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Inland Revenue

Tax Policy

Chapter 2 - Some useful information

2.1 This chapter provides background information relevant to the discussion in chapter 3 of a possible approach to the use of income splitting in New Zealand.

Current support for families with children in New Zealand

2.2 The government is committed to supporting families with children and, as such, provides a number of measures to assist them.

2.3 The Working for Families package, introduced in 2005 and extended in 2007, provides significant financial support to families with children. The package consists of four tax credits – the family tax credit, in-work tax credit, parental tax credit and minimum family tax credit; the childcare and Out of School Care and Recreation (OSCAR) subsidies; and the accommodation supplement. The accommodation supplement assists low-income and middle-income families with housing costs irrespective of whether they have children. The other measures are all targeted at families with children.

2.4 The main goals of Working for Families are to ensure income adequacy, to make work pay, and to support people into work. The measures are targeted at low-income and middle-income families: the minimum family tax credit ensures working families have a specified minimum level of income, while the other three tax credits abate as family income increases.

2.5 The family tax credit and the in-work tax credit are paid for families that have children under 18 years of age if the children are financially dependent on the principal caregiver. The amounts of the credits depend on family income and, for the family tax credit, the age of the children. To receive the in-work credit, parents must work a combined total of 30 hours or more per week. The parental tax credit is paid on the birth of a child for the first eight weeks of the child’s life. It also depends on family income. However, it can be received only if the primary caregiver is not receiving paid parental leave.

2.6 The childcare subsidy is paid per hour per child under five[1] directly to the childcare provider at varying rates (depending on family income) and for up to 50 hours a week. It is abated by family income. If the child’s primary caregiver is not in work or is studying (on an approved course) he or she will be eligible for up to nine hours of subsidised childcare.

2.7 The OSCAR subsidy is for children from five to 13 years of age, and is provided at the same rate and with the same abatement as the childcare subsidy. It is available for up to 20 hours a week in term-time, and 50 hours a week during school holidays.

2.8 Outside the Working for Families package, free early childhood education (ECE) is provided to three and four-year-olds for up to six hours a day, and a maximum of 20 hours a week. Families can choose between receiving free ECE, the childcare subsidy or a combination of both, but they cannot receive both for the same hours. Targeted assistance is provided to single parent families through the Domestic Purposes Benefit.

2.9 Paid parental leave is available for 14 weeks to eligible employees and self-employed parents, on the birth or adoption of a child. To be eligible, the parent must have worked for the same employer or have been self-employed for six or 12 months immediately before the expected date of birth or adoption, and have worked an average of at least 10 hours a week. Parents receiving paid parental leave receive their gross weekly rate of pay or the maximum rate of payment (currently $391.28), whichever is lower. Employees who meet the 12-month criteria are also entitled to 38 weeks extended unpaid leave, which can be shared between eligible parents.

2.10 These, then, are the main forms of government support for families with children. The main question posed in this discussion document is whether income splitting would be the best way to provide additional support, provided readers think that additional support is needed.

2.11 Before looking at the specifics, however, it is useful to see how income splitting works elsewhere.

Income splitting in other OECD countries

2.12 Whether to allow income splitting is essentially a question regarding the appropriate unit of taxation – the family or the individual. New Zealand is not alone in taxing on an individual basis, and the international trend over the last 30 years has been away from family-based or “joint” taxation towards individual-based taxation.

2.13 At present, 17 OECD countries (including Australia, Canada and the United Kingdom) use pure individual taxation. Only four OECD countries (France, Luxembourg, Portugal and Switzerland) use pure joint taxation of earnings. In the Czech Republic, Iceland, the Netherlands, Norway, Poland and Spain, the individual is used as the tax unit but joint taxation is also possible (only capital income of married couples is taxed jointly in Iceland, while in the Netherlands certain parts of income, such as from owner-occupied housing and from savings, can be taxed jointly). In Germany and Ireland, spouses are normally assessed jointly but they have the option of being separately assessed. In the United States, married couples can file their earnings either separately or jointly

2.14 In every country where joint taxation is allowed, income can be split between partners[2] who do not have children. This is because the general rationale for taxing on a family basis is one of increasing fairness in the taxation of households with different compositions of income.[3] In other words, why should two different couples with the same aggregate income pay different amounts of tax? With the partial exception of France, the support of children is not the rationale for income splitting, and consequently most countries also provide some form of additional assistance to families with children in the form of tax credits or targeted cash transfers.

2.15 Germany and the United States provide good examples of the alternative methods of achieving standard 50/50 income splitting, while France, Belgium and Denmark illustrate what variations from the standard model are possible.

2.16 In Germany, married partners are generally assessed jointly, but can elect to be separately assessed. The tax liability of jointly assessed married couples is determined by aggregating the total income of each partner and dividing by two. The progressive tax schedule is then applied to this figure, the result of which is multiplied by two to determine the family’s total tax liability.

2.17 The United States also allows married partners to be assessed jointly or separately, by having a separate tax rate schedule for joint filers. Tax thresholds for joint filers are double those which apply to individuals for joint income up to $63,700 (as of 2007), providing full 50/50 income splitting. Beyond this point the joint filing thresholds are less than double those for individuals. Consequently, it will be better for some couples that both earn significant incomes to file separately. The top tax rate (35%) applies from exactly the same income level ($349,700) whether taxpayers file individually or jointly.

2.18 France provides an example of an extreme version of joint taxation, whereby taxpayers can split their income not just with their partner, but also with their children and any dependent adults in the family. The system was instituted just after World War II, the intent being to take into account the consumption capacity of each member of the family and to tax it accordingly.[4] The tax unit is the “fiscal household” (foyer fiscal). This means the total family, including children if they are claimed as dependents. Since 2004, a family includes a French civil union (pacte civil de solidarité). Unmarried couples always constitute two separate fiscal households, while married persons can, in exceptional circumstances, file separately provided that they live apart.

2.19 Income splitting occurs according to the quotient familial or “family share” system. A family is attributed a total number of family shares as follows: two shares are attributed to a married couple (or pacte civil de solidarité), one share for a single person, half a share for the first two dependents, and one share for each additional dependent (or for each dependent of a single parent). Total family income is then divided by total family shares. Tax liability is calculated according to the progressive tax rate schedule for one share and then multiplied by the total number of family shares to determine the family’s total tax liability.

2.20 The tax benefit available for half shares beyond the first two full shares (or one full share for an individual) is limited to €2,159 per half share. The tax benefit from the share attributable to the first dependent of a single parent is limited to €7,472. The benefit from additional dependents is limited to €4,318 (2 x €2,159). These limits have been set on equity grounds, in recognition that the tax benefit of income splitting is greater for households with higher incomes.

2.21 Belgium allows partial income splitting similar to that proposed for New Zealand in the 1982 McCaw Report (discussed in more detail in chapter 3). Spouses are generally taxed separately, but under the marital quotient system (quotient conjugal), a notional amount of income can be transferred between spouses if one earns no more than 30 percent of the couple’s combined income. In this case the amount transferred is limited to 30 percent of total family income less the secondary earner’s actual income. This effectively provides 70/30 income splitting. The amount transferred is limited to a maximum of €8,570 (in 2006).

2.22 Another alternative is employed in Denmark, where family members are taxed separately, but some unutilised “personal allowances” can be transferred between spouses. The low tax bracket (at central government level) taxes aggregate personal and net positive capital income under 265,500 Kroner at 5.48%. If a married individual cannot use all of his or her 265,500 Kroner “personal allowance”, the remainder can be transferred to the spouse. This cannot be done for personal allowances at higher marginal rates.

2.23 The next chapter looks at the possibility of a different form of income splitting for New Zealand, one aimed at providing support for families with children.


1 Technically, the childcare subsidy is payable until a child enters school, which can be at any time between age five and six.

2 In some countries income splitting is restricted to married partners, while in other countries it is allowed for de facto partners and same-sex partners.

3 OECD, (2006) “Fundamental Reform of Personal Income Tax”, OECD Publishing, Paris, at p55.

4 Ault, H., (1997) “Comparative Income Taxation: A Structural Analysis”, Kluwer Law International, Amsterdam, at p273.