As part of Budget 2012, changes were made to three tax credits that have become outdated - the income under $9,880 tax credit, the tax credit for childcare and housekeeper expenditure, and the tax credit for the active income of children. The first two credits were repealed while the last was replaced by a limited tax exemption.

Sections CW 55BB, LC 3 to LC 12, YA 1 and schedule 2 of the Income Tax Act 2007 and 24B, 24H and 41A of the Tax Administration Act 1994

As part of Budget 2012, changes were made to three tax credits that have become outdated - the income under $9,880 tax credit, the tax credit for childcare and housekeeper expenditure, and the tax credit for the active income of children. The first two credits were repealed while the last was replaced by a limited tax exemption.

Background

These credits were identified by the Government as poorly targeted, outdated and inconsistent with New Zealand's broad-based, low-rate tax framework. Claiming the credits was often the sole reason for many people filing tax returns.

Key features

  • Three tax credits have been changed, effective from the 2012-13 and later tax years:
    • the income under $9,880 tax credit (referred to in the legislation as the "transitional circumstances tax credit");
    • the tax credit for childcare and housekeeper expenditure;
    • the tax credit for the active income of children.
  • The first two credits have been repealed, while the last has been replaced with a limited tax exemption.

Detailed analysis

Repeal of tax credits

The Taxation (Budget Measures) Act 2012 repeals sections LC 3 through to LC 12. These are the sections dealing with the income under $9,880 tax credit, the tax credit for childcare and housekeeper expenditure, and the tax credit for the active income of children.

Several consequential omissions or amendments to definitions in section YA 1 have also been made, reflecting that these credits have been repealed. Section 41A of the Tax Administration Act 1994 has been similarly amended.

Transitional rules

These changes have effect from the 2012-13 tax year. This application date is possible as, by and large, these credits are claimed at year-end by filing tax returns. However, it was possible to claim two of the credits - the income under $9,880 credit and the credit for the active income of children - during the year through the PAYE system. Because of this, the amended Act contains transitional provisions.

The objective of these provisions is to allow employers to continue their current payroll and PAYE-withholding practices until 31 March 2013. The transitional rules are also designed to ensure that a taxpayer receiving these credits through the PAYE system is not required to file solely because of this. To support this objective, people currently claiming these credits through the PAYE system will be able to get the benefit of the credits in the 2012-13 tax year if they do not file a tax return. If they do file, their tax liability will be assessed as it is for other taxpayers; the credits will not be available. This may mean that they have tax to pay as their employer will have deducted insufficient tax throughout the year.

Schedule 2 of the Income Tax Act and section 24B of the Tax Administration Act are amended, both with effect from the 2013-14 and later tax years. The effect of these amendments is that the "ML" tax code, which allows a taxpayer to claim the income under $9,880 tax credit through the PAYE system, remains available for the remainder of the 2012-13 tax year, after which it is repealed.

These amendments work in concert with the repeal of section 24H(7), which has effect from the beginning of the 2012-13 income year. This provision prohibited the use of the "ML" code by someone who was not eligible for the tax credit; the omission of the provision means people are able to remain on the "ML" code despite the repeal of the credit.

There is no specific provision in the Income Tax Act that provides for the tax credit for the active income of children to be claimed through the PAYE system. Instead, this is achieved under a Commissioner's discretion in section RD 11, which allows the Commissioner to modify the PAYE rules in respect of a class of persons. The Commissioner will continue to exercise this discretion, allowing the credit to be claimed through the PAYE system, until 31 March 2013.

Limited tax exemption for children

New section CW 55BB is inserted providing that a school child does not need to pay tax on up to $2,340 of income which is not taxed at source (such as money for mowing the neighbour's lawn). The exemption does not apply to income on which tax has already been paid, such as salary and wages or interest.

If a child earns more than $2,340 from income which is not taxed at source, the exemption does not apply to any of the income. The child is required to pay tax on the full amount.

For the purposes of this new section, a school child is someone who is:

  • 14 or under;
  • 15, 16 or 17 and still attending school (excluding tertiary institutions); or
  • 18, and turned 18 on or after 1 January in the previous tax year and continued at school.

Example

Kate is at secondary school and has a part time job at the local retail store earning about $2,000 a year. Her employer deducts PAYE from her wages each week. Kate also gets paid for the occasional babysitter job for neighbours. She makes around $300 a year from babysitting. She also earns $50 in interest on her savings from which Resident Withholding Tax (RWT) is deducted.

Under the previous tax credit for a child's active income, Kate could file a tax return to claim back her PAYE, but not her RWT. The tax credit would also offset the tax payable on her babysitting income. With the new child's income tax exemption, Kate would not be required to file and pay tax on the babysitting income. She would not be able to claim back the PAYE or RWT.

Application date(s)

These changes apply for the 2012-13 and later tax years unless specified above.