based on a person’s net income (calculated under section BC 4) and adjusted as provided by subpart MB. This replaces the current wording in section MB 1(1) which referred to entitlement being based on “the net income (the family scheme income)”. The current wording is unclear and the amendment is intended to make the provisions more accurate.