In last week's budget, there were changes to the calculation of the Working For Families Tax Credit WFFTC, specifically around the threshold for abatement (reducing slightly to $35,000) and the increasing abatement rate (going from 20% to 25%).
These combined changes mean higher-income families will receive less, or no, WFFTC. At the other end of the scale, some lower-income families will receive a greater WFFTC.
This is consistent with the underlying social policy drivers that such a tax credit should be targeted to those who most need it (lower-income families).
However, this is only part of the story as the Government struggles to instil an overall fairness into the WFFTC system.
If you and your partner are simple wage- or salary-earners (even with more than one job), your family income is reasonably easy to determine, and the WFFTC is simple to calculate.
The exception to this is where some employees have elected to sacrifice salary cash for benefits, so that FBT applies as opposed to PAYE. In that instance, the income for WFFTC calculation purposes drops, and the WFFTC is higher, even though the employee's real position is unchanged.
Peter Dunne signalled on Budget day that the Government is going to address this loophole.
Where it gets more complicated is with families who involve other structures in their affairs to own businesses or income-earning assets. This includes trusts and companies.
By stage-managing the distribution of income from these entities (i.e. keeping personal taxable income levels lower by leaving income in these other entities), some taxpayers have been actively manipulating their entitlement to WFFTC.
To be fair, most taxpayers do not act in this manner (i.e. distribution decisions are driven by circumstance, not avoidance), but the Government feels compelled to act as if we all do.
As a result, a raft of new rules seek to look through these entities to determine a notional family income as if those entities did not exist. Unfortunately, this is an imperfect science and odd outcomes can be created, as often happens where tax fiction meets business reality.
For example, income derived by a trust will, for the purposes of determining entitlement to WFFTC, be deemed to be derived by the settlor(s) of the trust, irrespective of whether they will ever receive such. Similarly, shareholders in closely-held companies will be deemed to derive company income in proportion with their shareholding.
Then there are other forms of non-taxable income, such as unlocked PIE income (but not including KiwiSaver income) or passive income of children, that will count for WFFTC purposes, even though such is not returned for tax purposes.
Foreign-sourced income, attributed fringe benefits and farmers' Income equalisation Scheme contributions all now come into the mix, and regular family gifts used to meet your living costs may also be counted.
While the underlying policy seems logical and fair to some degree, the complexity of these changes mean that what was a relatively simple regime will become another bureaucratic nightmare for those who are not simple salary- and wage-earners.
In essence, they will probably need professional assistance to determine their entitlements, which is just another compliance cost.
• Scott Mason is a tax principal at WHK Otago.
