Appendix 1 - Calculation of family scheme income for Working for Families

Assessable income derived at uniform daily rate

When determining a person’s family scheme income in a relationship period[24] in an income year, assessable income derived from employment or an income-tested benefit is treated as derived at a uniform daily rate during the period of employment or period the benefit was received. All other income is treated as derived at a uniform daily rate throughout the income year.

Any expenditure incurred in deriving the income from other sources that is allowed as a deduction is also treated as incurred at a uniform daily rate during the income year.

Adjustments to a person’s net income (or net loss) for family scheme purposes

To calculate a person’s family scheme income, the following adjustments are made to a person’s net income (or net loss):

• include an amount of exempt income from overseas pensions (section CW 28(1)(e)) and child support and maintenance payments (section CW 32) derived by the person in the income year.
• exclude the following income (or loss):
  1. an amount of a tax loss of a qualifying company that is attributed to the person as a shareholder of the qualifying company under sections HA 20 and HA 24 (which relate to the treatment of tax losses of loss attributing qualifying companies);
  2. an amount of income attributed by a portfolio investment entity that is not excluded income of the person;
  3. an amount of retirement scheme contribution that is not excluded income of the person and would be their excluded income in the absence of section CX 50B(2) (contributions to retirement savings schemes);
  4. loss incurred in carrying on a business: If a person carries on 1 or more businesses in a year, the income of each business must be calculated separately. If a net loss is the result of this, the net loss is treated as nil;[25] and
  5. investment losses (from 1 April 2011).
• deduct an amount of any child support or maintenance payments made by the person during the income year (section CW 32) and any liable parent contributions made under section 256 of the Child Support Act 1991.

Other income included

The following amounts are included as family scheme income:

• major shareholders’ portion of retained earnings of close companies;
• certain distributions from superannuation schemes and retirement savings schemes.

Major shareholders’ portion of retained earnings of close companies

When a person is a major shareholder in a close company[26] on the last day of the company’s balance date for financial purposes, the person’s family scheme income includes an amount calculated using the formula –

(Person’s shares[27] /company’s shares[28] ) x company’s income[29]

If the company has paid the major shareholder a dividend in the income year, the amount calculated under the above formula is reduced by the total dividends paid by the company to the shareholder for the income year.

Distributions from superannuation schemes

When a person receives a distribution from a superannuation scheme to which an employer has contributed, that distribution will be included in the family scheme income for the tax year or years that corresponds to the income year or years that the contributions were made, if:

• the employer’s contributions to the superannuation scheme were made in

– the income year in which the distribution was received; or
– the 2 income years immediately before that income year; and

• the person continues to work for the employer for 1 month or more after the date of the distribution.

The amount does not include an amount attributable to a contribution by the person as a member of the superannuation scheme.

No adjustment is required if the distribution from a superannuation scheme is made as a result of and on or after the person’s retirement from employment with an employer who was a contributor to the scheme.

Distributions from retirement savings schemes

A person’s family scheme income includes distributions from retirement savings schemes in the income year in which the distribution is made if that person:

Other adjustments to income

Adjustments for period that is less or more than 1 year

If a person is returning income for tax purposes for a period which is greater than or less than a year, their family scheme income must be adjusted by an amount calculated using the formula –

person’s family scheme income x 365/days[30]

Historical adjustments

Adjustments are also required where income is spread into a year or where depreciation recovered is received from the sale of a building if the year the income was spread from or the year the depreciation was originally claimed was before 2004.

24A “relationship period” means an unbroken period in a tax year, whether the period consists of some or all of the days in the tax year.

25If the Commissioner considers that two or more businesses are of the kind that are normally carried on in association with each other, the businesses are treated as a single business.

26“Close company” means, at any time, a company at the time there are 5 or fewer natural persons the total of whose voting interests or market value interests (where a market value circumstance exists) in the company is more than 50 percent (treating all natural persons associated at the time as 1 natural person). Close company does not include a special corporate entity. A “major shareholder” is a person with a 10 percent or greater shareholding in a close company.

27“Person’s shares” is the number of shares issued by the company and held by the person, excluding fixed-rate shares, on the last day of the company’s accounting year.

28“Company’s shares” is the number of shares issued by the company, excluding fixed-rate shares, on the last day of the company’s accounting year.

29“Company’s income” is the net income of the company for the company’s accounting year.

30“Days” is the total number of days in the period for which the income has been derived.