Working for Families: removing the automatic indexation of the income threshold and excluding investment losses

As a part of the Taxation (Budget Measures) Bill 2010, the indexation of the income threshold for Working for Families (WFF) tax credits will be removed. This means that the income threshold at which WFF begins to abate will be set at the current threshold of $36,827 and this threshold will no longer be automatically indexed to inflation. However, the amounts of Family Tax Credit will continue to be automatically indexed to inflation. The removal of automatic indexation of the income threshold is intended to more effectively target WFF tax credits to those on lower incomes. This threshold can be increased by Order in Council if the Government wishes.

In addition, as a first step to improve the integrity of social assistance, the Taxation (Budget Measures) Bill 2010 will exclude investment losses, such as losses from rental properties, from the calculation of income for WFF tax credit purposes. This measure is intended to prevent higher income people gaining access to assistance they would not normally be entitled to.

This special report item outlines the amendments that affect the calculation of WFF tax credit entitlements.

Background

Removal of automatic indexation of the income threshold for WFF tax credits

At present, the amount of the Family Tax Credit (the main WFF tax credit) and the income threshold are both automatically indexed to the Consumer Price Index (CPI). The adjustment occurs once the cumulative increase in the CPI reaches 5% from the last adjustment (which was in October 2008). Although the Treasury forecasts at Budget Economic Fiscal Update (BEFU) 2010 indicated that the next adjustment will take place in time for increases to be paid from 1 April 2012, there is also a possibility that the 5% CPI accumulation may trigger an increase in payments from 1 April 2011.

While indexation of the Family Tax Credit maintains the real level of the tax credit for those on incomes below the current $36,827 threshold, it results in a double benefit for those on incomes above the threshold. For this group, indexation of the amount of the Family Tax Credit serves to increase the amount they receive, while indexation of the income threshold increases the amount a family can earn before it begins to abate. It extends eligibility to Family Tax Credit to people on even higher incomes. In contrast, removing the indexation of the abatement threshold will not impact on families with nominal incomes below the current $36,827 threshold. Over time, the effect of inflation would mean that WFF tax credits would increasingly be targeted to lower income families.

Exclusion of investment losses from the calculation of WFF tax credits

The Victoria University Tax Working Group report of January raised concerns about the integrity of the social assistance programmes, in particular, arrangements that have the effect of increasing social assistance entitlements such as WFF tax credits. As a first step to address the integrity concerns in this area, the Government proposes to exclude investment losses for the purposes of determining entitlements to WFF tax credits. Investment losses include losses from rental properties and trading in shares on revenue account. Currently, such investment losses can be used to reduce a person’s income and therefore increase their WFF tax credit entitlements.

Furthermore, excluding investment losses will make the treatment of losses for calculating WFF tax credit entitlements more consistent. Currently, other losses such as business losses and carried-forward losses are not taken into account for calculating WFF tax credit entitlements.

The Government will undertake a wider review of the rules determining entitlements for social assistance, especially arrangements that have the effect of increasing entitlements beyond what people’s true economic circumstances justify. An example is income from trusts. This review will cover WFF tax credits, student allowances and community services cards. An officials’ issues paper will be released later this year seeking public feedback on proposed legislative solutions that will make arrangements that undermine the intent of social assistance ineffective.

The goal is for legislation to be enacted later this year, with application on 1 April 2011.

Key features

Removal of automatic indexation of the income threshold for WFF tax credits (section MF 7 of the Income Tax Act 2007)

The income threshold at which WFF tax credits begin to abate will be set at the current threshold of $36,827. Section MF 7(1) will be amended so that this threshold will no longer be automatically indexed to inflation. However, the current WFF income threshold could be replaced by Order in Council if the Government wishes. The amounts of Family Tax Credit will continue to be automatically indexed to inflation.

Exclusion of investment losses from the calculation of WFF tax credits (section MB 3 of the Income Tax Act 2007)

Section MB 3 of the Income Tax Act 2007 will be amended to exclude investment losses from the calculation of family scheme income for WFF tax credit purposes. This means that if a person has an investment in an income year, such as a rental property, and that investment produces a net loss, the income and deductions from that investment will be ignored for calculating income for WFF tax credit purposes.

Application dates

The amendment to remove the automatic indexation of the income threshold for WFF tax credits will take effect on 20 May 2010.

The amendment to exclude investment losses for the purpose of calculating WFF tax credit entitlements will take effect on 1 April 2011.