Monday, August 16, 2010

Income splitting for tax purposes

Peter Dunne's Taxation (Income-sharing Tax Credit) Bill that aims to split a family income equally between two partners for tax purposes was tabled in parliament today. It is hardly a fair bill and I`d be surprised if it passes the second reading. It will go to select committee as it is part of National's confidence and supply agreement with United Future. The agreement says that National will support "appropriate legislation to First Reading in Parliament". But National could then oppose it at select committee, before the second reading.

The bill means the more one partner's income is in relation to the other, the more tax relief they`ll get - provided they parent at least one child. A one income family on $40,000 has the second partner go to work, getting $30,000 - a combined income of $70,000. Another family on $50,000 has their partner go to work for $20,000, getting exactly the same combined income. Trouble is, although they get the same amount of Working for Families payments if they have the same number of kids, they don't pay the same amount of tax. So Peter Dunne thinks that if the main breadwinner of the family has a a higher income than the main breadwinner of another, thus paying more tax, that family should get more tax relief from splitting their income for tax purposes. Particularly if that earner got a much bigger salary than his or her partner. Of course if there was no gap - say both were earning $35,000 - they'd get nothing as the other two couples would be paying the same amount of tax as them after income splitting.

The rationale behind this bill is that if a household was running a business it could get these tax breaks. Additionally it could encourage more parents to stay at home full time with kids, apparently. Lets take a look at how that can work.

If your partner was earning $60,000 and you earned $20,000, tax splitting would encourage you to stay home and look after the kids, so the theory goes. Staying at work, you'd be better off by $1500 with income splitting. Quitting work would mean you are only better off by $980 (thats $18 a week) less the forgone $20,000. Even halving your hours, getting $10,000 means you'd pay just $490 less tax - and be a total of $9510 worse off, due to loss of income.

That's hardly an incentive to quit work or reduce your hours to stay home with the kids , you may think. Furthermore if your family income did drop from $80,000 to $70,000 your three kids will get you a whopping $34 extra a week in Working for Families Payments. You'll wont save much on childcare costs staying at home, either because, with three kids you would have been getting the maximum $11.10 an hour child care subsidy anyway, - which means you were only paying a couple of bucks per hour per child .

But a family on $130,000 - one on $120,000 the other on $10,000 working one day a week will get $6830 in tax relief - and thats even when one partner does look after the kids four days a week. That`ll pay for your childcare, and your mortgage for three months..

While I`m no expert on tax, income splitting, to me, appears a little like a policy that is in essence an alternative policy to altering tax thresholds for those who earn more than $38,000 as compensation for paying a higher proportion of their income on tax, and getting a little less Working for Families - provided they have kids. Tax cuts for the rich - although not the childless rich - without altering the tax thresholds. The amount of kids doesn't matter, its the same amount of tax relief whether one has one or ten children. As it is an opt in policy, this means that if you don't apply to the IRD at the end of the tax year, you`ll miss out.

That said, low income families do get some relief. A family on $40,000 - one partner on $10,000 the other on $30,000 will get $280. But that's exactly what a family on $50,000 will get if one partner earned $10,000. But both couples will get $980 if the lower earning partner quits work, even though one breadwinner earns $10,000 more. Yep, the lower the income, the more unfair it gets, according to this chart.

The chart shows that many low income families will get nothing from income splitting - but a childless couple on $120,000 could get up to $8480 tax free just by having a child. That's more than nearly all couples - including the very poorest who get nothing from income splitting - get in Working for Families payments for having their first child.

Next post: What if you get paid in secondary tax because you have more than one job.

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Anonymous Anonymous said...

I think income splitting is a step in the right direction, maybe there should be a cap on how much, like when claiming back tax from money paid to child care providers.

If I want to send my child to a carer to look after the money I pay them to look after him I can claim back 1/3 up to a threshold ($940).

where as if my wife the mother of my child stays home and looks after him I can't claim anything as I am not allowed to pay her. where I consider it to be better for my child to be looked after by a parent.


August 17, 2010 at 10:01 PM  
Blogger Swimming said...

$940 is only five weeks childcare for three kids - and that's with the surcharges on 20 hours free. Not much, is it?

And If you earn over 140k, and your wife is languishing at home looking after the three and four year old, without pay , you can pay her more than you pay a child care centre - off your tax cut through income splitting.

The poor can't do that. Because they dont get a tax cut and have to pay a higher proportion of their income on childcare.

August 17, 2010 at 10:38 PM  
Anonymous Anonymous said...

Yea Ok I see your point, paying affectingly 70k for child care is a bit over the top. But not all of us earn $140k

August 17, 2010 at 11:57 PM  
Blogger Unknown said...

In essence this is about being fair. Why should a guy who earns 100K with a stay at home mum pay 7-8K more in tax than a couple that each earn 50K a year. The low income families get less is a red herring they benefit from a raft of other government support. Our society benefits from having parents able to spend more time with kids - we pay less in subsidising childcare for one - this is a good policy

August 19, 2010 at 11:02 AM  
Blogger Swimming said...

So why should the 100k family get more tax relief under income splitting than others get in working for for families payments when the child is born - both initially have stay at home partners.

August 19, 2010 at 11:06 AM  

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