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Inland Revenue

Tax Policy

Chapter 2 - The policy process to date

2.1 This chapter summarises the content of the April 2008 government discussion document, Income splitting for families with children and the submissions received. Although this issues paper is focused on the details of how an income splitting system would work, it is useful to recap the wider considerations around income splitting because they could influence the final design of the income splitting tax credit.

Criteria used to assess income splitting

2.2 The earlier discussion document considered the extent to which income splitting would meet the objective of providing choice to families with children. The document also assessed income splitting against the criteria of fairness, efficiency, simplicity and administrative costs. These criteria are taken into account by government as part of the development of tax policy.

Giving families greater choice

2.3 Income splitting was proposed as a way of enabling parents to have greater choices in their work and caring roles. Couples often face a choice between both parents working full-time, often using paid childcare, or one parent staying at home at least part-time to care for a child or children. Income splitting could help to alleviate the financial constraints on a parent’s ability to stay at home and give parents more choice around their work and home life balance. On the other hand, the discussion document noted that income splitting might not be the best targeted measure to provide this choice, since the benefit of income splitting rises with primary earner income.

2.4 For families with lower incomes, for whom the financial constraints might be greater, income splitting would provide only small amounts of support. For example, a one-earner family receiving $40,000 would gain only $1,190 a year from income splitting, while a one-earner family on a single income of $100,000 would gain $8,450 a year.


2.5 The discussion document explored the question of whether introducing income splitting for families with children would lead, at a reasonable fiscal cost, to a fairer outcome for families than is currently the case.

2.6 The decision to tax on a family basis by allowing income splitting could increase perceived fairness in some areas at the expense of others. Whether taxing on a family basis is a good thing would depend on the relative weightings given to different goals.
2.7 With individual taxation, as at present, a one-earner family would pay more tax than a two-earner family when the two have the same total family income. This might be seen as unfair, particularly when considered in light of the Working for Families package.

2.8 Working for Families uses the family, rather than the individual, as its basis for determining the appropriate level of assistance for families. As such, it provides equal support to families in similar circumstances that have the same total family income (and the same number, and age, of children). However, while those families are treated equally for Working for Families purposes, some families would still end up worse off and others better off because income tax liabilities are calculated on an individual basis.

2.9 Income splitting for families with children would mean that a couple with a child would pay less tax than a couple without a child even though both had the same combined income. Income splitting could be said to be a way to recognise the contribution of stay-at-home parents, when the current individual system of taxation does not.

2.10 On the other hand, family income might not always accurately capture a family’s ability to pay tax, and so may not be the fairest means of determining tax liability. It might be considered unfair for different couples with different work arrangements and the same combined income to face different tax burdens. Different work arrangements might result from one partner’s ability to earn a high hourly wage. If one partner is not in paid employment he or she would have additional time available for valuable activities at home, such as childcare.

2.11 It might be perceived as unfair that the benefit from income splitting increases as primary earner income increases, providing more benefit to couples with higher incomes. This is shown in table 2 in chapter 4.


2.12 The discussion document explored whether income splitting would bias people’s decisions to produce, consume, work, save and invest. It explained that the introduction of income splitting would lead to a decrease in effective marginal tax rates of some primary earners and an increase in the effective marginal tax rates of some secondary earners.

2.13 The lower effective marginal tax rates for primary earners would improve their incentives to work and to invest in their skills and move to better paid jobs. This is likely to boost labour productivity. In contrast, the increased effective marginal tax rates for secondary earners would reduce their work incentives, which could adversely affect their employment prospects and future productivity.

2.14 Evidence suggests that once people have been outside the workforce for more than a year their skills might begin to atrophy, resulting, in the long term, in a less productive workforce. [1] This could have an impact on economic growth. Furthermore, empirical evidence suggests that secondary earners, especially women, are more responsive than primary earners to changes in their after-tax incomes. [2]

Simplicity and administrative costs

2.15 The discussion document also noted that income splitting could be complex to implement. Consequently, in designing the details of an income splitting system there should be careful attention to providing a system that is easy to understand and fits with the rest of the tax system.

2.16 By implementing income splitting through the existing Working for Families tax credits system, income splitting would likely be relatively simple for people to comply with, and would restrict costs to an extent.

What readers were asked to comment on

2.17 The discussion document asked for readers’ views on the following detailed policy design questions, if they were in favour of income splitting as the best way to provide additional support for families with children:

  • whether family incomes should be split on a 50/50 basis, a 70/30 basis or in some other way;
  • how a “family” should be defined;
  • what restrictions should be placed on the children’s ages for a family to be eligible; and
  • whether income splitting should be optional or compulsory.

What they said

2.18 The discussion document attracted 205 submissions from individuals and a variety of organisations, including the Families Commission, the New Zealand Council of Trade Unions and the Child Poverty Action Group.

Supporters of income splitting

2.19 Ninety percent of those who responded, mostly individuals, were in favour of some form of income splitting. Many of these people argued that income splitting would recognise the contributions of full-time parents to their families and communities, with some arguing that income splitting would strengthen the family unit. Other benefits cited included balancing the assistance to parents in the workforce, reducing incentives to emigrate, and reducing the impact of fiscal drag.

Opponents of income splitting

2.20 Those who opposed the income splitting proposal included most of the institutions that made a submission. Their concerns included:

  • the inequities and distortions arising from different family structures – some eligible, some not – and no account being taken of family size;
  • the potential disruption to family life as primary earners could have an incentive to work longer hours;
  • the potential for abuse, with sole parents entering arrangements with higher earners for mutual gain; and
  • the fact that the fiscal cost is likely to be transferred to other taxpayers.

2.21 Of those who opposed the proposal, three noted that they would prefer that any additional assistance for families be targeted to assist those in need.

Responses to specific questions

2.22 Respondents generally supported limiting the eligibility for income splitting to “families” consisting of married couples, civil union partners and de facto couples who have dependent children up to 18 years of age. Most wanted to align the definition of “family” with the definition used for the Working for Families tax credits.

2.23 Most considered that income splitting should be optional and that income should be split on a 50/50 basis.

Development of the current proposal

2.24 Following the 2009 general election, the National government and UnitedFuture entered into a confidence and supply agreement. The agreement included commitments by National to support the introduction of legislation on income splitting through to its First Reading in Parliament.

2.25 Table 1 explains the reasoning behind some of the key features of the proposed income splitting tax credit.

Table 1: Key features of the tax credit
Key feature Reasons for proposing this feature
The income splitting tax credit would be based on the couple’s total income for the year, split 50/50 between the partners. Supported by 70 percent of submissions. Minimises complexity and avoids disadvantaging any couples, which could occur with any other income splitting ratio such as 30/70.
An eligible couple must consist of either a married couple, civil union partners or de facto partners. Supported by 60 percent of submissions. Consistent with other legislation dealing with couples, including Working for Families.
An eligible couple must have a child or children aged 18 years of age or under. Supported by 63 percent of submissions. Consistent with Working for Families and would provide support to all couples with dependent children. Chapter 1 notes the lower cost of an alternative age limit of six years.
The decision to split income for the purposes of receiving the tax credit would be optional. Supported by 70 percent of submissions. Consistent with the objective of providing choice. No need for compulsion.
The income splitting tax credit would be paid on an annual basis, rather than in periodic payments throughout the tax year. This would reduce the complexity of the system. A tax credit paid at regular intervals during the year based on estimated income would require an end-of-year square-up and recovery of any overpaid amounts.
An eligible couple and their dependent child must be New Zealand residents for tax and immigration purposes for the whole of the relevant tax year. This requirement is similar to those for the Working for Families rules. It is also consistent with the objective of assisting New Zealand families and avoids complexities in relation to when and where income was earned.
Couples would register for the tax credit through the system used to deliver Working for Families tax credits. This would minimise compliance costs for taxpayers and administrative costs for Inland Revenue. In particular, income splitting at source, through employers, would greatly increase compliance and administration costs.
The rules for determining whether a child is dependent would be consistent with similar rules for Working for Families tax credits. This would make it easier for all involved. There would need to be a good reason to diverge from the established Working for Families rules.
The tax credit would not generally affect or be affected by other obligations and entitlements administered by Inland Revenue. The objective is to split income for tax purposes only. This would also minimise complexity.

2.26 The government would need to make decisions on the final policy design before the introduction of legislation. The submissions received on this issues paper would help that decision-making.


1 See, for example, Jaumotte, F., (2003) “Female labour force participation: past trends and main determinants in OECD countries”, OECD Economics Department working papers No. 376; Fagan, C. and Walthery, P. “The role and effectiveness of time policies for reconciliation of care responsibilities”, paper presented to the OECD Conference on Life Risks, Life Course and Social Policy, Paris, 31 May – 1 June 2007.

2 See, for example, Blundell, R. and McCurdy, T. (1999) “Labour supply: A review of alternative approaches”, in O Ashenfelter and D Card (eds.), “Handbook of Labour Economics”, Volume 3, North Holland, Amsterdam.