Independent earner tax credit and residual income tax

2012 amendment adds the independent earner tax credit to the list of tax credits under the definition of 'residual income tax' in the Income Tax Act.

Section YA 1 of the Income Tax Act 2007

An amendment has been made to add the independent earner tax credit (IETC) to the list of tax credits under the definition of "residual income tax" in section YA 1 of the Income Tax Act 2007.

Background

Under the tax rules, a person's provisional tax liability is calculated by reference to their residual income tax (RIT). This is essentially the person's income tax liability less certain specified tax credits (generally based on the previous year). However, the IETC was not included within the legislative definition of RIT as one of the credits that reduces a person's income tax liability, at the time that it was introduced in 2009.

The IETC is aimed at individuals who are New Zealand residents and who do not receive an income-tested benefit, New Zealand superannuation or Working for Families assistance. For employees who qualify for the IETC, it effectively reduces the amount of PAYE deduction from their salary or wages. Self-employed, other non-salary and wage earners and salary or wage earners who do not use an ME tax code who qualify are able to claim the IETC at the end of the year by filing a tax return or requesting a personal tax summary from Inland Revenue. The IETC is available for people with net incomes of $24,000 or over per year, with the IETC abating once the $44,000 per year net income mark is reached. The IETC is fully abated away once a person's income reaches $48,000 per year. The maximum yearly amount of the credit is $520.

Key features

The IETC has been added to the list of tax credits under the definition of "residual income tax" in section YA 1 of the Income Tax Act 2007. The change ensures that the legislation reflects the original policy intent that the IETC should be one of the tax credits which reduces a person's income tax liability for the purposes of determining RIT under the provisional tax rules.

Application date

The amendment applies from 1 April 2009, being the date the IETC was introduced.