A number of legislative changes have been made to the Working for Families scheme in recent years. The aim of the new rules is to help define just what the true family income is and they extend well beyond a PAYE salary.
The idea was to look through all related entities to get a real picture of total income for a family – particularly income from companies and trusts. This was due to some quite well healed individuals qualifying for Working for Families because of the way they structured their assets.
As such, IRD introduced a new calculation which is called the family income adjustment. The start of this calculation begins with the more obvious taxable income and then adjusts for other entities including some non-income transactions. We cover some of the more common transactions below.
This calculation not only impacts Working for Families but also the community services card and student allowances.
The first thing to note is that offsets available for business or investment losses have been removed. The only exemption that now exists is if businesses are run in conjunction with each other, where one might be profitable and the other making a loss.
Interest deductions are not allowable where it is associated with an investment activity defined as a passive investment.
Some of the rules governing what type of income is included in the family income adjustment include:
- company income (where an associated person holds 10% or more of a close company). Interestingly, a husband and wife that each hold less than 10% of shares each are treated as two independent shareholdings. So if each held 9% of the shares in their individual names, they would not have to attribute their share of taxable income.
- trust income is divided across the number of settlors when distributions are not distributed to the beneficiaries. In law, a settlor is the person or persons who established the trust and ‘settled’ assets into the trust. The IRD have extended the tax definition of settlor to beneficiaries who don’t pay interest on their current accounts. It is very common for an interest free loan to be extended to a beneficiary but in this instance, the beneficiary could be added to the number of settlors by the IRD. We can also see who some clients would be impacted if they failed to consider income in their parents’ trusts when claiming Working for Families. Additionally, income paid to an infant beneficiary over a number of years could also be caught in the definition.
- other income over $5,000 is a catch all to cover grey areas in the law. ‘Soft loans’ between family members may be caught in this category but the application of the law is unclear. Capital distributions should be excluded even if used for day-to-day living but already some issues have arisen over what constitutes day-to-day living. One thing that is clear is that company drawings are excluded from this category.
- fringe benefit tax – work related vehicles are excluded.
Inheritances, lottery wins and other windfall gains are excluded so that Lotto win is not going to impact your eligibility.
There are a range of subjective approaches in the legislation that can result in inconsistent application by government agencies. The categories covered in this article are not exhaustive but intended to cover common situations. You can see that family income adjustments are complex and we recommend that you contact us if you think you qualify for the Working for Families scheme.