Chapter 4 - Calculation and payment of the income splitting credit

4.1 This chapter covers how an income splitting tax credit would be calculated and paid.

4.2 The income splitting tax credit would be calculated by Inland Revenue. A couple’s eligibility to receive the tax credit would not affect, or be affected by, other entitlements or obligations administered by Inland Revenue, such as child support and student loans. The calculation would be based on the couple’s total income for the year, split 50/50 between the partners.

The information required

4.3 The income splitting tax credit would be calculated for eligible couples using information provided by the couple in registering for Working for Families and from their personal tax information.

4.4 Inland Revenue would need the correct income details of each partner before calculating the income splitting tax credit. This would result in some additional administrative and compliance costs because some couples who would be eligible do not receive a personal tax statement or file a tax return.

4.5 If Inland Revenue is aware that a tax return is required from either partner the calculation would not occur until the return has been filed. Otherwise Inland Revenue would calculate the tax credit from around 15 July after the end of the tax year.

4.6 The need for Inland Revenue to have the necessary information before calculating the tax credit means that couples would receive their tax credit as a single payment on an annual basis. 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.

How the calculation would be done

4.7 The calculation would consist of the following steps:

Step 1

The taxable incomes of both partners (not the adjusted net income of the family used for Working for Families tax credits) would be combined.

Step 2

The combined taxable income for the couple, as calculated at step 1, would then be divided equally between the partners.

Step 3

Personal tax rates would be applied to each income calculated under step 2 to determine the couple’s notional income tax liability for the year.

Step 4

The standard income splitting tax credit would be equal to the difference between the couple’s combined tax payable before income splitting, and the tax they would pay if it was calculated on an income splitting basis.

Step 5

Tax year of birth or adoption

In the year that an eligible couple’s first dependent child or children are born or adopted, the income splitting tax credit would be calculated according to the following formula:

(number of days from date of birth or adoption to 31 March) ÷ 365
multiplied by the amount calculated at step 4

Reaching 18 years of age

If an eligible couple’s youngest dependent child turns 18 before 31 December in the relevant tax year, the income splitting tax credit would be calculated according to the following formula:

275 (number of days from 1 April – 31 December inclusive) ÷ 365 = 0.75
multiplied by the amount calculated at step 4

Becoming financially independent

If an eligible couple’s youngest child has become financially independent during the tax year, the income splitting tax credit would be calculated according to the following formula:

(number of days from 1 April until the date the child becomes financially independent ÷ 365) multiplied by the amount calculated at step 4

Shared-care situations

In a shared-care situation, the amount of the income splitting tax credit would be reduced based on the proportion of time that a couple had a dependent child in their care during the tax year.

Amount of the income splitting tax credit

4.8 The annual payment to couples with various combinations of primary and secondary earner incomes is set out in table 2. For example, if the primary earner’s income is $40,000 and the secondary earner’s is $10,000, the amount of the income splitting tax credit would be $340.

Payment of the entitlement

4.9 The income splitting tax credit would ordinarily be paid in full into a bank account of the primary caregiver unless the couple chose for each partner to receive half of the tax credit each.

4.10 In some cases Inland Revenue might withhold part or all of the tax credit. These could include when:

• the couple has been overpaid social assistance under the Working for Families system;
• one of the partners has an overdue tax debt or student loan repayment; and
• one of the partners has a history of non-compliance with tax laws and has not filed a tax return or confirmed their taxable income with Inland Revenue.

Impact of tax credit on other payments and tax credits

4.11 The income splitting tax credit would not generally affect, or be affected by, other entitlements or obligations administered by Inland Revenue, such as the independent earner tax credit, child support, or student loan repayments. In particular, provisional tax would continue to be assessed and payable on an individual basis. The effect on recipients of the minimum family tax credit would, however, need to be considered in the detailed design of the credit.

Submission points

4.12 We welcome submissions on:

• the process for calculating the income splitting tax credit;
• using income splitting tax credits to offset Working for Families overpayments or other liabilities, such as tax liabilities;
• continuing to calculate any provisional tax of each partner on an individual basis, without reference to the income splitting tax credit;
• the value to couples of the proposed annual income splitting tax credit, compared with a tax credit paid at regular intervals during the year based on estimated income, which would require an end-of-year square-up; and
• alternative ways of providing for income splitting for couples with dependent children.

3 The income splitting tax credit amounts calculated in this table are based on the tax rates from 1 April 2009.