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Tax changes - Budget 2010
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Tax changes - Budget 2010: Working for Families Tax Credits

Adjustments to your Family Income for Working for Families Tax Credits

Example: Gavin and Stacey are settlors of the “A Family Trust”. The trust owns, and receives income from the building company that both Gavin and Stacey work for.

The Building company has earned $70,000 profit. From 1 April 2011, Gavin and Stacey will have to include attributable trustee income of $35,000 each as part of their estimated income to calculate their Working for Families Tax Credits entitlement.

Example: Jack and Diane own a plumbing company and are both employed by the business. They each receive an income of $35,000 and both of them have private use of a vehicle provided by the company. These vehicles are worth $8,000 a year.

From 1 April 2011, Jack and Diane will have to include the value attributed under the FBT rules (ie $8,000 each) in their family income for Working for Families Tax Credits.

Example: George and Mildred are both salary and wage earners. George receives an inheritance of $400,000 and invests it in a PIE (that is not a superannuation fund or retirement savings scheme). He receives an annual return of $20,000 on that investment.

From 1 April 2011, George will have to include this $20,000 in his family income for Working for Families Tax Credits.

Example: Johnny is gifted $15,000 from his parents in April 2011. This money is invested in term deposits. At the end of the year (31 March 2012) Johnny receives a letter from the bank showing he earned $600 interest. As the total interest earned by Johnny is over $500 his parents will need to include the amount over $500 (ie; $100) as part of their family income for the year 1 April 2011 to 31 March 2012.

Example: Mary has two children in her care. Jane receives $900 interest and Mark receives $200 interest. Mary will have to add $400 of this to her family income. Only the amount of Jane's interest over $500 is included. Mark's income is under $500 therefore none of his interest is included.

Example: Christine lives in New Zealand with her children and is supported by John who works overseas. John is not a tax resident in New Zealand. He receives an income which is equal to $NZ 150,000. Christine is not in paid employment, she stays at home to look after the children.

Christine will need to include John's income, of NZ $150,000, as family income for any Working for Families Tax Credits entitlement she claims from 1 April 2011 onwards.

Example: John is a New Zealand tax resident and works for the Organisation for Economic Co-operation and Development (OECD).

Although John's income is exempt from income tax it will need to be included as family income to determine any entitlement to Working for Families Tax Credits from 1 April 2011 onwards.

Example: Before David retired, he had been paying in to a private superannuation plan run by his employer. Now that he has retired he receives weekly pension payments which come to $20,000 each year.

From 1 April 2011, David's family will have to include 50% of the annual value of these payments (ie $10,000) in their family income for Working for Families Tax Credits.

Example: Patrick has been paying monthly premiums on his life insurance and investment policy for many years. It has an investment value of $200,000. Now that he has turned 60 his policy has matured and he needs to decide what to do with the money. He chooses to purchase an annuity (a regular monthly payment to be received for the rest of his life). The annual amount he receives is $16,000.

From 1 April 2011, Patrick's family will have to include 50% of the annual value of these payments (ie $8,000) in their family income for Working for Families Tax Credits.

Example: Jack and Jill receive a combined income of $80,000 a year. Their parents give them $100 a week which they put towards the mortgage payments. The total amount their parents give them in the year is $5,200.

As they receive over $5,000 from their parents, they will need to include the total amount of $5,200 as part of their family income.

Example: David and Rachel are on a low income. Rachel's father agrees to pay their power bill. The arrangement is that they will give him the bill and he will pay the power company directly. The bills average $347 each month which comes to a total of $4,160 a year.

As the total amount for the year is under $5,000 David and Rachel do not need to include this amount as part of their family income. If the amount was over $5000 for the year they would need to include the full amount as part of their family income.

Example: Farmer John deposits $50,000 into his farm's income equalisation account on 15 August 2011.

Any deposits John makes into the farm’s income equalisation account needs to be included in their family income to determine their WfFTC entitlement. In this case they will have to include the $50,000 deposited.

There have been changes to the types of income you must tell us about when applying for and receiving Working for Families Tax Credits.

For the year starting 1 April 2011, we need to know if you receive income from the following sources:

The above income types will need to be included in the 'other income' box of the Working for Families Tax Credits application form (FS1) along with income from interest, dividends, rents, royalties, estates, trusts and Māori authorities.

If you are already receiving Working for Families Tax Credits, and you receive any of the above income types, you’ll need to tell us about them before 1 April 2011 so that we can make sure you receive your correct entitlement. You can do this by phoning us on 0800 227 773.

Attributable trustee income

Attributable trustee income is all income for the year of a trust that hasn't been distributed as beneficiary income. It includes income from trading and investment activities and the net income of any company controlled by the trust.

Trustee income will be attributed only to settlors of a trust. The settlors are individuals who establish or contribute funds to the trust. The relevant definition of a settlor is contained in sections HC 27 - 28 of the Income Tax Act 2007.

The definition of settlor, in conjunction with the nominee look-through rule in section YB 21 of the Income Tax Act 2007, doesn't include professional advisors acting on behalf of clients and other persons, such as friends and family members, who simply allow their name to be listed as the settlor on a trust deed.

In the case of multiple settlors, the trustee income is distributed evenly to all settlors. However, if a settlor arranges for friends or relatives to be settlors so as to artificially dilute the attribution rule, the original settlor will be treated as the sole settlor of the trust. This complies with the existing settlor definition (including the nominee look-through rule) and the anti-avoidance rule

Exclusions to this attribution rule include:

  • if the trustee of a person’s trusts is registered as a charitable entity under the Charities Act 2005
  • any settlements for the benefit of local authorities
  • superannuation schemes registered with the Financial Markets Authority that are trusts
  • any trust which requires a court order to enable a distribution to a settlor or any member of the settlors family.

A company controlled by a trust is defined as a company in which the trustees and their associates hold 50% or more of the voting interests or market value interests (if there is a market value circumstance).

The attribution of a company's net income is restricted to controlled companies only.

The amount of net income of a controlled company included as trustee income is calculated according to the proportion of voting interests in the company held by the trust:

Trustee income = trust's voting interests x company's
net income
total voting interests

Read our example for attributable trustee income

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Attributable fringe benefits

The value of any attributable fringe benefits is required to be declared by all shareholder employees if they, or their associates, hold voting interests of 50% or more in a company.

Attributable fringe benefits are defined in the tax rules in sections RD 47 - 49 of the Income Tax Act 2007 as:

  • motor vehicles for private use
  • low/nil-interest employee loans
  • subsidised transport (when the employer is in the business of transporting the public) in excess of $1,000 in value
  • contributions to insurance schemes in excess of $1,000 in value
  • contributions to sickness, accident or death funds in excess of $1,000 in value
  • any other benefits received in excess of $2,000 in value.

If you receive fringe benefits but you or your associates (eg the family trust) are not shareholder-employees of the company you work for, then you don’t need to include the fringe benefits in your family income.

The value of the fringe benefit is the tax-inclusive value of the benefit, ie, the tax payable under the fringe benefit rules is to be added to the value of the benefit to give a tax-inclusive (gross) amount.

Read our example for attributable fringe benefits

Find out more about fringe benefits

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PIE income

This includes an amount of income attributed by a portfolio investment entity (PIE) to the principal caregiver or their spouse or partner, except if the PIE is a superannuation fund or a retirement savings scheme (eg KiwiSaver).

Read our example for PIE income

Find out more about PIEs

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Passive income of children

If your child(ren) receive(s) any of the following types of income totalling over $500 a year (per child), you’ll need to include the amount over $500 (per child) as part of your family income:

  • resident passive income. This includes interest, dividends, a taxable Māori Authority distribution (other than a retirement scheme contribution) and a replacement payment under a share-lending arrangement.
  • royalties
  • rent
  • beneficiary income. However, beneficiary income that is excluded under the minor beneficiary rule is not included in family income (eg, income from a testamentary trust).
  • distributions from a listed PIE
  • attributed income from a PIE that is not a superannuation fund or retirement savings scheme.

Read our examples below for income of children:

Example 1

Example 2

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Income of non-resident spouse

If your spouse or partner, who is not a tax resident, is earning an income overseas, from 1 April 2011 you will need to include their worldwide income as part of your family income for Working for Families Tax Credits. We may require you to provide evidence of their income.

Read our example for income of non-resident spouse

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Tax exempt salary or wages

This includes salary and wages that are exempt from income tax under specific international agreements in New Zealand. It includes employees of international organisations such as the United Nations or the Organisation for Economic Co-operation and Development (OECD), or under the Diplomatic Privileges and Immunities Act 1968.

Read our example for tax exempt salary or wages

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Pensions and Annuities

This includes 50% of the amount of pension or annuity payments from life insurance policies or a superannuation fund, (excluding NZ Super).

Read our examples below for pensions and annuities:

Example 1

Example 2

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Other payments

These are payments from any other person or entities that are used for the family’s day-to-day living expenses. If the total amount is more than $5,000 for the tax year, then the total amount must be included as family income. However if the total amount for the year is less than or equal to $5,000 you do not need to tell us about it.

A payment is considered to be used to meet day-to-day living expenses if it is:

  • replacing lost or reduced income (eg; payments from an insurance policy that covers loss of earnings/employment)
  • used to pay regular liabilities (for example, car payments, hire purchases, mortgage, loans)
  • used to meet the family’s usual living expenses (eg; monthly phone bill or power bill)
  • paid directly by another person on behalf of the principal caregiver, or their family members, for regular expenses (eg; paying the power, phone, gas bills directly).

Payments can include soft loans. A soft loan is a loan made available to a person on favourable terms, such as no or little interest payable and no set repayment date.

The following are excluded:

  • any one-off capital payments, such as payment from the sale of a house
  • any payments that have specific purposes other than income-related purposes, such as funeral grants, educational scholarships, lump sum ACC compensation payments, non-taxable payments under the Social Security Act 1964, charitable distributions or compensation based payments
  • any student loan payments, including the living costs component
  • any specified item or amount of income, or income from a specified source, that's declared not to be income for the purposes of the Social Security Act 1964 by regulations made under section 132 of that Act, such as payments to victims of crime
  • periodic payments received from the repayment of loan principal or when the recipient of the sale of an asset is paid in instalments
  • one-off gifts such as gift vouchers for a persons birthday
  • payments that are already included under another family income provision
  • payments that are received as a result of being adversely affected by an event declared to be an emergency event by the Commissioner.

Read our examples below for other payments:

Example 1

Example 2

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Income equalisation scheme deposits (excludes "adverse events" deposits)

This includes any deposits made by:

  • you
  • a company controlled by you or your trust, or
  • your trust

to an agricultural, fishing or forestry business income equalisation scheme account at Inland Revenue.

Subsequent refunds from these accounts (excluding interest) shouldn't be included as income for WfFTC.

Read our example for income equalisation scheme deposits

Find out more about the income equalisation scheme

 


Date published: 26 May 2011

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