Chapter 1 - Introduction
1.1 The Government provides a range of programmes to ensure that people have a minimum standard of living, and have access to health and education. These programmes use income as one of the key ways of identifying those people in genuine need. How income is defined is crucial to the proper targeting of these social assistance programmes. This officials’ issues paper focuses on three social assistance programmes: Working for Families tax credits, student allowances and the community services card. The entitlements to these three programmes are based on the definition of “taxable income” in the Income Tax Act 2007.
1.2 Maintaining the integrity of these programmes is important for New Zealand to continue to have an effectively targeted social assistance system for those in genuine need. People should not receive different levels of assistance according to how they structure their affairs or the manner in which they receive income to live on – this is inequitable and inconsistent with social assistance objectives. Providing undue social assistance also costs money which must be found through taxes and government borrowing or reduced expenditure elsewhere.
1.3 As part of Budget 2010, as a first step to addressing integrity concerns regarding social assistance programmes, the Government excluded investment losses such as rental losses for the purpose of determining Working for Families (WFF) tax credit entitlements.
1.4 The Government also announced that it would reform the definition of “family scheme income” used for determining entitlements to WFF tax credits, student allowances and the community services card.
1.5 The purpose of this reform is to improve the integrity of social assistance programmes by, for example, countering arrangements that have the effect of inflating entitlements beyond what people’s true economic circumstances justify. This undermines public confidence in the social assistance system, which has a strong focus on equity and fairness. As part of the move to greater integrity, different types of economic income that have previously not been counted as family income, such as fringe benefits, would be included.
1.6 Any changes need to be properly targeted – changes should not include for social assistance purposes economic income that is not reasonably available to meet family needs. Moreover, any changes need to consider the compliance costs of extending the definition of income for this purpose.
1.7 The purpose of this paper is to broaden the definition of income used for these social assistance programmes. This would counter people structuring their affairs to inflate their social assistance and address gaps in the current definition of income.
1.8 The proposal in this paper is to include in the definition of “family scheme income” amounts involving:
- trustee income;
- fringe benefits;
- passive income of children;
- unlocked PIE income;
- income of non-resident spouses;
- exempt income;
- main income equalisation scheme deposits; and
- periodic payments.
1.9 The paper also proposes replacing the current definition of “parental income” for student allowance purposes with an expanded definition of “family scheme income”.
1.10 The expanded definition of income would also apply to people with dependent children who apply for the community services card.
1.11 The Ministry of Social Development, the Ministry of Health and the Ministry of Education have been consulted during the development of this issues paper.
SUMMARY OF LEGISLATIVE PROPOSALS
The definition of “family scheme income” would include:
1. Trustee income. This would include the net income from trading and investment activities of a trust (excluding beneficiary income) and the net income of a company controlled by the trust. The trustee income would be attributed to the individuals who are the settlors – as defined in the Income Tax Act 2007 – of the trust.
2. Attributable fringe benefits. This would typically include fringe benefits that are substitutable for cash or household expenditure. Only attributable fringe benefits within the meaning of the fringe benefit tax rules in the Income Tax Act 2007 would be included in family scheme income. This would apply only to shareholder/employees who control the company for which they work.
3. Income of children. This would include passive income such as interest, dividends and beneficiary income directly received by dependent children above a threshold of $1,000 per annum per child.
4. Unlocked PIEs. This would include income from portfolio investment entities (PIEs) that are not sufficiently locked in, such as cash PIEs and listed PIEs. PIEs will be treated as sufficiently locked in if they are registered superannuation schemes, such as KiwiSaver schemes.
5. Income of non-resident spouses. This would include the worldwide income of a non-resident spouse.
6. Exempt income. Income that is exempt from income tax and that is in the nature of salary or wages, including salaries received by employees of international organisations such as the United Nations or the Organisation for Economic Co-operation and Development (OECD), would be included. Bonus bond prizes and similar payments from “save and win” bank accounts could be included as a part of this reform.
7. Main income equalisation scheme deposits. This would include deposits to a person’s main income equalisation scheme account.[1] Subsequent refunds (excluding interest) from main income equalisation accounts would not be counted for family scheme income purposes.
8. Periodic payments. This would include any periodic cash payments used by the person for income-related purposes.
Working for Families
The amended definition of “family scheme income” for WFF will apply from 1 April 2011.
Student allowances
The amended definition of “family scheme income” would be used to determine parental income for the purposes of student allowances. The new definition could apply to all new applications for student allowances from 1 January 2012.
Community services card
The amended definition of “family scheme income” would be used to determine income for WFF recipients who apply for the community services card. The new definition will apply to all new applications for the community services card from 1 April 2011.
Submissions
1.12 Officials invite submissions on the proposed legislative solutions to include certain types of income for social assistance purposes.[2] Submissions should be addressed to:
Social assistance integrity
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Wellington 6140or email [email protected] with “Social assistance integrity” in the subject line.
1.13 Electronic submissions are encouraged as this increases the efficiency of the analysis process.
1.14 The closing date for submissions is 24 September 2010.
1.15 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for officials to contact those making the submission to discuss the points raised, if required.
1.16 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.
1See sections EH 3 to EH 36 of the Income Tax Act 2007.
2Note that the Government is aware of a number of other issues relating to social assistance integrity. Although these issues are not included as a part of this reform, such issues can be the subject of future reforms.