Working for Families: Removing the automatic indexation of the abatement threshold and excluding investment losses
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Sections MB 3 and MF 7 of the Income Tax Act 2007
The Taxation (Budget Measures) Act 2010 introduced a number of changes that affect the calculation of Working for Families (WFF) tax credits:
- the indexation of the abatement threshold for WFF tax credits has been removed; and
- investment losses, such as losses from rental properties, are now excluded from the calculation of income for WFF tax credit purposes.
Under the previous rules, the amount of the Family Tax Credit (the main WFF tax credit) and the abatement threshold were both automatically indexed to the Consumer Price Index (CPI).
Households earning over the current abatement threshold of $36,827 benefited from the indexation of both the amount of the Family Tax Credit (FTC) as well as the income level at which it abates. Households earning below $36,827 only benefited from the indexation of the amount of FTC. This made the FTC inequitable and inefficient at targeting those on lower incomes.
Certain adjustments are made to the calculation of income for WFF tax credit purposes. Currently, business losses are excluded from the calculation of income for WFF purposes but investment losses are not.
Section MF 7(1) has been amended so that the threshold at which WFF tax credits begin to abate is no longer automatically indexed to inflation. However, this abatement threshold can be changed by an Order in Council if the Government wishes. The amount of Family Tax Credit continues to be automatically indexed to inflation. Removing the indexation of the abatement threshold does not impact on families with nominal incomes below the current $36,827 threshold.
Section MB 3 has been amended to exclude investment losses such as rental losses from the calculation of family scheme income for WFF tax credit purposes. This means that if a person has or carries on an investment activity in an income year, and that investment produces a net loss, the income and deductions from that investment are ignored when calculating family scheme income for WFF tax credit purposes. An investment activity includes the passive holding of an investment asset such as a rental property, but does not include a bank account. This measure is intended to improve the integrity of the WFF scheme by preventing higher income people gaining access to assistance they would not normally be entitled to.
The amendment removing automatic indexation of the abatement threshold applies from 20 May 2010.
The amendment excluding investment losses from the calculation of income for WFF tax credit purposes applies from 1 April 2011.