Limited tax exemption for children
2013 amendment to the Income Tax Act ensures that casual domestic work of a child is tax-exempt.
Section CW 55BB of the Income Tax Act 2007
The amendment to section CW 55BB of the Income Tax Act 2007 corrects an error to reflect the original policy intent of the limited tax exemption for children.
As part of Budget 2012, a limited tax exemption for children replaced an out-dated tax credit for the active income of children.
Section CW 55BB tax-exempts a school child from up to $2,340 of income if that income is not taxed at source; such as money for babysitting or mowing the neighbour's lawns. The limited tax exemption does not apply to the following situations:
- when the income is subject to withholding tax such as salary or wages, or interest; or
- when the child earns more than $2,340 of income that is not taxed at source.
Before the amendment, income from casual domestic work that is not taxed at source was not exempt. The "PAYE income payment" definition, which is used in section CW 55BB to identify income that is not tax-exempt did not cover income from casual domestic work.1 It meant that a child who earned income from their casual domestic work (such as babysitting or mowing lawns) may not have received the benefit of the exemption. This was inconsistent with the policy of introducing the limited tax exemption.
To correct this error, the "PAYE income payment" exclusion in section CW 55BB(2)(a)(i) has been amended to refer to an amount of PAYE income payment from which the person's employer is required to withhold tax under the PAYE rules. This ensures that casual domestic work of a child is tax-exempt.
The amendment applies from the 2012-13 tax year, which is the date when the limited tax exemption for children came into force.
1 See section RD 16 and the definition of "private domestic worker" in section YA 1 of the Income Tax Act 2007.