Working for Families
Issue: In-work tax credit and ACC survivor spouse payments
Submission
(New Zealand Institute of Chartered Accountants)
The drafting should make the link between hours worked and ACC income clearer, especially to ensure the surviving spouse’s hours are not overridden.
Comment
This amendment deals with a drafting issue of who is covered by the “ACC special rule” for hours worked. Currently, a person receiving ACC compensation can claim the hours they previously worked as counting towards the hours test. The rule had been intended to cover all situations when ACC weekly compensation is paid, but the language does not clearly include the situation of a surviving spouse weekly compensation.
The amendment seeks to confirm that when the accident compensation received relates to the death of a spouse, the deceased spouse’s prior work hours can be counted towards the hours test of the surviving spouse. Officials consider that the current provision clearly links the hours worked by the deceased spouse to the ACC income being received. Officials will provide amended drafting to make clear that the hours worked relating to the ACC payment are added to any hours worked by the spouse in their own right, and do not override them.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: In-work tax credit and major shareholder employees of close companies
Submission
(New Zealand Institute of Chartered Accountants)
NZICA supports the amendment but recommends the commencement date be made retrospective to 1 April 2008, when the issue was first raised. This will allow affected people to claim for prior years. Alternatively, a savings provision should be included to prevent people having to repay tax credits inadvertently received for prior years.
Comment
Making the change retrospective would allow for affected people to reapply for past year tax credits if they can meet the new criteria. The change is not arising from a technical error, omission or dispute but a change in the policy boundary for situations that can qualify for assistance. Additionally, there are unknown fiscal, administrative and compliance costs to making the change retrospective as people revisit previous applications, although the fiscal cost is likely to be relatively small in terms of total spending on the in-work tax credit. The general approach is to make changes prospectively unless there is a strong case for retrospectivity. As this is a policy change there is not a strong case for backdating the change.
A savings provision is in effect the same as a retrospective change but limited in this case to those who applied the law incorrectly at the time, and should likewise be used sparingly.
The application date could be amended to 1 April 2011 with limited impact on fiscal, administrative and compliance costs for affected persons. This is because applications for an in-work tax credit can be lodged after the end of the tax year to receive payment as a year-end lump sum. Most applications for shareholder-employees would be received after June 2012 or later if tax agents are used. The bill is expected to be passed in July 2012. Shareholder-employees would be able to apply for interim payments from the 2013–14 tax year, if they wish.
Recommendation
That the submission to have the change apply from 2008 be declined, and that the application date be changed from 1 April 2012 to 1 April 2011.
Issue: In-work tax credit and trust owned companies
Submission
(New Zealand Institute of Chartered Accountants)
The amendment to allow major shareholder employees of a close company to claim the in-work tax credit should be extended to apply also to a full-time earner employed by a close company that is owned by the full-time earner’s family trust.
Comment
Trust arrangements are far more complicated than arrangements involving companies, where there is a clear and identifiable link between the company and its owners. For example, a trust can have several settlors and beneficiaries, making it unclear if a trust is “the full-time earner’s family trust”. There is insufficient time to consider the implications of extending the provision to unpaid workers of companies owned by a trust established by the worker, for inclusion in this bill.
Recommendation
That the submission be declined.
Issue: Excluding repayments from debtors from “Other payments” category
Submission
(New Zealand Institute of Chartered Accountants)
Family scheme income should exclude repayments of amounts standing to the credit of a person that falls within the ambit of section MB 13(1) of the Income Tax Act 2007. In particular, amounts received by company shareholders from current account repayments should be excluded.
Comment
Section MB 13(1) captures other payments in the nature of family income that a person might receive and use to replace wages or meet their usual family living expenses. Section MB 13(2) sets out types of payments that are excluded from the rule. The rule is not intended to catch payments relating to changes in how assets are held, such as the sale of an asset or taking out a commercial loan. Repayments from debtors of amounts standing to the credit of the person are not specifically excluded, although small amounts may fall under the $5,000 threshold in section MB 13(3).
Payments received where the person is in credit appears to be similar in nature to the existing exemption for proceeds from disposal of property. Further consideration is required to consider how to word the exemption to avoid unintended consequences. The Income Tax Act, for example, does not define a shareholder’s current account. Officials will consider the issue for inclusion in a future tax bill.
Recommendation
That the submission be noted.
Issue: Withdrawals from KiwiSaver and complying superannuation funds
Submission
(New Zealand Institute of Chartered Accountants)
NZICA supports the amendment made for KiwiSaver and complying superannuation funds (CSFs) which stops withdrawals from these schemes being included in taxable income for the purposes of calculating family scheme income.
The amendment should also apply to other superannuation schemes in which members are locked in until retirement and may only exit the scheme in defined circumstances.
Comment
The existing Working for Families (WFF) rule prevents people from diverting employment income into superannuation schemes (and later receiving it as a tax-free distribution) to maximise their entitlement to tax credits. The rule addresses situations when a person’s taxable income is apparently reduced by channelling income through these schemes. It is of an anti-avoidance nature and is aimed largely at situations in which the employer, employee and scheme are closely connected.
The rule applies only when the individual continues to work for the employer after the distribution. Many employer-based superannuation schemes make distributions only after the person has left employment – for example, as retirement or serious (terminal) illness benefits. These distributions are not included in family scheme income under the current rule and so these individuals are not affected by the amendment proposed in the bill.
The amendment overrides the WFF rule in order to support early withdrawals that are a deliberate design feature of KiwiSaver – for example, the first home withdrawal facility. Counting distributions made under the first-home withdrawal facility as family scheme income, and thereby reducing WFF tax credit entitlements, is not consistent with the KiwiSaver objective of encouraging home purchase nor the WFF objective of supporting day-to-day living expenses.
These early withdrawal features are heavily prescribed in KiwiSaver legislation, and are carefully regulated. Other employer-based superannuation schemes that allow early withdrawals do so in circumstances permitted by their trust deed which may not be as prescribed as those under the KiwiSaver and CSF rules. It is these early withdrawal situations that the WFF anti-avoidance rule is aimed at; restricting this amendment to KiwiSaver and CSFs provides an appropriate balance between the policy intention of WFF tax credits and the KiwiSaver policy for permitted early withdrawals.
Recommendation
That the submission be declined.