General policy statement
This bill contains amendments to the Income Tax Act 2007 and the Tax Administration Act 1994 to provide for an annual tax credit for couples who are married, or are partners in a de facto relationship or a civil union, and who have responsibility for a dependent child.
Regulatory impact statement
In accordance with Cabinet Office Circular CO (09) 08, this explanatory note does not contain a regulatory impact statement for this bill. A copy of the regulatory impact statement for this bill is available at the following internet sites:
Income-sharing tax credits
Nature of tax credit
The bill provides for an annual tax credit to be made available to resident couples who are married, or are partners in a de facto relationship or a civil union, and have responsibility for a dependent child aged up to 18 years. The credit is called the income-sharing tax credit and is intended to be available from 1 April 2012.
The amount of the tax credit is the difference between the total tax payable by the couple and the tax they would pay if each partner derived half of the couple’s combined income.
The credit is intended to give couples greater freedom to work fewer hours or more flexible hours in order to care for children. For eligible couples whose partners have different marginal tax rates, the credit would provide up to $9,080 per year.
Under the proposed rules, a couple is eligible for the tax credit if—
they are spouses, civil union partners, or de facto partners for a full tax year; and
both are New Zealand tax residents for the entire year; and
during the year, at least 1 of the partners is a principal caregiver of a dependent child.
If a couple receives the income-sharing tax credit for a tax year, neither partner is eligible to receive an independent earner tax credit for that year.
Calculation of tax credit
The tax credit is paid at the end of a tax year, based on the couple’s assessed taxable incomes for that year. A couple must apply for payment of the tax credit, submit a tax return for the year, and confirm their eligibility for the credit. For transitional years, the amount of taxable income and tax payable is annualised.
The amount of the credit is determined by splitting the couple’s combined taxable income equally between them, and applying the progressive tax rates to each partner’s share. The total tax calculated on this notional basis is compared with the couple’s actual combined tax liability. The difference is the unadjusted amount of the credit. When applying for the tax credit, the couple must nominate whether the Commissioner pays the full amount of the credit to 1 partner or divides the credit equally between them.
A child ceases to be a dependent child when they reach the age of 18, or before that age if they marry, enter a de facto or civil union relationship, or become financially independent. In the year in which a child turns 18, they continue to be treated as a dependent child if they are attending school or a tertiary educational establishment and remain financially dependent. The credit is paid pro-rata in a tax year in which a child ceases to be a dependent child.
Special eligibility rules apply when a child has 2 or more principal caregivers who are living apart. To be eligible for the credit in shared-care situations, a caregiver must have the exclusive care of a dependent child for at least one-third of the relevant tax year, or at least 122 days a year, or 5 days every fortnight. The caregiver must, in addition, be in a relationship with a new partner for a full tax year in order to meet the general eligibility criteria.
As a result, when 2 couples meet the one-third test in relation to the same child, both couples are eligible for the full amount of an income-sharing tax credit.
Treatment of overpayments
Before paying the amount of the credit to the couple, Inland Revenue may recover any overpayment of a Working for Families tax credit that is payable to either partner, or an overpayment of an amount of the income-sharing tax credit for an earlier year. An amount payable to a partner as an income-sharing tax credit may be used in the same way as a WFF tax credit, that is, it may be automatically applied by the Commissioner to satisfy a partner’s earlier income tax liability.
Clause by clause analysis
Clause 1 gives the title of the Act.
Clause 2 gives the commencement date for provisions in the Act.
Amendments to Income Tax Act 2007
Clause 4 amends section GB 44 to update cross references.
Clause 5 amends section HR 8 to update cross references.
Clause 6 amends section LA 7 to treat the tax credit as a refundable credit.
Clause 7 inserts a new section LB 4B to give an eligible person an income-sharing tax credit.
Clause 8 amends section LC 13 to clarify the relationship between the independent earner tax credit and the income-sharing tax credit.
Clause 9 amends section MA 1 to include the income-sharing tax credit in the scheme of Part M tax credits.
Clause 10 amends section MA 5 to update cross references.
Clause 11 amends section MA 6 to update cross references.
Clause 12 amends section MA 8 to update cross references.
Clause 13 amends section MB 1 to ensure an amount of income-sharing tax credit is not included in family scheme income.
Clause 14 amends section MF 5 to include an overpaid amount of income-sharing tax credit in the recovery provisions.
Clause 15 inserts new subpart MG containing the rules for the entitlement to and calculation of the income-sharing tax credit.
Clause 16 amends section RM 6 to update cross references.
Clause 17 amends section YA 1, affecting the definitions of child, dependent child, civil union partner, income-sharing tax credit, principal caregiver, refundable tax credit, and spouse.
Amendments to Tax Administration Act 1994
Clause 19 inserts new section 41C relating to the application a person must make for an income-sharing tax credit.
Clause 20 amends section 83 to allow certain disclosures to be made in relation to an income-sharing tax credit.
Clause 21 amends section 85G to allow certain disclosures to be made in relation to an income-sharing tax credit.
Clause 22 amends section 92 to update cross references.
Clause 23 amends section 177C to allow the Commissioner to write off tax resulting from an overpayment of an income-sharing tax credit.