Income splitting II

Peter Dunne has said that income splitting for tax purposes would give about 310,000 families tax relief. However it appears that this group of people include those who have more than one job, and thus get taxed on secondary income. A one income family on $80k will get $5280 in tax relief from income splitting. But they wont if a partner was home, and 25 percent of his income was taxed as secondary tax. If that couple had two jobs - one on $50,000 the other on $30,000 - that will get them $250 tax relief. This means that both couples pay the same amount of tax, even though one couple pays more transport costs in getting to and from work.

The bill does not seem clear as to how family income will be equalised through income splitting with secondary tax, meaning that partner not only pays a higher proportion of their income in tax, they cant split their income for tax purposes the same way as other couples either. This impacts lower income families - who are likely to have several part time jobs - more as a family who earns $60k between them - one on $40k, the other on $20k - gets no relief from income splitting. They won't get any tax relief if one of these partners works two jobs. For example, the higher earner may have 40 percent of his income taxed at secondary tax, and although that couple earn exactly the same amount, as other families on $60k - they'll pay more tax if it is not equalised. They'll also have more transport costs to and from their various places of work.

And these days there are more and more people in this situation. And a parent doing three jobs at a 35/30/40 percentage income split will be paying most of their tax on the secondary rate, with no clawback on income splitting.

Having bills that go to select committee on the basis of pre-arranged agreements is political reality under MMP. At least the public can have their say on matters as raised above and in my earlier post on the issue.

More about →

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.

More about →

So, you`re on $60k. Income splitting for tax purposes could assist in getting you $5450 for having a child

So, you're earning $60,000, live with a partner who is not working. You have no kids. Money's tight and the Government has just passed a law allowing for income splitting for tax purposes. You`d like some more money without working additional hours.

Have a child and split your income for tax purposes. United Future is promoting a discussion document on it's income splitting policy. This document is a direct result of a commitment made in the confidence and supply agreement between Labour and United Future.

The Child Poverty Action Group, in its case for opposing income splitting notes that a household with a single earner on $60,000 can save $3,217 per year from 50/50 income splitting. However, a household on $36,000 stands to gain only $570 per year. That is, a family on just over half the income gets less than one fifth as much tax relief, and therefore this policy favours high income families and confirms to non-earning partners that if they choose to stay home to mind kids that United Future considers their economic worth is dependant on their partners income. A former cleaner whose partner is earning $60,000 will get 500% more tax relief than a stay at home accountant who whose partner earns $36,000, thus widening the gap between richer and poorer families. If one partner earnss $30.000 and the other $10,000 they`ll get nothing from income splitting.

But you`ll actually get $5450 a year extra if you are on $60,000 and have your first child. This is made up of $2236 Family Support and $3,217 that you'll save from income splitting for tax purposes, which will not be available to childless couples. However if you earn $36,000, you`ll get 72% more: $7072 in Family Support and $570 a year in income splitting.

The policy on its own favours high income families just as WFF favours low income families. And given that low income families are still struggling, even with WFF payments, an income splitting policy merely widens the gap between the rich and the poor. This is despite the fact that a tax splitting policy minimises the individual basis of our tax system and lowers marginal tax rates for higher incomes.

More about →