Income Splitting Issues Paper Released
On 11 December 2009 the Government released an issues paper on income splitting. The paper fleshed out the UnitedFuture proposal, which has support from the Government to first reading as part of the coalition agreement.
What is the proposal?
Under the income splitting proposal, married, civil union and de facto couples would be able to split their income 50/50 to take advantage of lower marginal tax rates. The lower rate will be delivered by way of a credit through the Working for Families system.
- The couples must have the care of at least one child aged 18 years or under;
- The couples have to register with IRD for the privilege, i.e., it is not automatic;
- The credit will not apply if families have not been resident for tax and immigration purposes for the whole year;
- The credit can’t be claimed in the year of birth or adoption, but will apply to the end of the year of dependency;
- The couples must be married, civil union, or de facto for the whole year before the credit applies.
PIE Rate Misalignment
The paper does not consider the position of couples with investments in PIEs. This means that PIE rates and marginal tax rates of some people will be out of line, thereby discouraging investments through PIEs. For example, a couple with one parent on $80k pa and the other on $0 pa, will pay tax on PIE income at 30%, but will have an effective tax rate on other income of around 19% if the proposals go through in their present form.
The proposal not to give the credit in the year of birth of one’s firstborn or first arrival into the country may seem curious. It is in the first year of a new birth or arrival that one’s budget is usually tightest, and therefore, the greatest need for the credit. The reason for the rule is to make it consistent with other social policy initiatives delivered through the tax system. In addition, marginal tax rates are usually very low in the first year of migration, because migrants may arrive halfway through the tax year.
The tax credit will apply the first time in the tax year beginning 1 April 2012. It is interesting to think that timing may be everything! Thinking of entering parenthood? It could make a big difference whether baby is born on the 31st of March 2012, or the 1st of April 2012. The same goes for those thinking of striking up a relationship, or breaking one off, although I guess tax is the last thing on one’s mind with all of these significant life events.