2008 legislation increases the Working for Families tax credit amounts and abatement thresholds to reflect rises in the Consumer Price Index.

Sections MD 3(4), MD 13(3), ME 3(3) MF 4B and 4C, MF 7(2)(a) and Schedule 31 of the Income Tax Act 2007.

Working for Families tax credit amounts and abatement thresholds have been increased to reflect rises in the Consumer Price Index (CPI).

Background

The Taxation (Personal Tax Cuts, Annual Rates, and Remedial Matters) Act 2008 makes changes to the Working for Families tax credit package to take account of movements in the Consumer Price Index (CPI). The changes increase the family tax credit entitlement amounts and raise the income threshold above which the family tax credit, in work tax credit and the parental tax credit begin to abate.

The law relating to Working for Families tax credits requires that the abatement threshold and the family tax credit entitlement amounts are adjusted for inflation, as measured by the CPI, from the beginning of the tax year following the CPI movement cumulatively reaching 5% after 1 April 2007. This will occur in the September 2008 quarter, and the change would usually apply from the following 1 April, being 1 April 2009. However, it has been brought forward so that the new income threshold and family tax credit entitlement amounts will apply from 1 :October 2008.

Key features

  • Family tax credit entitlement amounts have been increased.
  • The abatement threshold above which the Working for Families tax credits (other than the minimum family tax credit) abate has been increased.
  • The provision that allows future indexation of the threshold and the tax credit entitlement has been amended so that the next adjustment will be when the CPI movement cumulatively reaches 5% after 1 October 2008.

Application date

These changes will apply from 1 October 2008.

Detailed analysis

New family tax credit entitlement amounts (sections MD 3(4), MF 4B and 4C))

A Working for Families tax credit entitlement is calculated on the basis of a full tax year (1April - 31 March). However, having the new entitlement amounts applying from 1October 2008 will result in two sets of entitlement amounts applying during the 2008-09 tax year. The amounts before and after 1 October are outlined (shaded) in the table below. New sections MF 4B and 4C provide that these entitlement amounts will be used to calculate a family's entitlement if it wants its family tax credit entitlement paid in instalments during the year (either weekly or fortnightly).

Also outlined in the table are composite entitlement amounts that will apply for the whole of the 2008-09 year and reflect the combination of the entitlement amounts before and after 1 October. These composite amounts will be used by Inland Revenue to calculate entitlements if a family waits until the end of the year to receive its family tax credit, or to square up a family's entitlement if it has received family tax credit instalments during the year. These changes have been made by amending section MD3(4).

Family tax credit amounts for the 2008-09 year

Children Current amount
1 April 2008
($)
New amount
1 October 2008 ($)
Composite amount for the 2008-09 year ($)

First child if under 16
First child if 16 or over
Subsequent child if under 13
Subsequent child if 13 to 15
Subsequent child if 16 or over

4,264
4,940
2,964
3,380
4,420

4,487
5,198
3,119
3,557
4,651

4,376
5,069
3,042
3,469
4,536

How much a family will gain from these changes depends on the number and age of children in the family and whether the family earns above the income abatement threshold.

The new entitlement amounts from 1 October 2008 also apply for the 2009-10 and subsequent years.

Abatement threshold (section MD 13(3) and schedule 31)

In addition, the income threshold above which the family tax credit, in work tax credit and parental tax credit abate has been raised from 1 October 2008 to take account of inflation. The previous abatement threshold was $35,000, and from 1 October 2008 it increases to $36,827. As with the changes to the family tax credit entitlement amounts, changing the abatement threshold part-way through the year (1 October) will result in a composite threshold applying for the 2008-09 year. The composite threshold for this year will be $35,914. These changes have been made by amending section MD 13(3).

For the 2009-10 and subsequent years, the threshold amount will be $36,827.

Schedule 31 of the Income Tax Act 2007 has also been amended to reflect the new abatement threshold of $36,827. This schedule is used to calculate weekly or fortnightly instalments of the Working for Families tax credits based on bands of estimated annual family income.

Calculation of net family scheme income (section ME 3(3))

The definition of "adjusted liability"; in the formula for calculating net family scheme income in section ME 3(3)(c) has been amended by repealing subparagraph (ii) as a consequence of the repeal of the low income rebate. Net family scheme income is a component of the formula for calculating the minimum family tax credit.

Future indexation (section MF 7(2)(a))

Section MF 7 of the Income Tax Act 2007 previously required the abatement threshold and the family tax credit entitlement amounts to be adjusted for inflation, by Order in Council, when the CPI movement cumulatively reached 5% after 1 April 2007. Because the CPI indexation has been brought forward, section MF 7 has been changed so that the abatement threshold and the family tax credit entitlement amounts are adjusted for inflation when the CPI movement cumulatively reaches 5% after 1October 2008.