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Inland Revenue

Tax Policy

Chapter 1 - Introduction

1.1 Couples with children often face a choice between both parents working full-time, employing others to care for their children, and one parent working full-time and the other staying at home to care for the children, possibly on a part-time basis. For most people, financial considerations play a large role in the decision.

1.2 Introducing some form of income splitting for tax purposes has been suggested as one way of enabling parents to have greater choice in their work and caring roles. It could help to alleviate the financial constraints on parents being able to stay at home, and give them more choice around their work and home life balance.

1.3 UnitedFuture has proposed the introduction of income splitting, which “recognises that the spouse or partner who has chosen to work part-time or has opted out of the paid workforce in order to raise children is making a vital contribution to our society.” Over 300,000 families (around 60 percent of families with a dependent child) could benefit from this additional financial assistance.

1.4 In the confidence and supply agreement between National and UnitedFuture, National agreed to support “appropriate income splitting legislation” to First Reading in Parliament. The present consultation is a direct result of that agreement.

The consultative process

1.5 This issues paper is the second stage in a process of public consultation on the possible introduction of an income splitting system. It follows on from the April 2008 government discussion document, Income splitting for families with children. That discussion document looked at the merits of introducing income splitting as a way of providing additional support to families with children. It also asked whether there were better ways for the government to provide this support than by means of income splitting. A total of 205 submissions were received, with the majority from individuals who supported the introduction of some form of income splitting.

An income splitting tax credit

1.6 The approach to income splitting set out in this issues paper would involve an annual tax credit to eligible families, to be calculated by Inland Revenue. For the purposes of calculating the tax credit a couple’s combined taxable income would be split equally, and the progressive tax rates would then be applied to each partner’s share of the total. The total tax calculated on this notional basis would be compared with the couple’s actual combined tax liability and the difference would be paid out by Inland Revenue as an “income splitting tax credit”.

Link with Working for Families tax credits

1.7 Couples wishing to receive the income splitting tax credit would need to register online through the system used to deliver Working for Families tax credits. Using this existing process would minimise costs for both recipients and Inland Revenue.

Annual cost

1.8 We estimate that the income splitting tax credit described in this issues paper would cost in the order of $450 million a year.

1.9 Inland Revenue would incur additional administrative costs in implementing and administering the income splitting tax credit. These would include an initial capital cost in the order of $2 or $3 million and annual operating costs averaging in the order of $3 or $4 million in the first five years. Increased contacts with taxpayers would represent about half of the operating costs.

1.10 An alternative to the 18-year age limit for income splitting would be to limit the tax credit to couples with a dependent child up to the age of six. This would reduce the annual revenue cost to approximately $230 million and also reduce administration costs.

What’s in the issues paper

1.11 The main focus of the issues paper is on how an income splitting tax credit might work, the eligibility requirements and the calculation of the proposed tax credit, rather than the arguments for and against introducing such a credit.

How the income splitting tax credit could work

Who would be eligible

A couple would be eligible for the income splitting tax credit if, for the relevant tax year, they are:

  • spouses, civil union partners, or de facto partners;
  • New Zealand residents; and
  • primarily responsible for the day-to-day care of a dependent child or children aged 18 years or under.


Couples registered for Working for Families assistance would be automatically registered. Other couples who are eligible would need to register online through the system Inland Revenue uses to deliver Working for Families tax credits.

How it would be calculated

Inland Revenue would calculate the income splitting tax credit using the income details from the couple’s individual tax returns, or from other sources (such as the employer monthly schedule) if no tax return is required. The couple’s combined taxable income would be split on a 50/50 basis. Inland Revenue would carry out the following calculation:

Step 1: combine the total taxable incomes of both partners.
Step 2: equally split the total income between the partners.
Step 3: apply the personal tax rates to each income calculated under step 2.
Step 4: calculate the difference, if any, between the tax payable before income splitting and that payable under step 3.


Spouse A’s taxable income: $60,000; tax is $12,850
Spouse B’s taxable income: $10,000; tax is $1,250

Taxable income of the couple before income splitting: $70,000
Tax liability of the couple before income splitting: $14,100

Step 1: total taxable income for couple: $70,000
Step 2: spouse A: $35,000 and spouse B: $35,000
Step 3: spouse A and B’s tax on $35,000: $6,160 each or $12,320 total
Step 4: $14,100 – $12,320 = $1,780

The income splitting tax credit of $1,780 would be paid to the primary caregiver of the child.

Additional features

The income splitting tax credit would not generally affect, or be affected by, other entitlements or obligations administered by Inland Revenue, such as the payment of provisional tax, the independent earner tax credit, child support, or student loan repayments.

When it would start

The income splitting tax credit would begin in the tax year beginning 1 April 2012.


1.12 Submissions are welcome on the workability of the proposed approach to income splitting. In particular, we are interested in hearing about any views on the submission points raised at the end of chapters 3 and 4.

How to make a submission

1.13 Submissions should be made by 5 February 2010 and addressed to:

Income splitting tax credit
C/- Deputy Commissioner
Policy Advice Division
Inland Revenue Department
P O Box 2198
Wellington 6140

1.14 Or email: [email protected] with “Income splitting tax credit” in the subject line.

1.15 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for officials from Inland Revenue to contact those making submissions to discuss their submission, if required.

1.16 Submissions could be the subject of a request under the Official Information Act 1982, which could result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, would be determined in accordance with that Act. Accordingly, those making a submission who think that any part of it should be properly withheld under the Act should indicate this clearly.