Working for Families tax credits
Issue: Complexity of Working for Families tax credit rules
Clauses 89-98
Submission
(NZICA)
The Working for Families tax credit (WFF) rules in subpart MA to MK should be reviewed and simplified and made more coherent. Continual redrafting of the legislation has made it difficult to determine a person’s entitlement.
Comment
There are trade-offs to consider when making a payment system more coherent and/or simple. Significant changes generally result either in families receiving less, or Governments spending more. Improving coherence may lead to systems becoming more complex. There are also concerns about accuracy and integrity.
For example, a review in 2001 recommended simplifying the family scheme rules, to reduce compliance costs and complexity by moving away from a welfare-based definition of income and aligning rules with a tax-based definition of income. However, a tax-based definition of income does not always provide a good estimate of the resources available to a family as the tax system can ignore payments received by families where it has been taxed elsewhere (such as distributions from trusts or fringe benefits).
The broadening of the definition of family scheme income from 2011 was in response to concerns about the fairness and integrity of the family scheme income rules. There had been an increase in the level of the tax credits over 2004-2007 and changes in how businesses were being structured (for example, as family trust-owned companies). The 2011 broadening reforms sought to recognise the resources available to some families and to better identify those families in genuine need of additional government assistance. The trade-off is an increase in complexity and for some families an increase in compliance costs and reduction in payments.
It is possible to align the wording and formulae in section MB 4 (relating to close companies) and section MB 7 (relating to trusts and trust-owned companies). In particular, the terminology on voting interests and shareholding in a company could be rationalised; the references to a company’s accounting year in section MB 4 could be aligned with references to the company’s income year in section MB 7; and the attribution of net company income to a shareholding trustee less dividends in section MB 7 could be aligned with the proposed formula in section MB 4 on the attribution of net company income less dividends to a major shareholder. It makes sense to rationalise the provisions that employ a similar concept, such as the attribution of company income in sections MB 4 and MB 7. These minor changes would reduce compliance costs with minimal impact on Government spending.
Officials will be reviewing the IR215 form and supporting information to see if we can provide better guidance on the income information that is required from families. In some cases it may be appropriate for a person to seek assistance from their accountant or tax advisor to complete parts of the form, such as determining the end-of-year net income of the close company in which they are a major shareholder.
Recommendation
That the submission be accepted in part, subject to officials’ comments.
Issue: Settlor test for Working for Families tax credits in section MB 7
Clause 92
Submission
(NZICA)
The use of the settlor test for Working for Families tax credits should be reviewed as the settlor test makes the rules very complex and difficult to apply. Alternatively, the definition for settlor in the context of section MB 7 should be clarified.
Comment
Officials consider the use of the settlor test continues to be appropriate. Section MB 7 attributes the net income of a trust (including trust-owned companies) to the settlors of that trust for inclusion in family scheme income. The definition of settlor in section MB 7 is the same as that used throughout the Income Tax Act 2007. The only exception is a specific exclusion in section MB 7 that a person is not a settlor for family scheme income solely as a result of providing personal services for less than market value in the administration of the trust or the maintenance of trust property.
The submitter has raised the issue whether a person is a settlor if they are a beneficiary who has a credit balance (undrawn funds) in their beneficiary account with the trust. This is a wider question of who meets the definition of settlor in the Income Tax Act 2007, although the answer will have implications for parents who are or may be subject to income attribution under section MB 7. Inland Revenue is considering its response.
Recommendation
That the submission be noted.
Issue: Negative amounts calculated under section MB 4 — close company income
Clause 91
Submission
(NZICA)
The formula in section MB 4 is being amended to confirm that it cannot result in a negative amount. This amendment should not proceed. A negative amount should be allowed to avoid double counting the same income.
Comment
Section MB 4 as proposed in the bill specifically states the amount to be included in family scheme income “is the greater of zero and the amount given by the formula”. This clarifies the previous wording, which referred to the amount of family scheme income calculated under the section being “reduced by” the total dividends paid. The drafting confirms the long-standing policy that negative amounts are not taken into account. Similar wording exists in section MB 7, stating that the amount of dividends being deducted cannot exceed the amount of net company income attributed to the shareholding trustee.
Dividends received by a person are included in family scheme income as they are taxable income of the person. Section MB 4 seeks to attribute income that is retained in the close company; represented in the formula by net income of the company less total dividends paid. This avoids double counting of income which is earned and paid out as dividend in the same year.
It is possible that close company income would be attributed under section MB 4 to a parent in one year and when company income is paid out as a dividend in the following year is included as family scheme income in that following year. It is also possible that this does not occur, as the person may not be eligible for Working for Families tax credits in either of those years or may not be involved in the close company in one year. The scope of the WFF tax credit is to provide financial assistance for families in need in that year rather than looking at overall family income across several years. Disallowing negative amounts is consistent with this annual focus.
Recommendation
That the submission be declined.
Issue: Updating Working for Families tax credit references
Clause 89, 90, 118
Submission
(Matter raised by officials)
There should be a consistent use of the term “family scheme income” to refer to income calculated under subpart MB. The term “net income” should not be used when referring to income calculated for the family scheme. Also, a provision’s heading still refers to Family Support which has since been renamed.
Comment
This Bill corrects references in the Income Tax Act 2007 and uses “family scheme income” when referring to income calculated for the family scheme in subpart MB. There are other references to “net income” used to calculate a Working for Families tax credit (in the Tax Administration Act 1994) and “net income” under subpart MB (in the Health Entitlement Cards Regulations 1993) where the context of the section means that “family scheme income” is the most appropriate term. These other references should be amended to refer to “family scheme income”.
The heading to section 84 of the Tax Administration Act 1994 refers to family support payments. Family support was renamed as the family tax credit from 2008. Also, section 84 refers to the disclosure of information to prevent double payment of a Working for Families tax credit. The heading should be amended to reflect the purpose of the section.
Recommendation
That the submission be accepted.