By Hayes Knight – 23 August 2010

A new tax Bill, introduced by United Future, proposes to allow couples with dependent children to split their income equally for income tax purposes, leading to a reduced tax liability.

As part of United Future and National’s Confidence and Supply Agreement, National will support the Taxation (Income-sharing Tax Credit) Bill to select committee stage. However, many commentators doubt that the Bill will be enacted due to the apparent lack of support from National and Labour. 

If enacted, each partner in a relationship caring for children under 18 can choose to be taxed on an equal share of their combined income. At the end of the tax year, the couple could apply to the IRD for a tax credit based on the difference between the tax payable on an individual basis and tax payable based on half their combined income.

To be eligible for this income-sharing tax credit, parents would have to be spouses, civil union partners or de facto partners and New Zealand tax residents for the whole tax year. At least one partner would also have to be the principal caregiver for the dependent child/children. 

If the legislation becomes law next year, it would be in effect for the 2012/13 tax year with tax credits paid after 31 March 2013.

Due to the income tax rates and thresholds, the scheme would only benefit income up to $140,000. Couples who earn more than $140,000 can still split their incomes but will not gain more than the maximum tax credit of $9,080 per year.  

According to United Future, the Bill will give couples with children the option of having a parent work fewer or more flexible hours, be at home raising their children, and able to increase their combined after-tax income. 

The Ministry of Social Development suggests that the proposal provides additional income for a limited population, with the most gains being for higher single-income householder and lowest for lower-income families. 

Based on this Government “spin”, it is likely that this Bill will meet some resistance. It appears that much of the commentary focuses on the fiscal aspect and not the social/family issues it was intended to target. Accordingly, it will be a wait and see situation to see whether this legislation comes to fruition.

If you would like to further discuss the Income Splitting proposals, please contact Phil Barlow or Shelley-ann Brinkley