Issued
01 Jun 1986

Income Tax Amendment Act (No 2) 1986

Archived legislative commentary on the Income Tax Amendment Act (No 2) 1986 from PIB vol 151 Jun 1986.

This commentary item was published in Public Information Bulletin Volume 151, June 1986

More information about Public Information Bulletins.

This Act gives effect to the 20 August 1985 Statement on Taxation and Benefit Reform announcement of measures to:

  • Reduce personal income tax rates with effect from 1 October 1986 to coincide with the introduction of GST.
  • Replace the present family rebate available through the tax system and the Family Care Scheme and child supplement payments made by the Department of Social Welfare with a new Family Support Tax Credit (FSTC) scheme (which incorporates a guaranteed Minimum Family Income concept) with effect from 1 October 1986.
  • Abolish the principal income earner rebate with effect from 1 October 1986.
  • Introduce a transitional tax allowance as a personal tax rebate with effect from 1 October 1986.
  • Subject all basic income-tested Social Security benefits and income-tested war pensions to taxation with effect from 1 October 1986.

The Act received the Governor-General's assent on 6 May 1986 and is now law. Particular attention should be given to the dates from which the various amendments have effect.

Part I Deals with the personal income tax reform measures.

Part II Covers the provisions relating to the Family Support and Guaranteed Minimum Family Income tax credit schemes.

Note: The Minister recently announced the Government's intention to amend the FSTC scheme to enable provisional taxpayers to receive regular advance payments of Family Support through the Department of Social Welfare. It should be noted that this publication gives an explanation of the legislation that received the Governor-General's assent on 6 May 2986 and does not cover the proposed amendments. These will be explained in a subsequent publication which will be issued when the empowering legislation has been passed by the Government.

Amendments to PIB Number 147

The following are minor amendments relating to PIB 147 which provided a technical interpretation of the provisions of the Income Tax Amendment Act 1986.

Page 13

The commentary on subsection (2) refers to qualifying expenditure incurred "on or after the 5th of May 1985". The commentary should read "on or after the 8th of May 1985".

Page 22

The commentary on subsection (3) refers to the fact that the notice of election must be given to the Commissioner "before the taxpayer is required to furnish his or her return of income for the income year". This commentary should read "within the time within which the taxpayer is required to furnish his or her return of income for the income year".

(The previous wording may have led readers to conclude that the notice of election was required to be lodged prior to the lodging of the return of income. The correct position is that they may be lodged simultaneously).

Page 33

The last two lines of the second paragraph read: "It ensures that the liability of such backpayments for both income tax and surcharge purposes is the same. The effect is that backpayments of foreign social security pensions will be liable for the national superannuitant surcharge in the year of receipt".

These two sentences should be deleted and the following inserted: "It ensures that the liability for income tax and treatment for surcharge purposes is the same. The effect is that backpayments of foreign social security pensions will be included in the calculation of net national superannuation in the year of receipt".

Page 34

The commentary that refers to subsection (1) of section 29 ends with the following two sentences: "This ensures that the liability of such backpayments for both income tax and surcharge purposes is the same (ie, in the year in which such backpayments of national superannuation and specified foreign security pensions are received they are deemed to be 'other income' and therefore liable for the national superannuitant surcharge)."

These two sentences should be deleted and the following inserted. "This ensures that the liability of such backpayments for income tax and their treatment in the calculation of the surcharge is the same (ie, the calculation of a national superannuitant's "other income" takes into account all the income received in the income year, irrespective of the year to which it relates.)"

Section 1 - Short Title And Application

This section provides that the Amendment Act is to be read with and form part of the Income Tax Act 1976.

It also provides that the various amendments are to apply from the date on which the Act received the Governor-General's assent (6 May 1986), unless otherwise stated. It is important to check the commencement date when applying any of the amending sections. The commentary which follows will bring this out.

Part I - Personal Income Tax

This Part of the Amendment Act contains 15 sections which deal with the personal income tax reform measures announced in the 20 August 1985 Statement on Taxation and Benefit Reform other than the new Family Support/Guaranteed Minimum Family Income schemes which are outlined in Part II. Details of each of the sections follow.

Section 2 - Interpretation

This section makes a number of amendments to section 2 of the principal Act, the interpretation provision, which relate largely to the proposal to subject all basic income-tested benefits and income-tested war pensions to tax with effect from 1 October 1986.

Subsection (1) - Amendments to existing definitions

(a) Employer"

The present definition of the term "employer" includes within its meaning the Director-General of Social Welfare in respect of payments of national superannuation and unemployment benefit. The amendment made by section 2(1)(a) achieves two things:

  1. It replaces the reference to the Director-General of Social Welfare with references to the Social Security Commission and War Pensions Board. This change ensures that the Income Tax Act "employer" definition is consistent with the Social Security Act 1964 (which provides that all benefit payments are LEGALLY made by the Social Security Commission) and the War Pensions Act 1954 (which provides that pension payments are legally made by the War Pensions Board). The change has no practical effect as in practice all the powers of the Social Security Commission and War Pensions Board in relation to the payment of benefits have been formally delegated to the Director-General of Social Welfare.
  2. It extends the "employer" definition by providing that the Social Security Commission will also be an employer in respect of those income-tested benefits (including the unemployed benefit) that are to become taxable from 1 October 1986. The definition is similarly extended to provide that a War Pensions Board will also be an employer in respect of those war pensions which are to become taxable from that date.

(b) "National Superannuation"

The present definition of the term "national superannuation" excludes from its ambit (and thus from being subject to tax) all supplementary benefits which are paid in addition to, but along with, the basic rates of national superannuation. The supplementary benefits so excluded are child supplements, the accommodation benefit and the special benefit, being amounts paid under sections 61A, 61E and 61G of the Social Security Act 1964 respectively. The definition is being amended with effect from 1 October 1986 to remove the reference to child supplements (which are to be replaced by family support) and to include references to the disability allowance (which is payable under section 69C of the Social Security Act) and to certain lump-sum payments of benefits made after death (which are payable under Sections 61DC, 61DD and 61DE of that Act) which can also be paid as supplements to national superannuation.

(c) "Salary or Wages"

The present definition of the term "salary or wages" includes within its meaning payments of national superannuation and of the unemployment benefit. The amendment made by section 2(1)(c) extends that meaning to also include payments of those income-tested benefits and war pensions that are to become taxable from 1 October 1986.

This amendment is significant in that it allows (through the definition of "income from employment" which includes "salary or wages") the standard deduction (section 105 of the principal Act) to be claimed against those benefits and war pensions which are to become taxable in October, in the same manner as that deduction is allowed against national superannuation and the unemployment benefit (in those cases where it is presently taxed).

(d) "Unemployment Benefit"

This definition is repealed by section 2(1)(d) of the Amendment Act. By virtue of its inclusion in the term "income-tested benefit" (see commentary that follows) and the amendments made in sections 7 and 8 of the Amendment Act, a separate definition of "unemployment benefit" is no longer necessary.

Subsection (2) - New Definitions

(a) "Income-tested Benefit"

This is a new definition which specifies those income-tested Social Security benefits that are to become taxable from 1 October 1986. The definition includes the following benefits:

  • Domestic purposes benefit
  • Invalids' benefit
  • Sickness benefit
  • Unemployment benefit (at present taxable only where the recipient has no dependent children)
  • Widows' benefit

These are the five main "income maintenance" benefits paid by the Department of Social Welfare and although they have different eligibility criteria, each is paid at the same rate subject to an income test.

Also included are those emergency benefits which are paid (usually at the same rates as the five main income maintenance benefits) where an applicant has failed to meet the qualifying criteria for those benefits in certain circumstances.

Those emergency benefits which are paid at the same rate as the family benefit or as the standard tertiary bursary (paid pursuant to the Tertiary Assistance Grants Regulations 1982) are excluded from being taxable.

Specifically excluded from the "income-tested benefit" definition are those supplementary payments which can be paid in addition to and along with the basic income-tested benefit rates. These benefits are the accommodation benefit, the special benefit and the disability allowance which are payable under sections 61E, 61G and 69C of the Social Security Act respectively. Similarly excluded are those lump-sum payments of benefits made after death, payable under Sections 61DC, 61DD and 61DE of that Act, which do not represent a continuation of those benefits for a short period after death (which are payable under Section 61DB of the Social Security Act).

(b) "Specified War Pension"

This is a new definition which specifies those war pensions that are to become taxable from 1 October 1986. The definition includes the following war pensions:

  • War service pensions
  • War veterans allowances and gratuities
  • Economic pensions

These are the war pensions which are paid by the Department of Social Welfare subject to an income test. By their exclusion, those war pensions which are not subject to an income test, namely the war disablement pensions (this is the most commonly paid war pension), war widows' pensions, and those war pensions paid from overseas countries, will continue to be exempt from tax. All age and dependent's supplements paid with war pensions are similarly excluded from the definition and remain exempt from tax.

Subsection (3)

This subsection makes amendments consequential to those outlined above.

Subsection (4)

This subsection provides that all the section 2 definition amendments are to apply from 1 October 1986. This means in the 1986/87 income year only 6 months of benefit/war pension income will comprise taxable income (except in the case of those unemployment benefits paid to those without dependent children). See also the commentary on sections 7 and 8.

Section 3 - Child Rebate

At present section 50A of the Income Tax Act provides that in those cases where a child qualifies for BOTH the child and principal income earner rebates, that child is entitled to claim only one of those rebates, whichever is to his/her advantage.

As a consequence of the replacement of the principal income earner rebate with the transitional tax allowance from 1 October 1986, this section now provides that:

  • In the 1986/87 income year, children who qualify for the principal income earner rebate and/or the transitional tax allowance will have the choice of claiming either the child rebate, or a combined entitlement to the principal income earner rebate and transitional tax allowance, whichever is to their advantage (subsections (1) and (3)).
  • In the 1987/88 and subsequent income years, children who qualify for BOTH the child rebate and the transitional tax allowance will be entitled to claim only one of those measures: whichever is to their advantage (subsections (2) and (4)).

The approach to be adopted in respect of those who qualify for both the child rebate and the transitional tax allowance thus parallels the position which currently applies to children who qualify for both the child and principal income earner rebates.

Section 4 - Principal Income Earner Rebate

This section gives effect to the abolition of the principal income earner rebate with effect from 1 October 1986. In order to avoid the need for claimants to keep details of income earned in the six months to 30 September 1986, the income for the full 1986/87 income year will be taken into account but only HALF the annual amount of the rebate will be available. This is the approach normally adopted in respect of income-related rebates which are abolished part way through an income year.

Persons who do not qualify for the principal income earner rebate at any time during the six months ending on 30 September 1986 will be excluded from claiming that rebate in their 1987 tax returns.

Subsection (1)

This subsection amends the "qualifying person" definition for the purposes of entitlement to the principal income earner rebate in respect of the 1986/87 income year so as to exclude those persons who:

  1. Receive national superannuation at all times throughout the six months ending on 30 September 1986; or
  2. Are children in respect of whom the family benefit has been payable at all times throughout that six-month period; or
  3. Had a spouse (de facto or de jure) at all times throughout that six month period and the spouse earned more than the person during the full 1986/87 tax year; or
  4. Are entitled to the family rebate in respect of the 1986/87 tax year; or
  5. Had a spouse (de facto or de jure) at all times throughout the six months ending on 30 September 1986 who was entitled to the family rebate in his or her own right in respect of the 1986/87 tax year; or
  6. Are not taxpayers in respect of income derived in the six month period ending on 30 September 1986; or
  7. Are deemed to be non-residents at all stages during that six month period.
  • The first five of these exclusions are the same as those that currently apply to the principal income earner rebate with the exception that the references to annual periods are replaced by six months periods. The two new exclusions are in respect of non-taxpayers and non-residents. The former of these is particularly important in that it excludes from entitlement to the principal income earner rebate those Social Security beneficiaries who derive no other income (as their benefits are not taxable until 1 October, they are non-taxpayers in respect of the first six months of the 1986/87 tax year).

Subsection (2)

This subsection provides that entitlement to the principal income earner rebate in respect of the 1986/87 income year shall be as follows:

Assessable Income ($) Rebate
Up to $6,117 4.25% of income
$6,118-$12,000 $260
$12,001-$15,152 8.25 % of the difference
  between income and
  $15,152
$15,153 and over Nil

This approach effectively retains the principal income earner rebate until 31 March 1987 but at half the full year rate.

Subsections (3) and (4)

These subsections provide for the repeal of the principal income earner rebate section (section 50B of the Income Tax Act) and of all amendments made to that section since its introduction. All such repeals are to take effect on 1 April 1987 with the result that all references to the principal income earner rebate in the Income Tax Act will disappear from that date.

Subsection (5)

This subsection simply provides that the changes to the qualifying criteria and rebate amounts described above will apply to the 1986/87 income year only.

Section 5 - Transitional Tax Allowance

This section introduces a new section 50C in the principal Act which provides for the transitional tax allowance to be claimable as a tax rebate with effect from 1 October 1986. Details of the new allowance follow.

Subsection (1)

This subsection inserts the new section 50C into the Income Tax Act.

Section 50C(1) - This is the definition subsection of the new section 50C. It outlines five definitions as follows:

  • "Family Benefit"

This has the same meaning as in the new section 374A (the family support definition section) - see the commentary on that section later in this publication.

  • "Full-time earner"

This term is defined in relation to periods of one week. A person is regarded as a full-time earner in any week where that person works (either as an employee or as a self-employed person, or both) at least 30 hours during that week. Persons who would have met that requirement but for their having suffered an accident (for which earnings-related accident compensation is payable) or having been unfit for work due to sickness (for which the sickness benefit is payable) are also included. The definition also provides that where a pay period is longer than one week any hours worked during the pay period are deemed to have been worked at a uniform rate throughout the period when considering the 30 hours requirement.

  • "Qualifying person"

This is the key definition of the section. To qualify for the transitional tax allowance a person must have been a full-time earner (as defined above) at some stage during the income year AND that person must NOT:

  1. Be a child in respect of whom the family benefit has been payable at all times throughout the income year: nor
  2. Be a non-taxpayer in respect of that tax year (this exclusion has practical significance in respect of the 1986/87 transitional year only - see commentary on section 5(2) of the Amendment Act): nor
  3. Be a non-resident at all stages throughout the income year (this exclusion also has practical significance in respect of the 1986/87 transitional year only); nor
  4. Be a person who is entitled to a tax credit pursuant to Part XIA of the Act (as inserted by Part II of this Amendment Act) in the income year; or
  5. At all stages in the income year be a spouse of a person who, in the income year, is entitled to any tax credit pursuant to Part XIA of the principal Act.

NB:The qualifying criteria are based on those which apply for the principal income earner rebate. Thus, where as at present a person cannot claim both the principal income earner rebate and the family rebate, this definition continues that approach by ensuring that people cannot claim both the transitional tax allowance and be entitled to the Family Support or Guaranteed Minimum Family Income tax credits at the same time (the apportionment formula used reflects this relationship).

  • "Remunerative work"

This definition, by referring to the performance of work from which income is derived, ensures that both employees and the self-employed can be "full-time earners" (as defined).

  • "Spouse"

This has the same meaning as in the new section 374A (the family support definition section) - see the commentary on that section later in this publication.

Section 50C(2) - this section specifies how to calculate a qualifying person's entitlement to the transitional tax allowance. This is calculated in accordance with the formula:

y x z
52

where "y" is determined from the following table:

Assessable Income ($) Transitional Tax Allowance (y)
$0 - $6,240 ($120 pw) $728 ($14 pw)
$6,241 - $9,880 $728 reduced by 20% of
  income over $6,240
$0 - $9,880 ($190 pw) Nil

and where "z" is the number of weeks in which BOTH the taxpayer is a full-time earner (ie, has worked at least 30 hours) and in which neither the taxpayer nor his/her spouse has been entitled to a family benefit and subsequently a tax credit pursuant to Part XIA.

The proviso to section 50C(2) contains provision for the deferral of the date of ceasing to receive family benefit in certain cases. This provision is identical to those which appear in sections 374D(1)(a) (family support) and 394E(2)(a) (guaranteed minimum family income) - see the commentaries on those sections later in this publication. It ensures that where a deferral applies to extend FSTC/GMFI entitlement, entitlement to the transitional tax allowance is correspondingly reduced so that no person can claim the transitional tax allowance and be entitled to a tax credit pursuant to Part XIA at the same time.

Section 50C(3) - This section provides for an adjustment of assessable income in those cases where a person departs from, or arrives in, New Zealand during an income year. In line with similar provisions which currently apply with the principal income earner and family rebates in such cases, the assessable income derived in New Zealand will be grossed up to reflect the annual equivalent of the income the person derived in the number of days in the income year he/she was resident in New Zealand.

Subsection (2)

This subsection contains those amendments required for the 1986/87 transitional year to reflect the fact that the transitional lax allowance will be first available from 1 October 1986.

The section provides:

  • the "qualifying person" criteria are to apply in respect of the six-month period commencing on 1 October 1986. This will ensure that a person cannot claim the transitional tax allowance unless he/she qualifies for it in the second half of the 1986/87 income year.
  • the amounts of the transitional tax allowance are to be halved. Calculation of item y in the transitional tax allowance entitlement formula for the 1986/87 income year will thus be as follows:
Assessable Income ($) Transitional Tax Allowance (y)
$0 - $6,240 ($120 pw) $364
$6,241 - $9,880 $364 reduced by 10% of
  income over $6,240
$0 - $9,880 ($190 pw) Nil

This approach effectively means that the transitional tax allowance is available from 1 April 1986 but at HALF the full year rate.

Subsection (3)

This subsection inserts a reference to the new section 50C in section 57 of the principal Act which ensures that the transitional tax allowance is to be available as a personal tax rebate.

Subsection (4)

This subsection removes the 1986/87 transitional year provisions with effect from the end of the transitional year.

Subsection (5)

This subsection provides that the transitional tax allowance shall apply to the income year commencing on 1 April 1986 (1986/87 income year) and every subsequent year. It should be noted that, despite the use of the word "transitional" in the title no provision is made in the legislation for the phase-out of this allowance.

Section 6 - Family Rebate

This section gives effect to the abolition of the family rebate with effect from 1 October 1986. In order to avoid the need for claimants to keep details of income earned in the six months to 30 September 1986, the income for the full 1986/87 income year will be taken into account but only half the annual amount of the rebate will be available. This is the approach normally adopted in respect of income-related rebates which are abolished part way through an income year.

Persons who do not qualify for the family rebate at any time during the six months ending on 30 September 1986 will be excluded from claiming that rebate in their 1987 tax returns.

Subsection (1)

This subsection amends the "family income" definition for the purposes of entitlement to the family rebate in respect of the 1986/87 income year to require a "family" to be in existence in the six months ending 30 September 1986, and in such cases to take the family income for the full 1986/87 income year.

Subsection (2)

This subsection in effect amends the qualifying criteria for the family rebate by requiring that they be met at some time in the first six months of the 1986/87 tax year for a claim to be eligible.

Subsection (3)

Paragraphs (a) and (b) of this subsection ensure that a person must qualify for the family rebate in the first six months of the 1986/87 income year for his/her claim to be eligible. Paragraph (a) is particularly important in that it excludes from entitlement to the family rebate those social security beneficiaries who derive no other income (as their benefits are not taxable until 1 October, they are non-taxpayers in respect of the first six months of the 1986/87 tax year).

Paragraphs (c) to (e) provide that entitlement to the family rebate in respect of the 1986/87 tax year shall be as follows:

Family Income ($) Rebate
Up to $9,800 $962
$9,801 - $14,000 $962 reduced by 7.5% of income
  over $9,800
$14,001 - $20,470 $647 reduced by 10% of income
  over $14,000
$20,471 and over Nil

This approach effectively retains the family rebate until 31 March 1987 but at half the full year rate.

Subsections (4) and (5)

These subsections provide for the repeal of the family rebate section (section 53C of the Income Tax Act) and of all amendments made to that section since its introduction. All such repeals are to take effect on 1 April 1987 with the result that all references to the family rebate the Income Tax Act will disappear from that date.

Subsection (6)

This subsection simply provides that the changes to the qualifying criteria and rebate amounts described above will apply to the 1986/87 tax year only.

Section 7 - Incomes Wholly Exempt From Tax

Subsection (1)

This subsection amends section 61(10) of the principal Act. It removes from the war pensions tax exemption those war pensions paid under the War Pensions Act 1954 which are to become taxable from 1 October 1986. Such pensions are referred to as "specified war pensions" - refer to the commentary on the definition of "specified war pensions" as inserted by section 2(2) of this Amendment Act.

Subsection (2)

At present section 61(35) exempts from tax all social security benefits paid under Part I of the Social Security Act 1964 other than national superannuation and the unemployment benefit (which, by virtue of its definition in section 2 for the 6 months to 30 September 1986, refers only to those recipients without dependent children).

This subsection now also exempts payments made under Part IA of the Social Security Act, namely Family Care and Special Family Care payments. When Family Care was introduced, although it was intended such payments would not be subject to tax, their inclusion in a new Part of the Social Security Act meant that they were not covered by the general exemption for social security benefits. This amendment thus corrects that position with effect from 21 November 1984, being the date on which the Social Security Amendment Act 1984 (being the Act which first provided for Family Care) received the Governor-General's assent.

Subsection (3)

This subsection also amends section 61(35) by extending the reference to the unemployment benefit not being exempt to all income-tested social security benefits which are to be taxable from 1 October 1986. Such benefits are referred to as "income-tested benefits" - refer to the commentary on that definition as inserted by section 2(2) of this Amendment Act. Note that from 1 October 1986 all payments of unemployment benefit will be taxable.

Subsection (4)

Section 61(36) presently provides an exemption from tax in respect of overseas pensions to the extent to which they are deducted by the Department of Social Welfare from a recipient's entitlement to an income-tested Social Security benefit. Section 70 of the Social Security Act 1964 provides details of how such reductions are to be made.

Arising from a change in wording to section 70 of the Social Security Act which was made in recent years, it was necessary to amend the wording in section 61(36) to reflect the original exemption.

Subsection (5)

This subsection simply makes amendments consequential to those described above.

Subsections (6) to (8)

These subsections contain the application dates of the amendments described above. In particular:

  • Subsections (1) and (3) are to apply from 1 October 1986
  • Subsection (2) is to apply from 21 November 1984
  • Subsection (4) is to apply from 1 April 1985

Section 8 - Items Included In Assessable Income

This section extends section 65(2)(d) of the principal Act (which presently includes in assessable income all payments of national superannuation and unemployment benefit) to include within the meaning of that term those income-tested social security benefits and war pensions that are to become taxable from 1 October 1986. Such payments are referred to as "income-tested benefits" and "specified war pensions" refer to the commentary on those definitions as inserted by section 2(2) of this Amendment Act. This section is to apply from 1 October 1986.

Section 9 - Amounts Of Tax Deductions

Section 343 of the principal Act determines how the amounts of PAYE tax deductions are to be calculated. With the advent of the taxation of income-tested social security benefits and specified war pensions, because it is proposed that such benefits will be grossed up to ensure recipients continue to receive the same net levels, it was necessary to introduce a provision to allow the Commissioner to liaise with the Social Security Commission or with a War Pensions Board (in practice, the Director-General of Social Welfare and the Secretary for War Pensions are in fact the same person) in calculating the PAYE deductions to be applied to benefit payments. This section is to apply to tax deductions made on or after 1 October 1986.

Section 10 - PAYE Tax Codes

This section deals with the changes to the PAYE tax codes which take effect from l October 1986 as a result of the abolition of the principal income earner and family rebates and the introduction of the transitional tax allowance.

Subsection (1)

This subsection substitutes a new section 344(1) of the principal Act, which lists the various PAYE tax codes which are to apply from 1 October 1986. The existing tax codes, "A", "B", "C", "D", "E", and "F", the first of which relates to the principal income earner rebate, the rest of which relate to the family rebate, will no longer be available with the repeal of those rebates.

A new tax code "T" has been introduced which is to apply in respect of those persons entitled to the transitional tax allowance which is available on a pay-period basis.

At the same time as introducing the new list of tax codes, the opportunity has also been taken to alter the wording in various places so as to clarify when the various tax codes can apply. In particular the changes made arise from the insertion in recent years of "primary employment earnings" and "secondary employment earnings" definitions in section 2 of the principal Act.

In relation to the taxation of those income-tested benefits and specified war pensions which are to become taxable from 1 October 1986, it should be noted that:

  • None of the PAYE tax codes listed can be applied to payments of those benefits. Instead those benefits will be notionally "grossed-up" using a formula relating to the "G" tax code and taxed so as to leave the net benefit level unchanged.
  • A new proviso to section 344(1) provides that where a taxpayer is receiving BOTH a payment of an income-tested benefit or a specified war pension and other income from which PAYE tax is to be deducted, the tax code "SEC" must be applied to that other income. In those cases (expected to be few) where such a treatment would mean tax was being over-deducted during the year, the taxpayer would be entitled to apply for a special tax code in respect of that other income (ie, not in respect of the income-tested benefit or specified war pension).

Subsection (2)

This subsection consequentially amends section 341 of the principal Act as a result of the introduction of the new list of PAYE tax codes. This section details the amount on which PAYE tax deductions are to be calculated when payments to a qualifying superannuation fund are made.

Subsection (3)

This subsection repeals section 344(1A) of the principal Act, which was the section which dealt with family rebate entitlement through the PAYE tax codes. The repeal is necessary as the rebate is no longer available through the PAYE system with effect from 1 October 1986.

Subsection (4)

This subsection repeals a redundant provision of the existing section 344 of the principal Act. That provision has been superseded by the new wording in section 344(1) and because of the introduction of "primary employment earnings" and "secondary employment earnings" definitions in section 2 of the principal Act in recent years.

Subsections (5) to (7)

These subsections consequentially amend the lists of PAYE tax codes contained in sections 344(9), 344(10) and 379(2) of the principal Act respectively, as a result of the new list of PAYE tax codes contained in section 344(1), with effect from 1 October 1986.

Subsection (8)

This subsection deals with the requirement for employees to complete new IR 12 tax code declaration certificates prior to the introduction of the new PAYE tax codes from 1 October 1986.

Arising from the fact that the "A" to "G" primary tax codes will be replaced by the "G" and "T" primary tax codes and as the number expected to qualify for the transitional tax allowance (and to use tax code "T") is not expected to be great, this subsection provides that all "A" to "G" tax codes operative as at 30 September 1986 will automatically translate to "G" tax codes with effect from 1 October 1986 WITHOUT the need for an employee to complete a second IR 12 tax code declaration in respect of the 1986/87 income year. In particular, employees are deemed to have furnished a new IR 12 specifying the tax code "G" while in practice they will not be required to do this. The provision thus results in administrative savings for employers and employees as well as the Inland Revenue Department.

It should be noted that this automatic translation provision is subject to subsection (9) which is described below.

Subsection (9)

This subsection provides that notwithstanding the automatic translations to "G" tax codes provision contained in subsection (8), an employee who expects that he will be entitled to claim the transitional tax allowance may elect to complete a new IR 12 tax code declaration specifying the "T" tax code so as to obtain the benefit of that allowance on a pay-period basis.

The first proviso restricts this election to primary employment earnings source deduction payments only. It also provides that shearers and shearing shed hands cannot use tax code "T". This is because of the flat 25 cents per dollar and 20 cents per dollar tax rates which apply to those two classes of earners.

The second proviso ensures that where an employee delivers a new tax code declaration specifying the "T" tax code, that tax code shall only apply until 31 March 1987 or earlier if that tax code ceases to apply in accordance with sections 344(7) or 344(9).

For the year ending 31 March 1988 a new IR 12 will need to be completed by employees in all cases specifying one of the tax codes listed in the new section 344(1), The tax codes available being "G", "T", "SEC" "SHR" and "SSH".

Subsection (10)

This subsection consequentially amends section 15(1)(a) of the Social Security Act 1964, which details the calculations to be made in calculating rates of national superannuation. Reference in that section is made to setting the married couple rate at no less than 80 percent of the average ordinary time weekly wage after tax has been deducted therefrom using tax code "A". As a result of the repeal of the principal income earner rebate with effect from 1 October 1986, the reference to the tax code "A" in that section will be replaced by a reference to the tax code "T".

Subsection (11)

This subsection makes amendments consequential to those described above.

Subsection (12)

This is the application subsection for the section. It provides that all the changes described above are to come into force on 1 October 1986, applying to pay periods ending on or after that date.

Section 11 - Cessation Of Transitional Tax Allowance Tax Code

This section substitutes a new section 346 in the principal Act. The previous section 346 provided that the "A" or "B" to "F" tax codes would cease to apply where an employee expected that he/she would not be entitled to claim the principal income earner or family rebates respectively. With the repeal of those rebates that provision is no longer necessary from 1 October 1986. In its place, however, has been added a similar provision in respect of the transitional tax allowance. The new section 346 provides that the "T" tax code shall cease to apply where an employee expects that he/she will not be entitled to claim the transitional tax allowance.

Section 12 - Amount Of Tax Deductions Where Several Deductions Are Made For One Week

This section makes a minor amendment to section 347 of the principal Act, which is the provision which details the amount of total tax deductions where several deductions are made in one week. In particular, the second proviso to that section provides that the salary or wages of a shearer shall not be taken into account for the purposes of that section. The amendment in this Act extends that exclusion to the salary or wages of a shearing shed hand, as a consequence of the separation of the tax rates applying to shearers and shearing shed hands.

Section 13 - Pay Period Taxpayers And The Requirement To Furnish Tax Returns

Section 356 of the principal Act defines who can and who cannot be "pay-period taxpayers" - persons whose tax liability is determined solely on the basis of PAYE deductions made during the year with the result that they are not required to furnish an annual tax return (unless they wish to do so in order to claim for various rebates not available on a pay-period basis during the year). Specifically excluded from being able to be pay-period taxpayers, and thus specifically required to furnish tax returns, are all persons who are, or whose spouses are, entitled to claim the family rebate.

Subsections (1) and (3) of this section maintain that provision in respect of the 1986/87 tax year, the last tax year in which the family rebate can be claimed. These subsections also provide that persons who have been, or whose spouses have been, issued with a certificate of entitlement for a tax credit pursuant to Part XIA are similarly excluded from being able to be pay-period taxpayers and thus will be required to furnish tax returns. As certificates of entitlement will be issued to applicants in all cases except where they are social security beneficiaries (where family support will be automatically paid with benefit payments), all recipients of a tax credit other than beneficiaries will be specifically required to furnish annual tax returns.

Subsections (2) and (4) remove the provisions relating to the family rebate with effect from the 1987/88 tax year since that rebate will no longer be claimable.

Sections 14 And 15 - Basic Rates Of Income Tax

These sections specify the basic rates of income tax which apply to individual taxpayers in respect of the 1986/87 and subsequent income years. It should be noted, however, that the new tax rates cannot be applied to income tax assessments until they have been confirmed by the annual taxing Act.

The rates for the 1986/87 income year are composite rates reflecting six months of the present tax rates (which incorporate the temporary surtax) and six months of the tax rates proposed to apply from 1 October 1986. The composite 1986/87 tax rate scale is:

On income Tax rate per $1
Up to $6,000 17.5c
$6,000 - $ 9,500 24.0c
$9,501 - $25,000 31.5c
$25,001 - $30,000 37.55c
$30,001 - $38,000 52.05c
Over $38,000 57.00c

It should be noted that although these rates cannot yet be applied to income tax assessments (until the passing of the Income Tax (Annual) Act 1986) nor can they be taken into account in special tax code applications until October 1986, provision has been made for the composite tax rates to be used in respect of 1987 provisional tax payments where the taxpayer wishes to do so. Details of this option are contained in the 1986 IR 3 tax guide.

The basic tax rates for the 1987/88 and future tax years are those rates which apply from 1 October 1986. They are:

On Income Tax Rate per $1
up to $9,500 15c
$9,501 - $30,000 30c
Over $30,000 48c

Section 16 - Basic Tax Deductions

Subsection (1)

Clause 3 of the Second Schedule to the principal Act sets out the "no declaration" rate to be used by employers where an employee has not completed or has incorrectly completed an IR 12 tax code declaration. The no declaration rate is a flat 35 cents up to the income level at which the average tax rate on the "G" tax code scale equals 35 cents. Above that income level the "G" tax code should be used. The income level where this change-over presently occurs is $648 per week. This subsection increases this amount to $1,014 per week which is the new change-over level under the October 1986 tax rates.

Subsection (2)

Clause 6 of the Second Schedule to the principal Act sets out the secondary tax rate to be applied to payments of secondary employment earnings. At present the rate to be used is 33 cents in the dollar which corresponds with the present standard marginal tax rate. This subsection reduces that rate to 30 cents In the dollar with effect from 1 October 1986 which corresponds which the standard marginal tax rate applying from that date.

Subsection (3)

Clause 9 of the Second Schedule to the principal Act sets out the rate of tax to be applied to payments of extra emoluments. At present the rate to be used is 33 cents in the dollar which corresponds with the present standard marginal tax rate. This subsection reduces that rate to 30 cents in the dollar with effect from 1 October 1986 which corresponds with the standard marginal tax rate applying from that date.

Subsection (4)

Appendix A to the Second Schedule to the principal Act sets out the weekly PAYE tax tables. This subsection replaces the current rates with the new rates which are to apply from 1 October 1986. With the reduction in the number of primary tax codes from 7 ("A" to "G") to 2 ("G" and "T") the format of these tables has changed from that which currently exists.

Subsection (5)

This subsection makes amendments consequential to those described above.

Subsections (6) and (7)

These are the application subsections for this section. They provide that the changes in the no declaration rate change-over level, secondary tax rate, extra emolument tax rate and weekly PAYE tax deduction tables are to apply from 1 October 1986 in respect of pay periods ending or payments made on or after that date.

Part II - Family Support (FSTC) And Guaranteed Minimum Family Income (GMFI) Tax Credits

Introduction

This Part contains a detailed explanation of the legislation that provides for the Family Support Tax Credit (FSTC) and the Guaranteed Minimum Family Income Tax Credit (GMFI). It commences by outlining the operation of the schemes in general terms, and then examines each provision of the legislation in greater detail.

Questions And Answers

Attached as Appendix A are a series of questions and answers which have been prepared to help explain the FSTC and GMFI schemes.

General Outline Of The Schemes

The tax credits are provided for in a new Part XIA of the principal Act which is inserted by section 17(1) of the Income Tax Amendment Act (No 2) 1986.

Family Support Tax Credit (FSTC)

It was announced in the Statement on Taxation and Benefit Reform that the present Family Care Scheme, child supplements for beneficiaries and the Family Tax Rebate will be combined into a new form of family assistance, to be known as Family Support to apply from 1 October 1986. This scheme is to be administered by Inland Revenue.

The level of assistance will be $1,872 per year ($36 per week) for the first child and $832 ($16 per week) for each subsequent child. The entitlement will be reduced by 18 cents in the dollar on the joint household income in excess of $14,000 per annum. The legislation contains a wide range of provisions to cater for changes in family circumstances during the income year.

For the purpose of calculating the joint household income various adjustments will be made to the assessable income of the household members. These adjustments are designed to arrive at the level of income which more accurately reflects the actual, rather than taxable, household income for the income year. For a complete list and description of the adjustments, refer to the commentary on section 374B later in this publication.

Guaranteed Minimum Family Income Tax Credit (GMFI)

In addition to providing the family assistance described above, the scheme will also ensure a guaranteed minimum family net income for all full-time earners with dependent children. For one-child families the minimum income will be $250 (after tax) per week (including FSTC and Family Benefit). This amount is increased by $22 per week (which equals $16 FSTC and $6 Family Benefit) for each additional child in the family.

This means that after taking into account receipts from FSTC and Family Benefit, the GMFI scheme ensures that the minimum family income of full-time earners will be $208 per week ($10,816 per annum) after tax, irrespective of the number of children in the family. Where the family income is less than this amount, a tax credit will be allowed in order to make up the difference for each week in which the taxpayer is a "full-time earner" The GMFI tax credit will be apportioned if the "full-time earner" criteria are met for part of the income year only.

Eligibility

Eligibility is dependent on the parent, or in the case of a two-parent household one of the parents, receiving the Family Benefit (from the Department of Social Welfare) for the child in respect of which a tax credit is claimed. Both FSTC and the GMFI income tax credit will be split equally between the partners in a two-parent household and paid in full to the parent in a single-parent household.

Method of Payment

Employees will receive payment in the pay packet wherever this is practical, while persons who are self-employed will be able to have their payments credited against their provisional tax instalments when these fall due.

People who qualify for a tax credit and wish to receive payment through the pay packet during the income year are required to make an application to Inland Revenue. On the basis of the information furnished in that application, the person's weekly entitlement will be estimated and a certificate of entitlement issued. A certificate of entitlement enables:

  1. an employee, upon delivering the certificate to the employer, to receive tax credit instalments through the pay packet.
  2. a non-earner or a part-time earner whose tax deductions are less than the tax credit entitlement, upon delivering the certificate to the Department of Social Welfare, to receive tax credit instalments from that Department.
  3. a provisional taxpayer to receive the tax credit by way of a credit against provisional tax instalments.

Social Security Beneficiaries will automatically receive their FSTC with their benefit payments and are not required to make separate application to Inland Revenue.

Employers' Requirements

Employers to whom a certificate of entitlement has been delivered, are required to pay the weekly amount of tax credit with the employee's wages. The amounts paid may be funded out of the tax deductions made from the wages of all employees (including those who receive no tax credit instalments). Where the tax deductions held by the employer are not sufficient to fund the tax credit payments in full, the employer is still required to make the payments but may claim a refund from Inland Revenue.

End of Year Adjustment

FSTC and GMFI instalments received during the income year will be treated as interim and are to be debited against the actual entitlement which will be calculated based on actual income when returns are filed at the end of the income year. If the end of year entitlement exceeds the amount received during the year by way of instalments it will be deducted from any income tax payable and any excess tax credit will be refunded. If the end of year entitlement is less than the amount received during the year it will be added to the income tax payable.

Detailed Examination Of The Legislation

Section 17(1) of the Amendment Act inserts the new Part XIA into the principal Act.

The new Part XIA consists of sections 374A to 374P. A brief description of each section and where it can be found in this publication is contained in the Table of Contents.

Section 374A - Interpretation

This section is the interpretation section and lists 13 definitions relevant to the new Part XIA of the principal Act. (Please note that Sections 2 and 18 of this Amendment Act also insert, into section 2 of the principal Act, new definitions of "certificate of entitlement", "income-tested benefit", and "specified war pension", which are directly relevant to this Part. These definitions are discussed in the commentary on those sections.) The definitions contained in section 374A are as follows:

(a) "Director-General"

This term means the Director-General of Social Welfare appointed pursuant to the Department of Social Welfare Act 1971 and includes any person acting under his delegated authority.

Its relevance is to the provisions contained in this Part as they relate to the payment of tax credits by way of interim instalments to beneficiaries, non-earners, and part-time earners whose PAYE deductions are less than the tax credit instalments. These persons will receive their instalments through the Department of Social Welfare.

(b) "Employment"

This definition is necessary for the purposes of the definition of "fully-employed person" contained in this section.

The term "Employment" is also defined in the new section 374E the principal Act for the purposes of that section, which deals with the GMFI. (Refer to the commentary on that section for a full explanation of the meaning of the term "employment" as used in that section).

Employment means an activity, the performing of which gives rise to a source deduction payment. However, for the purposes of this definition, a source deduction payment does not include any payment of the kind:

  • referred to in paragraph (ba) of the definition of "salary or wages", (payments made by any partnership to any working partner of the partnership to the extent that such payments are, pursuant to section 167B(2) of the principal Act, deemed to be expenditure necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income).
  • referred to in paragraph (c) of the definition of "salary or wages" (which, as amended by section 2 of the Amendment Act, are all payments of national superannuation, income-tested benefits, and specified war pensions).
  • specified in Part E of the Schedule to the Income Tax (Withholding Payments) Regulations 1979 (contract payments to non-resident contractors).

The definition is expanded to cater for extraordinary situations where in any day a person works for a number of hours less than the number he or she would normally work in that day, but is paid as if the hours normally worked had been worked. This includes days on which annual leave or sick leave is taken and days such as statutory holidays. In these cases a person will be treated as being employed on those days for the number of hours that person is paid.

Example: Mrs Jones works at the local tavern serving counter lunches between the hours of 12 noon and 2.30 pm each working day. On Anzac day the tavern did not open for business until 1 pm but Mrs Jones is paid as if she worked from 12 noon. Mrs Jones will be deemed to have been employed on that day between the hours of 12 noon and 2.30 pm notwithstanding the fact she only worked from 1 pm to 2.30 pm.

(c) "Family Benefit"

The qualification criteria for the tax credits allowed under this Part are dependent upon a member of a household being entitled to receive a Family Benefit for the child or children in respect of whom the tax credit is claimed. For this reason it was necessary to define the term.

It should be noted that as the definition refers to "... Family Benefit payable ...", persons who have capitalised their Family Benefit entitlement will qualify for FSTC.

(d) "Fully employed person"

This definition has significance for the delivery method of the tax credit instalments to employees as provided for in section 374G(6). This definition differs from that of "full-time earner" (refer section 374E(1) for a commentary on that term) as it depends only on the number of hours worked by the individual and does not take account of any hours worked by any spouse of the individual.

In order to be considered a "fully employed person", a person must be either:

  1. a solo-parent and employed for at least 20 hours per week, or
  2. a member of a two-parent household and employed for at least 30 hours per week, -

by the person who is the primary employer.

(e) "Net realisable value"

When determining a person's assessable income in accordance with section 374B, in any case where standard or nil values in relation to livestock have been used, an adjustment to market values is required to be made. These market values are determined on the basis of the net realisable value of the livestock. Net realisable value is the amount that would normally be realised as a result of an arm's length sale, less any selling costs, killing charges etc that would normally have been incurred in such a sale.

(f) "Qualifying person"

The term "Qualifying person" establishes the link between the entitlement to a tax credit under this Part and the need for at least one member of a household to be entitled to receive a Family Benefit for the child in respect of whom a tax credit is claimed. A qualifying person is a person who receives a Family Benefit, but not a person who receives a war widows mother's allowance. Persons who receive this allowance (the definition of which is discussed later the commentary on this section) will continue to receive it free of tax after 1 October 1986 and will not therefore qualify for FSTC.

Note that a different definition of "qualifying person" is contained in section 374E(1) for the purposes of the GMFI tax credit only. (Refer to the commentary on that section),

(g) "Separated person"

This term is used in the definition of "spouse" and refers to persons who, although legally spouses, no longer live together in a relationship in the nature of marriage.

(h) "Social Security Commission" or "Commission"

This term is required in relation to the delivery of FSTC to persons who receive Social Security Benefit payments through Social Welfare. The Social Security Commission, established under the Social Security Act 1964, pays these benefits (not the Director-General of Social Welfare) and consequently that Commission will also be responsible for the delivery of FSTC to the beneficiaries.

(i) "Specified income"

This is the full year equivalent of the income derived during any specified period in an income year, the grossing up exercise being conducted in accordance with Section 374B(4). In short, in relation to a specified period, the specified income represents the figure that results when the income derived by a person in that specified period is grossed-up to an amount representing a full-year equivalent of that income. For example, if the income derived (after any necessary adjustments contained in section 374B(1)) in a specified period of 100 days is $5,000, the specified income in relation to that specified period is equal to:

$5,000 x (365/100) = $18,250

(j) "Specified period"

In any case where the family circumstances changed during the year, the tax credit entitlement must be calculated separately for the periods, in the income year, both before and after the change in circumstances occurred (sections 374D and 374E refer). This approach requires the use of periods other than the income year.

A specified period can be any unbroken period consisting of any number of CONSECUTIVE DAYS in the income year. It is generally used in relation to the period in which a person is a "qualifying person" and throughout which that person's marital status has remained unchanged.

(k) "Spouse"

The definition of spouse is required since the tax credits are to be split equally between the partners in a two-parent household. In this case the tax credit entitlement is to be calculated on the basis of the combined income of both spouses.

Two persons, in relation to each other, are spouses if they live in a relationship which is in the nature of marriage. De facto relationships are therefore treated in the same manner as de jure (legal) marriages. Where two persons are legally married but have separated and no longer live together, they are not considered to be spouses in relation to each other. (Refer also to the definition of "Separated Person".)

(l) "War Pensions Board" or "Board"

This term is required in relation to the delivery of FSTC to persons who receive Specified War Pensions through Social Welfare. A War Pensions Board, established under the War Pensions Act 1954, pays such pensions (not the Director-General of Social Welfare) and consequently that Board will also be responsible for the delivery of FSTC to such pensioners. The definition is expanded to include the Secretary for War Pensions, who is in fact (although not in legislation) the same person as the Director-General of Social Welfare.

(m) "War widows mother's allowance"

A war widows mother's allowance is an allowance paid to certain war widows under section 32(2) of the War Pensions Act 1954. This definition is needed because persons who receive such an allowance' are not entitled to receive FSTC or GMFI.

Section 374B - Determination Of Assessable Income

Subsection (1) - This subsection is in effect another definition section. It describes the adjustments to be made to a person's assessable income as returned for tax purposes, in order to calculate the income on which FSTC and GMFI tax credit entitlements are based.

As assessable income is used as the base for the calculation of FSTC and GMFI it should be noted that assessable income means the income before any deduction for the life insurance/superannuation special exemption ie income net of the standard deduction, employment related expenses, interest/dividend exemption.

It should also be noted that the adjustments are required to be made to the person's ASSESSABLE INCOME for the year. This means that previous years losses that may be able to be brought forward and offset against the person's assessable income for tax purposes cannot be offset in calculating the income for family support purposes.

The adjustments may be categorised as follows:

Paragraph (a) - Kinds of income which, although exempt from income tax, are to be included in the assessable income for the purposes of calculating the tax credit entitlements. Included in this category are:

  1. income derived by way of interest, dividends, and investment society dividends up to the $200 exemption provided for under section 61(13). Any amount in excess of the $200 exemption is of course already included in the person's assessable income.
  2. income derived by way of interest on Post Office National Development Bonds or New Zealand Savings Certificates up to the $500 exemption provided for under section 61(14).
  3. income derived in the form of payments in the nature of alimony or maintenance received from a former spouse. Section 61(15) exempts such payments from income tax.
  4. bursary or scholarship income which is exempt under section 61(37).
  5. income derived from interest on any farm vendor finance bond or in respect of any farm vendor mortgage to the extent that that income is exempt from income tax under section 61(52).

Paragraph (b) - Items in respect of which a deduction shall be allowed where there is no provision for any such deduction for income tax purposes. In calculating the assessable income for the purposes of Part XIA, a deduction shall be allowed of:

  1. any payments in the nature of alimony or maintenance (of the kind referred to in section 61(15)) made to a former spouse.
  2. any payments made to the Department of Social Welfare under section 27K of the Social Security Act 1964, relating to the liable parent contribution scheme.
  3. an amount equal to the difference between the "net realisable value" of any livestock at the end of the previous income year and the value of that livestock, calculated, at the end of that previous income year, using the standard or nil values adopted. In making this adjustment, net realisable values of livestock are to be added together to obtain the total net realisable value of all livestock on hand, and this total is to be compared with the total opening stock value for tax purposes. Note that if the total value of all livestock for tax purposes exceeds the total "net realisable value" of that livestock, no adjustment may be made.

Paragraph (c) - Items in respect of which no deduction is to be allowed even though they are deductible for income tax purposes. In calculating the assessable income for the purposes of determining the entitlement to a tax credit, no deduction shall be allowed (in other words deductions allowed for tax purposes must be added back) in respect of:

  1. depreciation on buildings of any kind.
  2. any development expenditure that has been allowed as a deduction for income tax purposes under:
    • (A) sections 126 and 127, relating to certain expenditure on land used for farming or agricultural purposes.
    • (B) section 127A, relating to certain expenditure on land used for forestry purposes.
    • (C) section 128, relating to certain expenditure incurred by persons engaged in aquaculture.
  3. any amount paid on mining shares in respect of which a deduction for income tax purposes is provided for under:
    • (A) section 159, relating to amounts paid on shares in mining holding companies to be used for mining specified minerals.
    • (B) section 159A, relating to amounts paid on shares in mining holding companies used for petroleum exploration.
    • (C) section 160, relating to amounts paid on shares in mining companies.
    • (D) section 160A, relating to amounts paid on shares in petroleum mining companies.
  4. any amount deposited into an income equalisation reserve account to the extent that a deduction in respect of that amount is allowed under section 178.

Paragraph (d) - other items to be included:

  1. income which is derived in the income year but which 1s allowed to be spread over other income years under any of the following sections of the principal Act:
section 81A - spreading of income derived from the sale of timber from farms.
section 82 - spreading of income derived on acquisition of land by the Crown.
section 83 - sums received from sale of patent rights.
section 84 - spreading of income derived from assignment of or grant of interest in copyright.
section 92 - compensation in connection with outbreak of scrapie.
section 93 - spreading of excess income derived on sale of livestock where unduly lowstandard values or nil value adopted.
section 94 - excess income on sale of livestock where farmer forced to quit farm, or farming business adversely affected by fire, flood, etc.
section 95 - excess income on sale of livestock where sharemilker or lessee farmer quits farm and purchases another farm.
section 117 - revised assessments where assets sold after deduction of depreciation allowances.
section 172 - specified suspensory loans.
  1. an amount equal to the difference between the net realisable value of any livestock at the end of the income year and the value of that livestock at the end of the income year, calculated using the standard and nil values adopted.

Stock is to be broken down into various categories for the purpose of determining the standard value or net realisable value of each category. In making this adjustment, net realisable values of livestock are to be added together to obtain the total net realisable value of all livestock on hand, and this total is to be compared with the total of the closing stock value for tax purposes.

Note that if the value of closing stock for tax purposes exceeds the "net realisable value", no adjustment is to be made.

Paragraph (e) - other items NOT to be included in the assessable income (ie the income returned for tax purposes is to be reduced by the following):

  1. any amount, not including any interest, received by way of refund from an income equalisation reserve account under any of the following sections of the principal Act:
section 179 - refunds from income equalisation reserve accounts.
section 180 - refund from income equalisation reserve account on retirement of taxpayer.
section 182 - refund from income equalisation reserve account on bankruptcy of taxpayer.
section 184 - refund from income equalisation reserve account after expiry of 5 years.
  1. any amount of income which, although derived in another income year, is deemed to be derived in the current income year as a result of that income having been allowed to be spread in accordance with Section 81 of the principal Act or the provisions of any of sections 81A, 82, 83, 84, 92, 93, 94, 95, 117, 172 of the principal Act referred to in paragraph (d)(i) above.

Paragraph (f) requires a person who carries on one or more businesses in the income year to make the specified calculation (ie make all the above adjustments) for that business or separately for each of those businesses. Where, after the adjustments are made, a business shows a loss, that loss is ignored for the purposes of this Part and cannot be offset against the income derived by that person from any other source.

Example: One business + salary income.

Mr White earned a salary of $20,000 during the income year. He was also a partner in a business enterprise which was in a loss situation. The share of the loss for tax purposes was $8,000, which after making the adjustments under this section was reduced to $5,000.

Assessable income for income tax purposes:

Salary $20,000
Business ($8,000)
  $12,000

Assessable income for FSTC purposes:

Salary $20,000
Business nil
  $20,000

Under paragraph (f), the $5,000 loss is deemed not to have been incurred for FSTC purposes.

Example: Two businesses

Mr Black declares three separate business interests when lodging a claim for Family Support. Income details for tax purposes are as follows:

Business $38,000
Rental loss ($1,500)
Share of partnership loss ($10,000)
Assessable income $26,500

After section 374B adjustments, the rental loss is turned into a profit of $2,100 while the partnership loss is reduced to $5,000. Assessable income for FSTC is therefore:

Business $38,000
Rental profit $2,100
Share of partnership loss Nil
Assessable income for FSTC $40,100

Paragraph (g) - applies to any person who, on the last day of the accounting year of a private company, is a major shareholder in that private company.

The term "major shareholder" has the same meaning as in section 336N(1) of the principal Act (part of the Fringe Benefit tax legislation). ie a person who owns, controls, or has the right to acquire 10 percent or more of the shares or voting rights in that private company. In determining that percentage, consideration is given to the interest in that company held by any nominee or relatives of that shareholder.

Two different approaches are applied in determining the assessable income of such a "major shareholder" in a private company.

Subparagraph (i) - sets out the approach to determine the assessable income for the purposes of FSTC.

Any such person must include in the assessable income, for the purposes

calculating any tax credit entitlement, (in addition to the total amount of income received during the income year by way of dividends in respect of the shares held in the private company) an amount calculated as follows:

(Number of issued shares of the Company held by the person at the end of the year) x Assessable Income of the Company after making adjustments required by section 374B) - Dividends received from the Company during the year
(Total issued shares of the Company at the end of the year) 1 1

It should be noted that in determining the assessable income of the company in these cases, the adjustments required to be made in accordance with this section must be made to the income of the company.

Example: Major Shareholder in Private Company.

Mrs White holds 40 percent of the shares in a private company which derived assessable income of $50,000 (inclusive of adjustments for FSTC purposes) for the income year. Dividends of $5,000 were received by Mrs White during that year in respect of those shares. When determining her assessable income for the purposes of calculating the tax credit entitlement, the amount of $15,000 (being 40 percent of $50,000 less the $5,000 dividends returned for tax purposes) must be included as Mrs White's share of the company's profit, in addition to the $5,000 actually received as dividends.

Subparagraph (ii) - sets out the approach to determine the assessable income of a major shareholder in a private company for the purposes of GMFI. In this case the amount of the company's income to be added back is adjusted to recognise the tax paid by the company. The amount added back is an amount equal to the difference between the dividends received by the person and an amount calculated in accordance with the following formula:

a x (c-d)
b
"a" is the number of issued shares in the company, held by the person; and
"b" is the number of issued shares in the company; and
"c" is the company's assessable income (after adjustments); and
"d" is the income tax paid by the company

Subsection (2) - This subsection clarifies certain issues which arise from paragraph (f) of subsection (1) of this section (denial of business losses).

Paragraph (a) - deals with the situation where a taxpayer carries on more than one business and incurs expenditure or is allowed depreciation in respect of an asset which is used in more than one business. It provides that only that part of the expenditure or depreciation as specifically relates to each business may be deducted when making the specified calculation for each business.

Example: Asset used in more than one business.

Mr Green owns a fast food takeaway bar and a fruit shop which are separate businesses. The fruit supply business is run at a loss even after the adjustments for Family Support purposes are made. The takeaway bar makes a profit. Mr Green has a truck which he uses both in the fruit supply business and the takeaway business to approximately the same extent. When making the specified calculation in respect of the takeaway business, only half the repairs and maintenance claimed and only half the depreciation allowed may be deducted in calculating the assessable income derived.

Paragraph (b) - makes provision for two businesses, which are conducted by the same taxpayer, to be treated as one business, in any case where those businesses would normally be carried on in association with each other.

Example: Two businesses treated as one.

Mr Red has a motorcycle repair shop which also retails new bikes. The retail business and the repair business may be considered to be associated businesses and therefore treated as one for Family Support purposes. The specified calculation (as required by section 374B(1)(f)) is therefore made by treating both activities as the one single business.

Subsection (3) - FSTC entitlement changes as family circumstances change during the income year (sections 374D(2) + (3) refer). It is therefore sometimes necessary to calculate the assessable income derived by a person not for the full income year but for part of the income year (a specified period) only. To make such an exercise more practical the following rules apply:

  1. Any salary or wages earned by an individual are deemed to be earned evenly throughout the period of that employment.
  2. Any income from an income tested Social Security benefit is deemed to be derived evenly throughout the period the beneficiary was in receipt of that benefit.
  3. Any income derived from any source other than one of the above is deemed to be derived evenly throughout the income year.

Example: Determination of assessable income for period within the income year.

Mr Brown has a lawn mowing business and works at a part-time job to supplement his income during the winter months. The details are as follows:

  • income from the business - $12,000 for the full year.
  • income from employment - $4,000 for the period 1 May to 31 August.

Mr Brown is eligible for the Family Support Tax Credit for the period, 1 July to 31 March (specified period). The assessable income deemed to be derived during this period is equal to $11,000, made up of $2,000 wages and $9,000 business income.

In every case the calculation is made on a daily basis.

Subsection (4) - Determines the amount of the specified income which represents the full-year equivalent of the income derived in a specified period. It is this specified income which is the amount used to calculate the Family Support entitlement under the provisions of section 374D. The formula merely achieves this grossing-up to the full-year equivalent on the basis of the number of days in the specified period. The formula to be used is:

a x 365
b

Where "a" is the amount off the income derived in the specified period, and "b" is the number of days in the specified period.

Example: Calculation of "specified income".

For the specified period 1 February to 31 March, a persons actual assessable income derived is equal to $3,000. The specified income is calculated as follows:

$30,000 x 365 = ($18,599)
99 (days in the period)

Subsections (5) and (6) - deal with the situation where the assessable income for an income year represents income derived in a period which is greater or less than 12 months. This situation will occur, for example, when a taxpayer changes his or her balance date. In each case the assessable income for the income year is adjusted to reflect a 12 month equivalent income for the purposes of calculating the Family Support entitlement.

Subsection (7) - lines up every reference in this section to an income year with the accounting year of the taxpayer, where that accounting year ends on a day other than 31 March.

Section 374C - Determination Of "Net Specified Income"

The new Guaranteed Minimum Family Income (GMFI) tax credit, which was announced in the Statement on Taxation and Benefit Reform 1985, is calculated on the basis of "net (after tax) specified income". The formula used in the calculation of net specified income takes the following two factors into account:

  1. The GMFI tax credit entitlement is calculated for each specified period in the income year in order to allow a change in family circumstances to be recognised.
  2. The GMFI tax credit is allowed only in respect of the number of weeks in the specified period during which the recipient was a full-time earner. (Refer section 374E(1) for the definition of full-time earner.)

The "net specified income" is calculated using the following formula:

(a x 52 ) - c
b

"a" is the portion of the assessable income derived by the person in the income year that was derived during the weeks in the specified period in which the person was a full-time earner. To determine this amount, it is necessary to find the number of weeks in the specified period in which the sufficient hours required to meet the definition of full time earner were worked. The income derived during each of those weeks is then added to determine the amount represented as "a" in the calculation.

"b" is the number that is equal to the number of weeks in which, in the specified period, the person is a full-time earner. (This is the number of weeks used in calculating the income to be included under "a" in the calculation.)

"c" is the amount of the tax payable by the person in respect of that income year. (This is the actual tax payable for the whole of the income year after deduction of all rebates but before deduction of any credits of tax).

Example: Calculation of net specified income

Mr and Mrs Green are a low income family who apply for a GMFI tax credit. Mr Green worked as a full-time wage earner for the whole of the income year. His income (after section 374B adjustments) was:

Gross $12,000
Tax payable $2,159
Net $9,841

Mrs Green earned no income during the year.

The net specified income of Mr Green is calculated as

($12,000 x 52 ) - $2,159 = $9, 841
52

Example: Variable employment status.

Mr and Mrs Brown claim a GMFI tax credit at the end of the income year.

Mr Brown worked 25 hours in each week of the Income year in several jobs at different rates of pay, while Mrs Brown was employed casually. During 22 weeks in the income year, Mrs Brown did not work at all while in the remaining 30 weeks she worked at least 5 hours each week.

In aggregate the full-time earner criteria (refer commentary on section 374E) are therefore met for only 30 weeks in the income year.

When calculating the net specified income, only the income derived in those weeks in the income year in which the full-time earner criteria were met is considered. The specified incomes for both Mr and Mrs Brown, that relate to the 30 weeks in which the full-time earner criteria are met, must be calculated.

Mrs Brown earned $1,200 for the year. Mr Brown earned $8,000 for the year, of which $5,434 was earned during those 30 weeks. Mrs Brown's tax payable for the year was $175, while Mr Brown's tax on his total income (after rebates) was $860. The net specified incomes are as follows:

Mrs Brown - using the formula

(a x 52 ) - c
b

Where "a" = $1,200

Where "b" = $30

Where "c" = $175

Mrs Brown's net specified income is therefore:

($1,200 x 52 ) - 175 = $1,905
30

For Mr Brown the calculation is:

($5,434 x 52 ) - $860 = $8,558
30

The combined net specified income is therefore equal to $1,905 + $8,558 = $10,463.

Section 374D - Family Support Credit Of Tax

This is the section which sets out the criteria governing eligibility for the FSTC and the method of calculation of the amount of the tax credit to which a person is entitled on an end of year basis.

The maximum amount of the tax credit for the full year is $1,872 for 1 child in the family and is increased by $832 for each additional child. The total of these amounts will be reduced by 18c for each dollar by which the combined family income exceeds $14,000. The table below illustrates the income levels at which the FSTC ceases.

No Children Family Income
1 $24,400
2 $29,022
3 $33,644
4 $38,267
5 $42,889
each further child an additional $4,622

The FSTC entitlement is tied to family circumstances and the scheme requires apportionments to be made in any case where these circumstances change during the income year.

Subsection (1) - clarifies certain issues that arise when a person's circumstances change in such a way as to affect the FSTC entitlement.

Paragraph (a) - The entitlement to receive FSTC requires the recipient, or the spouse of the recipient, to be a qualifying person (ie receive Family Benefit). This paragraph provides for the period of entitlement to FSTC to be extended by 28 days from the day on which the entitlement to a Family Benefit ceased under the Social Security Act 1964. This provision only applies in cases where the entitlement to receive a Family Benefit in respect of a child is terminated by reason of:

  1. The child's age, or
  2. The child's death.

The current provisions regarding the cessation of the entitlement to a Family Benefit under the Social Security Act are as follows:

  1. Where a child reaches the age of 16 (or where the child is still at school, the age of 18), a Family Benefit in respect of that child ceases to be payable on the day after the day on which that child reaches that age.
  2. Where a child dies, the Family Benefit continues to be payable until the end of the pay period (of the benefit) in which that child dies. (Section 3 of the Social Security Act 1964 defines "pay period" as a period of 4 complete weeks commencing on such date as the Social Security Commission from time to time determines.)

In each of these cases the entitlement to FSTC will continue for 28 days after the day on which the Family Benefit entitlement ceased.

Paragraph (b) - provides for the situation where an entitlement to a Family Benefit in respect of a child is terminated for whatever reason, but is subsequently reinstated with effect from the point of termination. In this case the Family Benefit entitlement will, for FSTC purposes, be deemed never to have ceased. This provision is needed to cater for the situation where, for example, Family Benefit is terminated by reason of a child reaching the age of 16, but subsequently reinstated when Social Welfare establishes the child is still at school. In such cases the benefit is usually backdated to the day it was terminated.

Paragraph (c) - ensures that all specified periods are mutually exclusive. ie There can be no overlap of specified periods and no day in the income year can be part of more than one specified period.

Paragraph (d) - repeats the safeguard, contained in paragraph (c), in respect of eligible periods.

Subsections (2) and (3) - provide for the FSTC to be allowed for each eligible period within each specified period in the income year.

The term "specified period" is defined in section 374A as meaning any unbroken period in any income year, whether that period consists of some or all of the days in the income year. The term "eligible period" refers to any part of a specified period during which at no time, except on the first day or last day of that period, the person's entitlement to a Family Benefit in respect of any child changed.

The use of specified and eligible periods allows the tax credit entitlement to be calculated separately for different parts of the income year as a recipient's changing circumstances dictate. Appropriate specified periods in respect of which separate tax credit entitlement calculations are made, always:

  • Commence on 1 April, or on the day during the income year on which the recipient's marital status (including de facto relationship) changed or the recipient's eligibility for the tax credit commenced, and
  • End on 31 March, or on the day during the income year on which the recipient's eligibility for the tax credit ceased or the recipient's marital status (including de facto relationship) altered.

In effect, a specified period is the period (or periods) in an income year throughout which a person (or a spouse of a person) receives the Family Benefit and throughout which the person's marital status remains unchanged.

An eligible period always commences on either the day on which the specified period commences or the day on which an entitlement to a Family Benefit in respect of a child changes, and ends on either the day on which the specified period ends or the day on which an entitlement to a Family Benefit in respect of a child changes. An eligible period is that part (or parts) of a specified period in which the Family Benefit entitlement of the person (or the person's spouse) remains unchanged. A separate tax credit entitlement calculation must be made for each eligible period to determine a person's entitlement for the year.

The eligible period is always the period in respect of which the tax credit entitlement is calculated. The specified period in which that eligible period falls is used to determine the amount of the assessable income to be used in the abatement of the tax credit payable for that eligible period.

Example: Two eligible periods within one specified period.

Mr and Mrs Green are married throughout the income year, and have one child. On 1 October Mrs Green gives birth to the couple's second child.

In this case the specified period used in calculating the couple's assessable income for FSTC purposes is the full income year, but the eligible periods in respect of which the tax credit entitlement is calculated are:

  1. 1 April to 30 September, and
  2. 1 October to 31 March.

The tax credit is calculated for each eligible period that falls within the specified period using the formula:

y x z
365
"y" is the amount of the tax credit the person would be entitled to if the eligible period was the full income year, and
"z" is the number of days in the eligible period.

It is important to note that a separate tax credit calculation must be made for each eligible period in each specified period, in each case using the specified income for the specified period in which the eligible period falls.

Subsection (2) applies in all cases where, throughout a specified period, a qualifying person does not have a spouse.

Subsection (3) applies in all cases where, throughout a specified period, a qualifying person does have a spouse. Any tax credit allowed under this subsection is divided equally between the eligible person and the spouse of the eligible person. The income used for calculations under this subsection is the joint income of both spouses.

Example: Simple case (no change in circumstances)

Mr and Mrs Orange have 2 children and remain married throughout the income year ending 31 March 1989. After appropriate adjustments are made in accordance with section 374B, details of assessable income for the year are as follows:

Mrs Orange - $1,000 and Mr Orange $16,000.

Their FSTC entitlements are calculated as follows:

Step 1: Determine the appropriate specified period(s), which in this case is the full income year.

Step 2: Determine the appropriate specified income for the specified period(s). In this case it is the full year's assessable income, ie $1,000 and $16,000 giving a total of $17,000.

Step 3: Identify any eligible period(s) within each specified period. Since, in this example, there has been no change in Family Benefit entitlement, the eligible period is the same period as the specified period, ie the full income year.

Step 4: Calculate the FSTC entitlements using the formula:

y x z
365

"y" =$1,872 (1st child) + $832 (2nd child) = $2,704

Reduced by 18c/$ for each dollar by which the combined assessable income exceeds $14,000.

ie $3,000 x 18c/$ = $540.

y is therefore equal to $2,704 - $540 = $2,164.

"z" =365 since the eligible period is the full income year.

a x ($6-b)
6

Mr and Mrs Orange are therefore each entitled to $1,082.

Example: Child born during the income year.

Mr and Mrs Smith have three children, the last of whom was born on 1 October, 1988. Details of assessable income for the year ended 31 March 1989 are as follows:

Mrs Smith - $1,000

Mr Smith - $16,000

The FSTC is calculated as follows:

Step 1: Determine the specified period. In this example this is the full income year from 1 April to 31 March.

Step 2: Determine the specified income for the specified period, which in this case is the full year's assessable income, ie $1,000 and $16,000 giving a total of $17,000.

Step 3: Identify any eligible period(s) within each specified period. In this example, there has been a change in Fatally Benefit entitlement by virtue of the birth of an additional child. There are therefore 2 eligible periods in the specified period. These are the periods 1 April to 30 September and 1 October to 31 March.

Step 4: Calculate the FSTC entitlements for each eligible period, using the formula:

y x z
365

Eligible period 1:

"y" =$1,872 (1st child) + $832 (2nd child) = $2,704

which is reduced by 18 cents for each dollar by which the combined specified incomes exceeds $14,000.

ie $3,000 x 18c/$ = $540.

y is therefore equal to $2,704 - $540 = $2,164.

"z" =182 which is the number of days in the eligible period.

The tax credit entitlement for the first eligible period is therefore $2,164 x (182 / 365) = $1,079-03.

Eligible period 2:

"y" =$1,872 (1st child) + $832 (2nd child) + $832 (3rd child) = $3,536

reduced by 18 cents for each dollar by which the combined specified incomes exceeds $14,000.

ie $3,000 x 18c/$ = $540.

y is therefore equal to $3,536 - $540 = $2,996.

"z" =183 which is the number of days in the eligible period.

The tax credit entitlement for the 2nd eligible period is therefore

$2,996 x (183 / 365) = $l,502-10.

This gives a total FSTC entitlement of $1,079-03 + $1,502-10 = $2,581-13. Mr and Mrs Smith are therefore each entitled to $1,290-57.

Example: Parents separate during the income year.

Mr and Mrs White separate on 1 July 1988. Mrs White retains custody of the couple's only child and receives the Domestic Purposes Benefit from Social Welfare. The full Family Benefit entitlement is paid to Mrs White during the whole of the income year. Mr White's income for the year ended 31 March is $18,000, while Mrs White received $8,500 from Social Welfare. Mrs White derived no income in her own right during the marriage. FSTC is calculated as follows:

Step 1: Determine the specified periods to be used. These are the periods l April to 30 June (in respect of which a tax credit is allowed to each parent under section 374D(3)) and the period 1 July to 31 March (in respect of which a tax credit is allowable to Mrs White only, under section 374D(2)).

Step 2: Determine the specified income for the specified periods. For the period 1 April to 30 June we must look at the combined specified income of both parents. This comprises only $18,000, being the income earned by Mr White during the period from 1 April to 30 June, grossed-up to a full year equivalent - (Mrs White did not receive any income during this period). For the period 1 July to 31 March we must look at Mrs White's specified income only in calculating her family support entitlement since she is now a solo parent. The gross amount of $8,500 she received from Social Welfare gives a specified income of $8,500 x (365 / 274) = $11,323.

Step 3: Identify any eligible period(s) within each specified period. Since, in this example, there has been no change in Family Benefit entitlement the eligible periods comprise the whole of each specified period.

Step 4: Calculate the FSTC entitlements for each eligible period, using the formula:

y x z
365

Eligible period 1 (1 April to 30 June):

y =$1,872 (1st child) which is reduced by 18c/$ for each dollar by which the combined specified incomes exceeds $14,000.

ie $4,000 x 18c/$ = $720.

y is therefore equal to $1,872 - $720 = $1,152.

z =91, which is the number of days in the eligible period.

The tax credit entitlement for the first eligible period is therefore $1,152 x 91/365 = $287-21.

Mr and Mrs White are therefore each entitled to $143-62 in respect of this period.

Eligible period 2 (1 July to 31 March):

y = $1,872 (1st child) since the specified income ($11,323) does not exceed $14,000.

z = 274 which is the number of days in the eligible period.

The tax credit entitlement for the 2nd eligible period is therefore

The tax credit entitlement for the 2nd eligible period is therefore $1,872 x 274/365 = $1,405-28, all of which is payable to Mrs White.

This gives a total FSTC entitlement of ($143-62 + $1,405-28 =) $1,548-90 for Mrs White and $143-62 for Mr White.

Subsection (4) - provides for the apportionment of the FSTC entitlement in cases where the custody of a child is shared between different persons who, for the purposes of FSTC entitlement, are not spouses in relation to each other. In any such case where the custody of a child is shared, Social Welfare will split the Family Benefit between the eligible parties in the appropriate portions.

FSTC will then be apportioned in the same ratio as the Family Benefit by deducting from the amount of FSTC that each party or their spouses would otherwise receive, an amount calculated using the following formula:

a x ($6-b)
b

Where

"a" = the FSTC the person would be entitled to receive if that person (or that person's spouse) had full custody of the child, and

"b" = the weekly amount of Family Benefit the person receives in respect of the child.

Example: Shared custody

Mr and Mrs Jones have separated on 1 July 1988 and their only child stays with the mother 4 days and with the father 3 days in each week. Social Welfare recognises the shared custody arrangement and pays $4 Family Benefit to the mother and $2 to the father. Mr Jones earned $18,000 for the full income year while Mrs Jones earned $16,000. In each case the income was derived evenly throughout the income year. FSTC is calculated as follows.

Step 1: Determine the specified periods to be used. These are the periods 1 April to 30 June (in respect of which a tax credit is allowed to each parent under section 374D(3)) and the period 1 July to 31 March (in respect of which each parent is eligible for a tax credit under section 374D(2)).

Step 2: Determine the specified income for each of the specified periods. For the period 1 April to 30 June we must look at the combined specified incomes of both parents. This comprises $18,000 earned by Mr Jones and $16,000 earned by Mrs Jones, giving a total of $34,000 (remembering that section 374B(3)(a) deems all income from employment to be derived evenly throughout the period of employment which in this example is the full income year). For the Period 1 July to 31 March we must look at the incomes of each party separately, ie the specified income for Mr Jones ($18,000) and that of Mrs Jones ($16,000).

Step 3: Identify any eligible period(s) within each specified period. Since, in this example, there has been no change in Family Benefit entitlement during a specified period. (because the change occurs at the same time as the specified periods change). The eligible periods comprise the whole of each specified period.

Step 4: Calculate the FSTC entitlements for each eligible using the formula -

y x z
365

Eligible period 1 (1 April to 30 June):

Since the specified income is $34,000 the abated. , FSTC entitlement has fully abated.

Eligible period 2 (1 July to 31 March):

The FSTC basis of entitlement is calculated separately for both spouses on their individual specified incomes.

  1. Mrs Jones' entitlement: (Specified income = $16,000)
  2. "y" =$1,872 (1st child)

    reduced by $2,000 x 18c/$ = $360

    ie y = $1,512, "z" =274 which is the number of days in the eligible period.

    $1,512 x 274 / 365 = $1,135-03, which, in accordance with subsection (4), reduced by an amount calculated using the formula:

a x ($6-b)
6

where "a" = $1135.03 and "b" = $4

ie. $1135.03 x ($6-4) = 378.34
6

Mrs Jones' full tax credit entitlement for the 2nd eligible period is therefore $1,135-03 - $378-34 = $756-69.

  1. Father's entitlement:
    • "y" =$l,872 (1st child) reduced by $4,000 x 18c/$ = $720
      • ie y = $l,152
    • "z" =274
    • which is the number of days in the eligible period. $1,152 x (274 /365) = $864 - 78, which, in accordance with subsection (4), is reduced by an amount calculated using the formula:
    • a x ($6-b)
      6
      "a" =$864.78 and "b" $2
      ie. $86478.78 x ($6-2) = 576.52
      6

Mr Jones' full tax credit entitlement for the 2nd eligible period is therefore $864.78 - $576.52 = $288.26.

Subsection (5) - deals with the situation which may arise when both spouses in a household receive a Family Benefit in respect of different children. This situation may occur in such instances as depicted in the example below. The legislation provides for such cases to be treated as if the Family Benefit in respect of all children in the household was received by one spouse only. The subsection has no practical effect on eligibility or entitlement levels. It is a machinery provision that enables the foregoing provisions to work in these circumstances.

Example: More than one spouse receives a Family Benefit

Mr and Mrs Grey separate on 1 July. They each retain custody of 1 of their 2 children after separation. Mr Grey shortly afterwards enters into a de facto relationship with a person who also has a child. Mr Grey receives a Family Benefit in respect of the child who remained in his custody while his de facto spouse receives a Family Benefit in respect of her child.

The FSTC entitlement is calculated as though either Mr Grey or his new spouse (but not both) received the Family Benefit in respect of both children. The actual calculation is of course on the basis of the combined specified incomes for the specified period in question.

Section 374E - Guaranteed Minimum Family Income Credit Of Tax (GMFI)

This section gives effect to the announcement in the Statement on Taxation and Benefit Reform 1985 that there is to be a guaranteed minimum income for all full-time earners with dependent children. For one-child families the minimum income will be $250 (after tax) per week including FSTC and Family Benefit. This amount is increased by $22 per week (which equals $16 FSTC and $6 Family Benefit) for each additional child in the family.

If the FSTC and Family Benefit components of the family income are ignored, the minimum family income will be $208 per week ($10,816 per annum) after tax, irrespective of the number of children in the family. This minimum "earned income" of $208 per week will only be available for each of the weeks in the income year that the applicant meets the "full-time earner" criteria.

The following points should be noted in relation to the GMFI:

  1. The amount of the tax credit does not vary according to the number of children in the family. A one-child family with a net specified income of $10,000 would receive $816 GMFI ($10,816 - $10,000 = $816), as would a three-child family with the same income. The larger family is catered for through the higher tax credit by way of FSTC.
  2. The concept of "eligible periods", which is used in calculating the FSTC, is not required for GMFI This is a direct above consequence of (1) above.
  3. Entitlement to GMFI is apportioned on a weekly rather than daily basis. Only those weeks during which the "full-time earner" criteria are met constitute weeks in respect of which the GMFI is payable.

Subsection (1) - defines three expressions for the purposes of this section only.

"Employment" - This definition is necessary for the purposes of the definition of "Full-time earner" contained in this section.

"Employment" simply means an activity, the performing of which gives rise to a source deduction payment. However, for the purposes of this definition, a source deduction payment does not include any payment of the kind:

  • referred to in paragraph (ba) of the definition of "salary or wages" (payments made by any partnership to any working partner to the extent that such payments are, pursuant to section 167B(2) of the principal Act, deemed to be expenditure necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income).
  • referred to in paragraph (c) of the definition of "salary or wages" (which, as amended by section 2 of this Amendment Act, are all payments of national superannuation, income-tested benefits, and specified war pensions).
  • specified in Part E of the Schedule to the Income Tax (Withholding Payments) Regulations 1979 (contract payments to non-resident contractors).

and also excludes -

  • A payment made by a private company to any of its "major shareholders" (as defined in s 336N(1) of the principal Act).
  • A payment made by any person to his or her spouse.
  • A payment made by any partnership business to the spouse of any partner in that partnership.

The definition also caters for extraordinary situations where in any day a person works for a number of hours less than the number he or she would normally work in that day, but is paid as if the hours normally worked had been worked. This includes days on which annual leave or sick leave is taken and days such as statutory holidays. In these cases a person will be treated as being employed on those days for the number of hours for which that person is paid.

"Full-time earner" - in relation to any week, means a person who meets any one of the following conditions:

  1. is a solo parent and is employed (refer subsection (1) for the definition of "employment") for 20 or more hours in that week.
  2. has a spouse at any time during any week and is employed for 30 or more hours in that week.
  3. is, [sic] the spouse of a person who is employed for 30 or more hours in that week.
  4. is employed and has a spouse who is also employed and the combined hours of employment total 30 or more in that week.
  5. receives Accident Compensation and does not meet any one of the conditions in paragraphs (a)-(d) above but who would have met one of those conditions if that person had not been on ACC. It effectively deems the person on ACC to have worked the number of hours that would have been worked had the person not been incapacitated.

Paragraph (f) of this definition provides for cases where a person has a pay period longer than a week. It also caters for persons who are employed longer than a week and for persons who are employed on shiftwork or who have irregular shifts (eg 8 days on - 4 days off). In these instances the hours employed are spread evenly throughout the days in the pay period. The person will then be considered a full-time earner if the hours of employment even out to a number which is sufficient to meet the conditions in any one of paragraphs (a)-(d).

Self-employed persons

Persons who are self-employed do not qualify for the GMFI tax credit unless the full-time earner criteria are met. This means that the self-employed person, the spouse of the self-employed person, or the two parents combined must derive income from employment (but not self-employment) for the required number of hours each week.

"Qualifying person" - is defined for the purposes of this section specifically, because its meaning in this section differs from the meaning of the expression elsewhere in Part XIA. As with the definition used elsewhere, a qualifying person is a person who is in receipt of a Family Benefit. The difference here is that a qualifying person, for the purposes of this section, does not include a person who receives an income-tested benefit, a specified war pension, or a war widows mother's allowance.

Subsection (2) - This subsection covers the situations where the Family Benefit has been terminated during the year, which are similar to those contained in section 374D(1). For clarification of paragraphs (a) to (c), refer to the commentary on section 374D(1).

Subsections (3) and (4) - contain the provisions to be used to determine the extent of an applicant's eligibility for the GMFI tax credit. Subsection (3) applies to solo parents, while subsection (4) applies to two-parent families.

The tax credit is calculated using the formula:

X x Y
52

"x" =the difference between $10,816 (the minimum net income level) and the net specified income as calculated under section 374C (see commentary on that section for details).

"y" =the number of weeks in the specified period the person met the full-time earner criteria.

Example: Simple case

Mr and Mrs Black have 1 child and the full-time earner criteria are met for all 52 weeks in the income year. Mrs Black does not earn any income and Mr Black's net specified income for the income year (as calculated according to section 374C) is $9,350. The GMFI entitlement is calculated by deducting $9,350 from $10,816 = $1,466. Half of this amount (ie $733) is allowed to each of Mr and Mrs Black as a tax credit.

Example: First child born during the income year

Mr and Mrs Blue become parents on 1 October. The family's net specified income for the period 1 October to 31 March is $9,500 (which is calculated by taking the family income for the six months ended 31 March and grossing it up in accordance with section 374C). The full-time earner criteria are met for each week in that period. The GMFI entitlement is calculated using the formula in section 374E(4), ie

XxY
52

"x" =$10,816 - $9,500 = $1,316 and "y" = 26, being the number of weeks during the specified period that the full-time earner criteria are met.

$1,316 X 26 = $658
52

of which $329 is payable to each spouse.

Subsection (5) - is similar to section 374D(5) and deals with the situation which may arise when both spouses in a household receive a Family Benefit in respect of different children. The legislation provides for such cases to be treated as if only one parent received the Family Benefit in respect of all the children.

Sections 374F To 374J set out the delivery system for the FSTC and GMFI tax credits.

Section 374F - Allowance Of Credit Of Tax In End Of Year Assessment

Subsection (1) - provides for the following treatment in the end of year assessment, in respect of any FSTC or combined FSTC and GMFI entitlement:

  1. Where there is any tax payable by the person in respect of the income year, the tax credit will be set off against that tax payable.
  2. Where the tax credit entitlement exceeds the amount of tax payable by the person, the balance will be treated as if it were an amount of tax paid in excess.

When furnishing an income tax return, a person wishing to claim a tax credit will need to make an application. This application must be on a prescribed form and be signed by both spouses (or by the applicant in the case of solo parents).

Subsection (2) - covers the situation where a person claims a tax credit at the end of the income year, but has already received all or part of his or her tax credit entitlement by way of interim instalments during the income year. This subsection ensures that the amounts already received are debited against the amount of the total entitlement claimed at the end of the year in the person's income tax return. Briefly, the subsection states that:

  1. where a person has received interim payments of his or her entitlement during the income year, and the amount received is greater than the actual tax credit entitlement calculated on an end of year basis in the person's income tax return, the excess is treated as if it were tax payable.
  2. where a person has received interim payments of his her entitlement during the income year and the or, amount so received is less than the actual end of year tax credit entitlement, the balance will be credited against any tax payable, with any excess paid to the person as if it were an amount of tax paid in excess.

Assessments - as the FSTC/GMFI is to be treated as tax payable the notice of assessment will show the actual tax credit entitlement. This will allow a person to object, in relation to a tax credit, in the normal manner ie the rules applicable to objections to assessments will apply to FSTC/GMFI.

Subsection (3) - is required to ensure that in any case where an overpayment of tax credit has been made as the result of incorrect information contained in an IR 12 tax deduction certificate, both the employer and the employee are jointly and severally liable to repay the amount of the overpayment. This would apply where the amount shown on the tax deduction certificate was less than the amount of the tax credit that had actually been paid to the employee during the income year. In general, it is envisaged that the amount would, in the first instance, be recoverable from the employee, with the employer being liable if the amount was not recovered from the employee and the employer had fraudulently or wilfully entered the wrong amount on the tax deduction certificate. The overpayment must be repaid by the 31st of May following the end of the income year to which the tax deduction certificate relates.

Subsection (4) - allows the Commissioner to recover any overpayments tax credit as if the amount of the overpayment was an amount of tax credit payable. In the case of two-parent households both parents are jointly and severally liable for any amount overpaid to them, even if the of the overpayment has been received by only one of the parents.

Subsection (5) - this subsection requires every person who has been issued with a certificate of entitlement for FSTC and/or GMFI to furnish a declaration of income at the end of the income year. This declaration will be in prescribed form and will require the person to show his or her assessable income and the assessable income of the spouse (if any), for the income year in respect of which they have applied for the tax credit. This declaration is to be furnished within the time period allowed for furnishing the return of income.

Section 374G - Credit Of Tax By Instalments

Subsection (1) - allows interim payments of FSTC and GMFI to be made regular intervals during the income year. Wherever a person expects to have a tax credit entitlement at the end of the current income year, that person may apply to the Commissioner to receive that entitlement by way of interim instalments.

Subsection (2) - requires applications made under subsection (1) (by persons who have a tax credit entitlement and who wish to receive that entitlement by way of interim instalments throughout the remainder of the income year) to be made to the Commissioner in a "prescribed form". This subsection requires that, in addition to any information the Commissioner may require to support the application, the application must contain the following:

  1. The signature of the applicant or, where the applicant has a spouse, the signature of each spouse.
  2. The assessable income that each spouse estimates they will receive during the whole of the income year, and
  3. Where the application covers a period that is less than the whole income year, the expected assessable income of each spouse for the period covered by the application.

Any application for interim instalments must be accompanied by supporting evidence of earnings. This evidence would consist of the following:

  1. where a spouse (or each spouse) derives income from employment, wage slips or other evidence of the wages or salary earned in the previous month.
  2. where a spouse (or each spouse) derives business income, either the accounts of the business (or businesses) for the previous income year, or a set of budgeted accounts for the income year in respect of which the application is made.

It should be noted that where an applicant has a spouse at the time the application is made, the application must be completed by both spouses. The legislation does not permit the application for the tax credit to be made by one spouse only.

The application must also specify whether the interim payments of the person's tax credit entitlement are to be received through the applicant's pay packet or are to be credited against his or her provisional tax. This requirement is not specified in subsection (2) but is a requirement that is necessary for the provisions of subsection (3) to be complied with.

Subsection (3) - requires the Commissioner, on receipt of an application to calculate whether the applicant is entitled to receive a credit of tax and if so, the amount of the interim instalments the applicant is entitled to receive during the period elected by the applicant. The Commissioner makes this calculation on the basis of the income estimates provided by the applicants and any other information that is available to him. The Commissioner will then issue a certificate of entitlement on which he must record:

  1. in the case of a provisional taxpayer, the amount that will be credited against each instalment of provisional tax.
  2. in the case of a person who is not a provisional taxpayer, the amount of the weekly tax credit entitlement that the person's primary employer, or the Department of Social Welfare, is required to pay to the person each pay day.

Subsection (4) - sets out the basis on which the Commissioner is required to calculate the amount of any interim instalments of FSTC that the applicant is entitled to receive during the period in respect of which the application has been made.

Two terms in the legislation require some clarification. They are the "elected period" and the "specified part" of that elected period. When a person makes an application to receive interim instalments of tax credit, the person must elect the period (which could be the whole or only part of the income year) during which the person is eligible for a tax credit and during which he or she wishes to receive interim "elected period" that entitlement. This period is referred to as the "elected period".

On receipt of an application to receive interim instalment for an elected period, the Commissioner must determine whether a tax credit is expected to be allowable in respect of the whole of the elected period or part of it only. The part of the elected period in respect of which the applicant is expected to be entitled to a tax credit is referred to in the legislation as the "specified part". For the sake of simplicity we will refer to the specified part as the "period of eligibility" in the remainder of the commentary on this section.

Paragraph (a) of subsection (4) Provides that interim instalments are calculated on a full-year equivalent of the income that will be derived in the period of eligibility (this full-year equivalent income is referred to in the legislation as the "annual amount") just as tax credit entitlement for a specified period is, at the end of the income year, calculated on the basis of a full-year equivalent income (specified income - refer section 374B(4)). The annual amount is determined using the formula:

Xx365
y

"x" is the assessable income the applicant expects to derive in the period of eligibility, and

"y" is the number of days in the period of eligibility.

Paragraph (b) - requires the Commissioner to determine which income band the annual amount (calculated under paragraph (a)) falls into. The income bands are contained in the 4th Schedule of the Amendment Act which inserts a new 11th Schedule in the principal Act. This Schedule is set out in Appendix B of this publication. If, for example, the Commissioner calculates that the assessable income for the full income year (the annual amount) is $23,000, the reference to the Schedule shows that this amount falls within the income band $22,499 to $24,499. The amount corresponding to this band in the Schedule (referred to as "the equivalent of the annual amount") is $24,500. It is this figure that is required to be used by the Commissioner in calculating the person's weekly tax credit entitlement.

Paragraph (c) - requires the Commissioner to calculate the amount of the tax credit that the person would be entitled to receive by way of interim instalments (using the calculation formula in section 374D) as if the equivalent of the applicant's annual amount (determined in accordance with paragraph (b) above), were the person's actual income for the period of eligibility.

In the example in paragraph (b) above, the amount used to calculate the interim instalments to which the recipient is entitled would be $24,500.

The income bands provide a protective margin to cater for unexpected pay rises that may occur during the year. If the margin proves to be too great and a recipient is underpaid during the year, a further credit will result at the end of the income year when the actual entitlement to the tax credit is established.

Subsection (5) - requires the amount of the interim instalments recorded on a certificate of entitlement to be truncated (ie rounded down) to whole dollars only. The applicant's entitlement to FSTC will be added to any GMFI entitlement for the period. That total will then be divided by the number of weeks in the period to determine the weekly tax credit entitlement and the whole dollars of that amount will be shown in the certificate of entitlement. No certificate will be issued where the weekly entitlement is less than $1 per week.

Subsection (6) - sets out the functions of a certificate of entitlement. A certificate of entitlement will:

  • require the employer of a fully-employed person (ie employed by the primary employer for at least 30 hours per week or 20 hours in the case of a solo parent) to pay to the person the interim instalment of the tax credit recorded on the certificate of entitlement. This means the employer must pay the full amount each pay period, regardless of the amount of income and PAYE deductions of the person to whom it was issued. (Paragraph (a) of subsection (6))
  • require the employer of a person who is not a fully-employed person to also make payment in full of the amount of interim instalments recorded on the certificate of entitlement. The proviso, however, requires the Commissioner, at the time an application for a certificate of entitlement is made, to estimate the amount of tax the employer would normally deduct from the employee's regular income. In any case where the tax normally deducted is estimated to be less than the amount of the tax credit payable each pay period, the certificate of entitlement is to require that the interim instalments be paid through the Department of Social Welfare rather than the employer. In other words, part-time earners whose PAYE deductions are less than their tax credit entitlement will receive their payments through the Department of Social Welfare. (Paragraph (b) of subsection (6))

It should be noted, however, that once a certificate has been issued requiring an employer to make weekly payments of the tax credit entitlement, that certificate remains in force notwithstanding that PAYE deductions may in fact be, or become, less than the tax credit entitlement.

  • require the Department of Social Welfare to make payments of tax credit instalments where it would be inappropriate for the employer to do so. This situation will arise in cases where persons derive income on an irregular basis. It will also apply where the Commissioner considers it would be inappropriate to require the employer to make the payments (eg IR 56 taxpayers). (Paragraph (c) of subsection (6))
  • state the amount of any tax credit to be credited account of a provisional taxpayer or the account of the person who would have an obligation to pay provisional tax but for:
    1. the expected incurring of a loss.
    2. the incurring of a loss from the immediately preceding income year.
    3. the carrying forward and setting off of a loss incurred in a previous income year.
    4. the commencement of the person to derive provisional income.
    5. the person, being a recipient of assessable income from source deduction payments, interest, dividends, and rents only, being relieved of his or her obligation to pay provisional tax under the provisions of the proviso to section 377 (ie by virtue of his or her assessable income from interest, dividends, and rents not exceeding $1,000). (Paragraph (d) of subsection (6))
  • state the amount of tax credit to be paid by the Department of Social Welfare to any Person who does not derive any assessable income during the income year. (Paragraph (e) of subsection (6))
  • be in a prescribed form and allow the Commissioner to impose any directions as to its use, application, etc as he considers necessary. (Paragraph (f) of subsection (6))

Subsection (7) - is required in order to cater for any case where more than one of paragraphs (a) - (d) of subsection (6) could apply. In such cases, the person must make a choice of which paragraph is to apply. For example, a person who is both a full-time salary earner and a provisional taxpayer must elect whether to receive the tax credit entitlement by way of interim instalments paid by the employer or by way of a credit against provisional tax payments.

Subsection (8) - prohibits persons who receive an income-tested benefit (refer section 374A) from applying for a certificate of entitlement. Such persons are automatically to be paid the full amount of the FSTC entitlement through the Department of Social Welfare without the need to apply for a certificate of entitlement from Inland Revenue (refer section 374I).

Subsection (9) - provides that where a certificate of entitlement issued to any person requires an employer of that person to pay the interim instalments of tax credit, the person can give the certificate only to the employer from whom he or she receives his or her primary employment earnings. For example, a person who has both a full-time and a part-time job may only receive interim instalments from the full-time employer.

Subsection (10) - allows an employee who resigns from his primary employment, or has that primary employment terminated, to uplift his certificate of entitlement from the employer and deliver it to his or her subsequent primary employer. A certificate of entitlement is thus transferable from one employer to the next in any case where an employee resigns and/or changes employment. The new primary employer is then bound by the provisions of subsection (9) regarding payment of tax credits from the time of receipt of the certificate. The new employer is required to pay any instalments that fall due after the time at which he or she receives the certificate from the employee.

The proviso to subsection (10) makes it clear that this transferability is not extended to any person who is receiving interim instalments of both FSTC and GMFI tax credits. Certificates of entitlement which require the payment of interim instalments of both FSTC and GMFI will be addressed to the recipient's current employer and cannot apply in respect of any other employer. When changing employers, the recipient would need to reapply for a new certificate of entitlement.

Subsection (11) - entitles a person, who has delivered to the Department of Social Welfare a certificate of entitlement which is addressed to that Department, to receive the interim instalments of the estimated tax credit entitlement at such intervals as Social Welfare considers appropriate.

Subsection (12) - requires a person, to whom a certificate of entitlement has been issued, to notify the Commissioner of a change in circumstances where that change results in a reduced tax credit entitlement. The specific changes of circumstance covered by the legislation are:

  1. The loss of Family Benefit entitlement in respect of any child, if that loss is expected to last for more than 56 days. The period of 56 days is expected to be long enough to allow for temporary breaks in entitlement, such as the situation where the Family Benefit entitlement is terminated upon the child reaching the age of 16, but subsequently reinstated upon the child returning to school after the summer holidays.
  2. A marriage or a marital break-up (including the commencement break-up of a de facto relationship).
  3. Any other change in circumstances that has been specified on the certificate of entitlement as being a change which should be notified to the Commissioner.

The subsection further allows any person whose circumstances change in such a manner to change the amount of the tax credit entitlement or any person who suffers the loss or destruction of that certificate of entitlement, to notify the Commissioner. Notification in these circumstances is optional and would normally be accompanied by a request for a replacement certificate.

Subsection (13) - gives the Commissioner the authority to require the return of a certificate of entitlement after receiving notification of a change in a person's circumstances. Irrespective of whether the Commissioner requires the return of the certificate of entitlement or not, he may:

  1. withdraw the certificate.
  2. withdraw the certificate and issue a replacement certificate.
  3. issue a supplement to a certificate issued earlier. For example, where a person notifies the Commissioner of the commencement of a Family Benefit entitlement in respect of a new born baby and the expectation of an increased tax credit entitlement, a supplement to the original certificate of entitlement could be issued requiring the employer to increase the tax credit currently delivered by $8 per week (or $16 in the case of a solo-parent).

Subsection (14) - contains a number of miscellaneous items in a certificate of entitlement. relation to

Paragraph (a) - requires an employer to whom a certificate of entitlement has been delivered to store that certificate in a safe place.

Paragraph (b) - Prohibits any person from delivering a certificate of entitlement to more than one employer with the intention of obtaining interim instalments of tax credit from those employers simultaneously.

Paragraph (c) - provides that a certificate of entitlement is not to be transferred by the person to whom it was issued, to any other person. In other words, no person may sell or trade a certificate.

Paragraph (d) - Provides that any certificate of entitlement which has been altered in any way shall be invalid.

Paragraph (e) - provides that all terms and conditions entered on a certificate of entitlement by the Commissioner shall apply in relation to that certificate.

Subsection (15) - allows the Commissioner to withdraw a certificate of entitlement in any case where he has reason to believe that certificate should no longer apply to a person. In this case the person, or the employer of the person, must return the certificate to the Commissioner for cancellation within 7 days of the notice of withdrawal having been given to them.

Section 374H - Employer To Deliver Credit Of Tax.

This section sets out the employer's rights and obligations in relation to the FSTC/GMFI scheme.

Subsection (1) - requires the employer to whom an employee has delivered a certificate of entitlement to pay the pay period equivalent of the weekly amount of tax credit recorded in that certificate. The employer must pay the amount at the time of paying any salary, wages or other source deduction payment (ie each payday). The legislation provides that the employer is acting as agent for the Commissioner in the making of each payment. Payments should be made only in respect of the period commencing with the latter of:

1. the day specified in the certificate of entitlement, or

2. the first pay day after the certificate has been delivered to the employer,

and ending with the earliest of:

1. the day on which the certificate is, at the request of the employee, returned to the employee, or

2. the day on which notification of the withdrawal of the certificate is given to the employer by the Commissioner, or

3. the day specified in the certificate (normally the end of the income year).

The proviso to subsection (1) applies in the situation where an employer pays to one of his or her employees an interim instalment of tax credit of an amount greater than the amount stated in the employee's certificate of entitlement. In these cases, both the employer and employee are jointly and severally liable for the amount overpaid, and that overpayment is required to be paid to the Commissioner by the 20th of the following month. After the payment to the Commissioner has been made, the overpayment portion of the original payment shall be deemed not to have been made for the purposes of section 394F (which deals with the tax credit in the end of year tax assessment). This latter provision ensures that the employee obtains his or her full tax credit entitlement (after deduction of instalments received during the year) in his or her end of year assessment.

If the employer recovers the excess from the employee and does not attempt to recover the excess from the Commissioner, the proviso will not apply.

Subsection (2) - sets out the basis on which an employer can calculate the pay period equivalent of the weekly tax credit entitlement shown on the certificate where the employee is not paid on a weekly basis. The amount of the instalment is simply grossed up or apportioned according to the length of the pay period as follows:

  • where the pay period is less than one week, by dividing the amount on the certificate by 7 and multiplying the resulting amount by the number of days in the pay period.
  • where the pay period is 2, 3, or 4 weeks duration, by multiplying the weekly entitlement by the number of weeks the pay period.
  • where the employee is paid monthly, by multiplying the weekly entitlement by the fraction 13/3.

Example: If the certificate of entitlement states a weekly amount of tax credit instalment of $15, and the pay period is monthly, the instalment paid each month is equal to $15 x 13/3 = $65.

For the purposes of this subsection, the employee is deemed to be engaged in the employment in each day of the pay period. For example, if the employee worked Thursday, Friday and Monday of a 5 day pay period, the employee is deemed to have been employed for 5 days and will receive 5/7ths of the weekly entitlement.

It should also be noted that the subsection applies on the basis of pay periods, not number of days worked per pay period. Thus, for a person who regularly works 3 days per week and who is paid fortnightly, the FSTC is to be paid fortnightly at the rate of two times the amount shown on the certificate.

The proviso to subsection (2) releases an employer from his or her obligation to pay the full amount of any tax credit instalment in any case where the amount of the instalment exceeds the amount of the PAYE deductions because the employee's pay has been reduced because of industrial action on the taking of leave without pay at any time during the pay period. In this case the amount of the instalment is limited to the amount of any tax deductions made for the pay period.

Example: Employee on strike

Mr X's pay is normally $200 per week. His weekly PAYE is $30 and tax credit instalment $25. Last week Mr X was on strike for two days and that week's pay was $120 from which $18 PAYE was deducted. The employer (in accordance with the proviso to section 374H(2)) is not required to pay the full amount of the tax credit instalment for that week, but is only required to pay the amount of $18.

Subsection (3) - sets out the delivery of interim instalments of tax credit in any case where a person is in receipt of earnings-related accident compensation. Where this occurs, the person, or the person's representative, may apply for the Accident Compensation Corporation, and not the employer, to pay the instalments of tax credit during the period that accident compensation is payable. Where the person makes such a request, the employer will be required to notify the Accident Compensation Corporation of the amount of the instalment stated on the certificate of entitlement. The employer should retain the certificate in his or her possession unless requested to give it to the employee or the employee's agent.

When the period of incapacity terminates and the employee recommences employment the employer will also recommence paying the tax credit entitlement.

It is proposed that those employees who are to be paid earnings-related accident compensation directly by the Accident Compensation Corporation will be asked to apply to their employer for the tax credit to be paid by the Corporation during the period of incapacity. In those other cases where the employer has made arrangements to continue to pay wages to the person during this period the employer will also continue to pay the tax credit.

Subsection (4) - provides that the employer shall deduct any tax credit payments, which he makes to his employees in any month in accordance with the certificates of entitlement he holds for those employees, from any tax deductions he is required to pay to the Commissioner by the 20th of the following month.

It is important to note that the legislation has the effect of treating that portion of PAYE tax deductions that has been used to pay tax credits to employees as if it had been paid to the Commissioner on the date(s) on which the tax credits were paid.

Example:

Mr White has 5 employees. The total tax deductions for the month amount to $2,400 and tax credit instalments paid as agent for the Commissioner amount to $1,300. The amount Mr White is required to pay by the 20th of the following month is therefore equal to $2,400 - $1,300 = $1,100. The tax deductions and the tax credit instalments will, however, be recorded separately.

Subsection (5) - requires the Commissioner, upon written application by an employer who in any month has paid employees a larger amount of tax credit instalments than the total amount of tax deductions made from employees' wages, to refund to that employer the amount by which the tax credit instalments paid exceeds the amount of tax deductions made. It should be noted that refund applications cannot be made on a pay period basis. The legislation requires that they be made following the end of the month in which the overpayment occurs.

The proviso to subsection (5) requires application for such a refund to be made within 8 years of the tax credits having been paid.

Example:

X employs 4 workers. The total tax deductions for the month of July equal $1,900 and the tax credit instalments paid equal $1,950. X therefore has no tax deductions to pay to the Department by the 20th of August and may claim a refund of $50, being the amount by which the tax credits paid to employees ($1,950) exceeds the tax deducted from employees' wages ($1,900).

Subsection (6) - requires the employer to take every reasonable step to ensure the name on the certificate of entitlement is in fact the name of the person to whom he or she pays the interim instalments of tax credit.

Subsection (7) - deals with the situation where any refund, made to an employer under subsection (5) of this section, was made as a result of a false claim by the employer. Where this occurs, the amount of the refund that was obtained fraudulently is deemed to be PAYE tax deductions made by the employer during the month in which the refund was made. The effect is that if the amount is not paid to the Commissioner by the 20th of the following month, it is subject to the normal penalties and recovery actions that apply to unpaid tax deductions.

Section 374I - Director-General To Deliver Credit Of Tax

This section deals with the obligations of the Director-General of Social Welfare and the Social Security Commission (as defined) who deliver interim instalments of tax credits to certain persons.

Subsection (1) - requires the Director-General to pay interim instalments of tax credits to any person who has delivered a certificate of entitlement that requires the Director-General to make such payments. In these cases the Director-General will act as if he were the employer of the person, and pay the interim instalments on a regular basis (for example, housewives who have no income). This provision is required to cater for those persons who have no alternative means of receiving their instalments on a regular basis, such as non-working spouses. Certificates of entitlement which are to be delivered to the Director-General rather than an employer, will contain a direction to that effect.

On receipt of such a certificate of entitlement, the Director-General will arrange to deliver the tax credit instalments at such intervals as deemed appropriate.

Subsection (2) - requires the Social Security Commission to pay the full amount of tax credit instalment (ie $36 pw for the 1st child and $16 pw for each subsequent child) to any person (and in the case of a two-parent household, one half to that person and one half to the spouse of that person) to whom an "income-tested benefit" is paid. In these cases the tax credit instalment will be paid automatically by Social Welfare without production of a certificate of entitlement and therefore without application to Inland Revenue.

Example: Beneficiary receiving Family Support through Social Welfare

Mr Grey is made redundant from his employment and on 23 September applies to Social Welfare for the unemployment benefit. Social Welfare approves the benefit and also ascertains that Mr Grey has two children. FSTC is paid at the rate of ($36 + $16 = ) $52 per week at the time the benefit is paid each pay period, $26 being paid to Mr Grey and $26 to his wife. Social Welfare will pay the full rate of FSTC notwithstanding the fact that because the recipient's family income for the income year may exceed $14,000 a smaller entitlement exists.

Subsection (3) - requires the War Pensions Board to pay the tax credits in the same manner as in subsection (2) above.

Subsection (4) - requires the Director-General, the Social Security Commission or the War Pensions Board to issue to every person, to whom one or more interim instalments of tax credit have been paid by them, and to whom they are not required to deliver an IR 12 tax deduction certificate, a certificate showing the total amount of tax credit delivered during the past income year. This certificate will be required for all persons to whom the Director-General or the Commission or the Board pays interim instalments of tax credit but who are not required to complete IR 12 tax deduction certificates. The certificate will be attached to the end-of-year income tax return by the person as evidence of tax credit payments received in the same manner as an IR 12 evidences income and PAYE tax deductions for the year. The certificates are required to be delivered to the person by the 20th of April following in the same manner as an IR 12.

In addition the Director-General, the Commission or the Board are required to deliver to the Commissioner copies of the certificates given to the recipients.

Section - 374J Credit Of Tax To Be Offset Against Provisional Tax

This section deals with the delivery of interim instalments of tax credit to provisional taxpayers. The interim tax credit entitlement is calculated in accordance with section 374G (refer to the commentary on that section) and the instalments will be applied by the Commissioner as follows:

  1. In payment of the provisional tax the taxpayer has an obligation to pay in respect of the income year that contains the elected period, ie FSTC for the 1988 income year will be credited against 1988 provisional tax: or
  2. As a credit to the account of a person who would have been a provisional taxpayer but for any of the reasons contained in section 374G(6)(d). (refer to the commentary on that section).

The Commissioner will apply the tax credit entitlement in payment of the instalments of provisional tax, or as a credit to the person's account, on the LATER of either:

  1. 1 month after the instalment of provisional tax became due and payable ie the day immediately preceding the day on which additional tax for late payment is imposed.
  2. the day the certificate of entitlement was issued to the taxpayer.

Every amount of interim instalment of tax credit applied in the above manner is deemed to be an amount paid by the person as provisional tax, irrespective of whether provisional tax was payable or not. If it exceeds any provisional tax the person was required to pay the person may request a refund in the same manner as if an overpayment had occurred.

The tax credit will be applied to each instalment of provisional tax, or credited to the taxpayer's account, in the same proportion as the instalment bears to the total provisional tax liability. This means that a provisional taxpayer who pays 1/3 of his or her provisional tax as a 1st instalment and 1/3 as the 2nd instalment will also have 1/3 of his or her total tax credit entitlement credited at the time of the 1st instalment and 2/3 at the time of the second. A farmer who pays provisional tax in three equal instalments will receive his or her tax credit entitlement in three equal instalments.

Where the certificate of entitlement is issued to the applicant after the last day for payment of any instalment of provisional tax, the relevant amount of tax credit is credited back to that date as if it had been a payment made by the person on the last day for payment. Accordingly any additional tax that has accrued in the meantime for non-payment of that portion of the person's provisional tax instalment will be cancelled.

Example: Certificate of entitlement issued after provisional instalment due

Mrs X applies for a certificate of entitlement to have her tax credit entitlement of $900 applied against her provisional tax liability, which is $1,200. The 1st instalment provisional tax of $400 must be paid by 7 September before imposition of additional tax but the certificate of entitlement is not issued until 30 September. In order to prevent additional tax for late payment arising in respect of that part of the provisional tax which will be offset by the tax credit, the instalment of tax credit is deemed to have been applied on 7 September. This means that $300 of the provisional tax liability of $400 is deemed to have been paid by the due date so any additional tax for late payment of that $300 will be cancelled.

Special transitional arrangements for the 1986/87 income year are contained in the commentary on section 17(2). Under these, the 1986/87 income year entitlement can only be credited against instalments of provisional tax that have a due date for payment of 1 September or later. The 6 months entitlement for the 1986/87 income year will be credited against that or those remaining instalment(s).

Section 374K - Money Payable Out Of Consolidated Account

This section provides for Parliament to appropriate funds out of the Consolidated Account for the tax credits paid under this Part.

Section 374L - Arrangements

This section declares invalid any arrangements entered into by two or more persons for the purpose of arranging their affairs in such a manner that either (or any) of them gains a greater entitlement to a tax credit than would otherwise be the case. The entitlement to a tax credit of any person who stood to gain from the arrangement is limited to the amount the person would be entitled to receive in the absence of such arrangements.

Section 374M - Advice

This section allows the Commissioner to obtain any information he requires from the Director-General of Social Welfare, for the purposes of determining a person's entitlement to a tax credit under this Part of the principal Act.

Section 374N - Offences

A separate offences section has been established for tax credits payable under this Part of the Act as there are a number of situations that arise in relation to the family support and guaranteed minimum family income tax credits that are not specifically covered in section 416 of the Income Tax Act. This approach is similar to that taken in Part XI of the Act, which deals with tax deductions.

This section does not limit the application of section 416 of the Act (General Offences) but creates a number of additional offences:

Paragraph (a) - makes it an offence for an employer or other person, to whom a certificate of entitlement has been delivered by a person, not to pay the amount of interim instalments of tax credit stated therein.

Paragraph (b) - makes it an offence for an employer or other person, to whom a certificate of entitlement has been delivered by a person, to wilfully pay an amount of tax credit instalment that differs from the amount stated in the certificate of entitlement.

Paragraph (c) - makes it an offence for an employer or other person. who is holding a certificate of entitlement and who receives a notice of withdrawal of that certificate under section 374G(15), not to deliver that certificate to the Commissioner within 7 days.

Paragraph (d) - makes it an offence for anyone to falsely claim to have paid any instalments of tax credits, and subsequently attempt to obtain a refund from the Commissioner under section 374H(5). (In addition, please note that Section 374H(7) deems any refund that is fraudulently obtained to be of the same nature as PAYE tax deductions, and therefore payable to the Commissioner accordingly.)

Paragraph (e) - makes it an offence for anyone to pay any interim instalment of tax credit in accordance with a certificate of entitlement where that person knows or suspects that:

  1. The certificate of entitlement had been altered in any way. (Even where the employee claims that the alteration was made by the Commissioner. All altered certificates are invalid); or
  2. The person receiving the credit of tax is not the person to whom the certificate of entitlement was issued by the Commissioner.

The offences contained in Paragraph (e) are in harmony with the requirements of sections 374G(14)(c) and (d).

Paragraph (f) - makes it an offence for any person to attempt to sell or transfer a certificate of entitlement to any other person. (This offence relates to the requirements of section 374G(14)(c)).

Paragraph (g) - makes it an offence for any person to -

  1. Attempt to obtain a certificate of entitlement or a tax credit by means of a false or misleading application or declaration.
  2. Give false information or mislead or attempt to mislead the Commissioner, any other officer, employer, or other person in relation to any matter which would affect a certificate of entitlement or a tax credit.

Paragraph (h) - makes it an offence for any person, who has been issued a certificate of entitlement for any income year, not to furnish a declaration (as required by section 374F(5)) with his or her annual tax return. (Section 374F(5) requires the furnishing of a declaration, containing a complete statement of the person's assessable income, and the assessable income of the person's spouse.)

Paragraph (i) - makes it an offence for any person to -

  1. Alter a certificate of entitlement.
  2. Falsely pretend to be the person whose name appears on the certificate of entitlement.
  3. Be in possession of an imitation of a certificate of entitlement without lawful justification.
  4. Cause or attempt to cause an employer to pay any tax credit by producing any document other than a certificate of entitlement issued by the Commissioner.

Paragraph (j) - makes it an offence for any person to deliver or attempt to deliver a certificate of entitlement to more than one person for the purpose of obtaining from each of those persons a tax credit in respect of the same period of time.

Paragraph (k) - makes it an offence to aid or abet any other person to commit any offence under this part of this Act. To aid or abet someone means to take some active step, by word or action, with intent to instigate any person to commit an offence.

Section 374O - Penal Tax

This section introduces a new offence which is subject to penal tax. It does not in any way affect the other penal tax provisions contained in the principal Act.

Subsection (1) - provides that where any person falsely pretends to have made any payment of tax credit to any person, and subsequently attempts to obtain a refund from the Commissioner of the whole or any part of that amount, under the provisions of section 374H (see also commentary on section 374N(d)), that person shall be chargeable with penal tax on the amount that he or she fraudulently attempts to obtain as a refund. Penal tax may be an amount of up to treble the amount of the attempted fraudulent refund, and is charged in addition to any other penalty to which that person may be liable.

Subsection (2) - deems any penal tax assessed under this section to be income tax assessed for the year ended 31 March immediately preceding the year in which it is imposed and provides that it shall be recoverable accordingly.

Subsections (3) and (4) - allow the Commissioner to amend, at any time, any assessment of penal tax in the same manner as any other assessment.

Subsection (5) - protects the right of any person who has been charged with penal tax to object on the grounds that -

  1. The person is not chargeable with penal tax; or
  2. The amount of penal tax assessed is excessive. (In this case regard must be had to the nature and degree of the offence or the reason for the imposition of penal tax.)

The proviso to this subsection directs that, where a person has been charged with penal tax, no Taxation Review Authority or Court shall reduce the amount of penal tax assessed below the smaller of:

  1. The amount of penal tax assessed, or
  2. An amount calculated on the fraudulent amount at the rate of 10 percent per annum of the amount of the fraudulent refund for the period commencing on the last day of the year of assessment in which the person attempted to obtain the fraudulent refund and ending with the day the assessment of the penal tax is made by the Commissioner.

Subsection (6) - states that, subject to subsection (5) of this section, all the provisions of the Income Tax Act relating to objections shall also apply to any objections to assessments of penal tax under this section. It places the burden of proving the offence that gave rise to the imposition of penal tax on the Commissioner.

Subsection (7) - provides that the other Parts of the Income Tax Act, "as far as they are applicable, and with any necessary modifications", shall apply to all penal tax imposed under this section as if -

  1. It were penal tax under section 420 of this Act; and
  2. It were tax payable for the year of assessment immediately preceding the year of assessment in which it is imposed under this section; and
  3. The person chargeable with the penal tax were the "taxpayer" referred to in these provisions.

Section 374P - Credit Of Tax Deemed Not To Be Assessable Income

This section provides that FSTC and GMFI tax credits shall be deemed not to be assessable income.

IN ADDITION TO INCLUDING THE SECTIONS 374A TO 374P DESCRIBED ABOVE, SECTION 17 OF THE AMENDMENT ACT ALSO MAKES THE FOLLOWING AMENDMENTS:

Section 17(2) of this Amendment Act adds an Eleventh Schedule to the principal Act. This new Schedule is contained in the Fourth Schedule of this Amendment Act (repeated in the appendix to this publication) and is used when calculating the amount of interim instalments of FSTC a person is entitled to receive. The full method of calculation is set out in the new section 374G(4) of the principal Act.

Transitional Arrangements For The 1986/87 Income Year

Section 17(3) of the Amendment Act contains the transitional measures in relation to the introduction of the FSTC and GMFI tax credits. Since the scheme commences on 1 October 1986, certain conditions will apply in respect of the income year commencing 1 April 1986 only.

Paragraph (a) - limits any specified period to a period COMMENCING ON OR AFTER 1 OCTOBER 1986. This means that no tax credits are available in respect of any period commencing prior to 1 October 1986, irrespective of the qualification criteria under sections 374D and/or 374E having been met.

Paragraphs (b) and (c) - limit the application of sections 374D and 374E in any case where the family benefit entitlement ceased prior to 1 October 7986. These sections deem the entitlement to a family benefit to be extended by 28 days in certain cases (refer to the commentary on those sections for details). The effect of this paragraph is to avoid a situation where the tax credit is paid out in respect of a period after 1 October during which the recipient or the spouse of the recipient is no longer entitled to a family benefit.

Paragraphs (d) and (e) - relate to the delivery of the tax credit through the reduction in provisional tax (section 374J refers). The effect of these paragraphs is that any estimated tax credit entitlement in respect of the 1986/87 income year may be offset against any provisional tax payment which first becomes, or would have become, due and payable on or after 1 September 1986. The effect of these paragraphs is that no tax credit can be credited against any provisional tax instalment which has a last date for payment that falls before 1 October 1986.

Paragraph (f) - omits the first proviso to section 374J. The proviso determines that any tax credit entitlement for the income year must be credited against provisional tax instalments in the same proportion as those provisional tax instalments bear to the total provisional tax payable for that year.

In order to allow the whole of the 1986/87 tax credit entitlement (which represents the credit for the last 6 months only) to be credited against the instalment(s) due and payable after 1 October 1986 the proviso is ignored for the 1986/87 year.

Section 17(4) - provides that the new Part XIA, the new Eleventh Schedule, and the transitional provisions apply in respect of the income year that commenced on 1 April 1986 and future years. (As opposed to the day on which the Amendment Act receives the Governor-General's assent).

Consequential Amendments

Section 18 - Interpretation

This section inserts the definition of the term "certificate of entitlement" into section 2 of the principal Act. This definition has been included in section 2 because it is also used in Parts of the Act other than Part XIA. (See sections 374G and 374H commentaries in relation to the certificate of entitlement).

"Certificate of entitlement" - means a certificate issued by the Commissioner under section 374G for the purpose of enabling interim instalments of tax credits to be made.

Section 19 - Annual Returns By Persons Who Receive A Credit Of Tax

This section inserts a new section 9A into the principal Act. It requires the furnishing of a tax return by any person who has either:

  1. been issued with a certificate of entitlement, or
  2. applies for a tax credit at the end of the income year.

This includes any person who does not derive any income in that particular income year, but does receive a tax credit under Part XIA.

Any person who has been issued a certificate of entitlement for any part of an income year must furnish a return, even if the person did not receive any interim tax credit instalments (for example, he or she did not deliver the certificate of entitlement to his or her employer). Details must be provided in this return of the amount of any tax credit received by way of instalments throughout the income year.

The provisions of the principal Act will apply to any return furnished under this new section 9A as if it were a return furnished under section 9 of that Act.

Section 20 - Application Of Part XI

This section amends section 337(1) of the principal Act. It substitutes a new subsection (1) which ensures that Part XI must now be read in conjunction with Part XIA (FSTC and GMFI). This is because the FSTC/GMFI system is closely interrelated with the existing tax deduction system, and as a result Part XI has been substantially amended to incorporate the new changes.

Section 21 - Special Tax Code Certificates

This section amends section 351 of the principal Act, by adding a new subsection (2A). This subsection ensures that when a person applies for a special tax code certificate, the amount of FSTC and GMFI tax credits that person is entitled to receive cannot be taken into account in determining that person's estimated tax liability for the year.

This provision is required to prevent a person from receiving any tax credit entitlement from his or her employer by operation of a certificate of entitlement as well as receiving those benefits by way of reduced tax deductions through a special tax code certificate.

Section 22 - Records To Be Kept By Employer

This section amends section 352 of the principal Act which deals with records that must be kept by the employer.

Subsection (1) - amends section 352(1) of the principal Act to ensure that where an employer makes a source deduction payment to an employee, he or she shall record not only the amount of the source deduction payment and tax deductions made from it, but also the amount of any tax credit paid to that employee pursuant to section 374D (FSTC) or 374E (GMFI) of the principal Act. (If a person is receiving both FSTC and GMFI tax credits, these are required to be shown as one total).

Subsection (2) - amends section 352(2) to include certificates of entitlement in the list of documents that the employer must keep in safe custody. These records must be retained for seven years except to the extent that a person is required by the Income Tax Act to deliver any documents to the Commissioner or to any other person, and except where the employer has received notification from the Commissioner that retention is not necessary. In practice however, the employer will be required to send all certificates of entitlement held at the end of the income year to the Department with the end of year reconciliation statement. They therefore will not be required to be retained.

Section 23 - Payment Of Tax Deductions To Commissioner

This section amends section 353 of the principal Act which deals with the employer's duty to pay tax deductions to the Commissioner. The amendments are required in order to incorporate the FSTC and GMFI tax credits in the administration of the PAYE system.

Subsection (1) - substitutes a new section 353(1) to include within the employer's duties relating to PAYE tax deductions those duties relating to tax credits.

Paragraph (a) of the new subsection provides that on the 20th of the month following the month in which an employer makes any tax deductions, that employer must remit to the Commissioner the amount of those tax deductions, less the sum of any tax credits paid out to employees in the same month, accompanied by a monthly remittance certificate showing not only the total amount of source deduction payments and tax deductions made, but also the total amount of tax credits paid in that month.

Paragraph (b) - requires the employer to deliver to each employee a tax deduction certificate not later than the 20th of April in each year, showing -

  1. the total amount of source deduction payments made by the employer to the employee.
  2. the total amount of tax deductions made from those payments.
  3. the total amount of all tax credits (if any) paid to that employee.

Paragraph (c) - within seven days of the employee ceasing employment, the employer must deliver to that employee a tax deduction certificate showing -

  1. the total amount of all source deduction payments.
  2. the total amount of tax deductions.
  3. the total amount of all tax credits paid to that employee during the period of employment in the income year.

Paragraph (d) - provides that where an employer makes a final, or only, withholding payment to an employee or group of employees, he must deliver to that employee or group of employees within seven days a tax deduction certificate which shows -

  1. the total amount of the payments made.
  2. tax deductions made from that payment (or those payments).
  3. the total amount of all tax credits (if any) paid to that employee or employees.

Paragraph (e) - provides that all employers must, not later than 31 May in each year, deliver to the Commissioner a reconciliation showing -

  1. the total amount of all the tax deductions paid to the Commissioner in the preceding year.
  2. the total amount of all tax deductions shown in the tax deduction certificates delivered to employees.
  3. the total amount of all tax credits paid to employees in the preceding year.
  4. the total amount of refunds received from the commissioner (under section 374G of the principal Act).

If these totals do not tally, an explanation must also be furnished to the Commissioner.

Signed copies of all tax code declarations, tax code certificates and certificates of entitlement (that have not been uplifted during the income year) that have been delivered to the employer in the preceding year, and all notices cancelling relevant deductions under section 344 (10) must also accompany the reconciliation.

Paragraph (f) - provides that where an employer ceases to carry on a business in respect of which he/she makes any tax deductions or pays tax credits, that employer must comply with the requirements of paragraph (e) not later than the 15th day of the month after the month in which he/she ceases to carry on that business (as if the period from the beginning of that year to the date of the last of those tax deductions were a preceding year).

Subsection (2) - repeals section 25(1) of the Income Tax Amendment Act 1981. This section made amendments to the old section 353(7) which no longer apply.

Section 24 - Tax Deductions To Be Credited Against Tax Assessed

This section amends the proviso to section 362(2) of the principal Act which contains provisions that prevent credit for PAYE tax deductions being given to a shareholder/employee of a private company where that company has failed to account for PAYE to the Commissioner. In these cases the PAYE credit is limited to the PAYE actually received by the Commissioner.

This amendment ensures that the amount of any tax credit paid to the employer is treated as if it were PAYE paid to the Commissioner by the company.

Appendix A

Questions And Answers

The following questions and answers have been prepared to help explain the Family Support (FSTC) and Guaranteed Minimum Family Income (GMFI) tax credit schemes.

Application

1. Question:

I expect to be an income-tested Social Security beneficiary for some time to come. My wife has a part-time job and earns up to $50 per week. How do I apply for FSTC and because my income is so low do I qualify for GMFI?

Answer:

You do not have to apply for FSTC. Because you are a social-security beneficiary both you and your wife will be paid the full amount of FSTC automatically by the Department of Social Welfare (DSW).

You are not eligible for the GMFI as this is not payable to social security beneficiaries.

2. Question:

if I cease to be on a benefit I understand that I will have to apply to Inland Revenue (IRD) for my FSTC entitlement. As the benefit is now taxable income do I have to include in my estimated income the benefit and from what date should it be included?

Answer:

Income-tested benefits will become taxable from 1 October 1986. If you apply for FSTC to be paid from your employer and you have received a benefit for a period after 1 October the amount of the benefit received after that date is to be included in your estimated income figure, in your application.

3. Question:

I am on the unemployment benefit and work part-time. I have a job to go to in December this year. I understand that while I am on the benefit my FSTC will be paid by DSW. When I get my job do I have to apply to IRD or will DSW just continue to pay the FSTC to both my wife and I?

Answer:

DSW will cease payment to both you and your spouse of FSTC when your entitlement to the benefit ceases. You and your spouse will need to apply to IRD for a Certificate of Entitlement. A Certificate of Entitlement will enable you to receive FSTC from your employer and your spouse if not working, will receive FSTC from DSW. Please note your spouse will also require a certificate of entitlement before payment from DSW.

4. Question:

As my benefit will cease on say 12 December and my new job will not start until 17 December, who will pay FSTC to me during the gap between cessation of benefit and start of my job.

Answer:

If it happens that there is a gap between the cessation of your benefit and the start of a new job there will be no interim payment of FSTC for that period. However the entitlement for that period will not be lost and will be covered during the "square up" assessment at the end of the year.

It is suggested that to deep any gap to a minimum applications are forwarded to the Inland Revenue Department as soon as possible, so that a certificate of entitlement can be issued quickly.

5. Question:

We are expecting our first child in November. How will I obtain an application form? Can we complete a form now?

Answer:

Application forms will be available at each Births, Deaths and Marriages Registry office. They will also be available at each Post Office. If it is more convenient the IRD will send one to you.

The main qualifying criteria for FSTC is that Family Benefit must be payable in respect of the child. Until such time as you have received a Family Benefit number an application for FSTC cannot be actioned.

6. Question:

I have completed my part of the FSTC application form but my spouse for reasons I am not prepared to disclose will not fill in part. How do I get my FSTC entitlement?

Answer:

You should fill in the application form as far as you can and give us details of how to get in touch with your spouse. We will contact your spouse and ask him to come in and complete the other part of the application. If this is not convenient a separate application could be completed by each spouse and the two forms will be associated in IRD.

7. Question:

I share custody of my child with my estranged wife on week with me, two weeks with my wife basis. Am I entitled to FSTC?

Answer:

You will only be entitled to FSTC if you qualify for payment of Family Benefit in respect of your child. From 1 October DSW will apportion Family Benefit in shared custody cases. In such cases FSTC will be apportioned according to the proportion of Family Benefit received.

8. Question:

My husband has been working away from home for the past 3 months and will continue to do so for the next 4 months. Your "Notes for Guidance" says that spouse does not include a person from whom you are separated ie living apart. Is my husband still my spouse?

Answer:

Yes, your husband will still be your spouse.

9. Question:

My husband left me 6 weeks ago and we are now separated although not legally. I receive money on a fairly regular basis to support the children. Who applies for FSTC? If I do, what income do I include?

Answer:

In these circumstances you will make application for FSTC as you are the person who receives Family Benefit for the children. Your husband is not entitled to claim as the definition of spouse excludes separated persons. Your income will be the assessable income derived by you in your own right plus the amount of the maintenance, being received from your husband.

10. Question:

I am a self-employed farmer who works part-time for a contractor in town. If I elect to be paid my FSTC through my employer and because I work part-time will I be paid my FSTC regularly by DSW?

Answer:

Yes.

11. Question:

If I qualify for GMFI how do I know whether I get it and if I do how much will I get?

Answer:

IRD will calculate the amount of any persons GMFI entitlement. This amount will be included in the figure shown on the certificate of entitlement. If you wish to know the amount of GMFI please do not hesitate to contact IRD who will advise you of the amount.

12. Question:

The application form states that I have to estimate my income. At this stage, depending on the performance of my employer, I may receive a pay increase later in the year. Is my estimate to take into account a possible pay rise or do I use my existing wage?

Answer:

You can elect whether to include an estimate of the pay rise. If you underestimate your income you will have to pay back the FSTC overpaid during the year. If your estimate is too high, your actual entitlement will be paid at the years end.

13. Question:

I care for a foster child. Can I claim FSTC for that child.

Answer:

No. Although you receive a payment from DSW in respect of the child it is not Family Benefit therefore you are not eligible to claim FSTC.

14. Question:

My wife and I capitalised the Family Benefit in order to purchase our first home. Can we still claim FSTC.

Answer:

Yes, although Family Benefit has been capitalised it is still payable in respect of the children, and you are therefore entitled to FSTC.

15. Question:

I am a grandparent who has recently taken over the full-time caring of my two grandchildren as my daughter is not in a position to care for them. I do not receive Family Benefit for them. Can I claim FSTC?

Answer:

No. You cannot claim for FSTC until such time as you receive the Family Benefit in respect of the children.

16. Question:

My children work after school to earn money some of which is used to purchase day to day requirements for the family. Is this money to be included as income for FSTC purposes?

Answer:

No, only the income derived by the parents of the family is to be included for the calculation of FSTC entitlement.

17. Question:

My two oldest children live at home and pay $30 board each per week. Is this to be included as income for FSTC?

Answer:

No, board received from your children is not assessable income for tax purposes therefore is not to be included as income for FSTC.

18. Question:

One of my children is thinking of leaving school this year. At this stage however I am not sure what will happen. Should I claim for this child or not?

Answer:

Yes, if you wish to receive the FSTC for that child for the period up to when the child may leave school. IRD will calculate the FSTC for the period up to the forseen date of leaving. If it happens that the child remains at school you can make a new application for the increased claim or wait for an end of year square up.

19. Question:

I see that I am required to support my estimate of business income by enclosing either my latest set of accounts or a set of budgeted accounts. My accountant informs me that he will not have my accounts ready until after 1 October and if I want budgeted accounts that it will cost me extra. What am I do to do? Will you accept an application without the supporting evidence?

Answer:

The law is quite specific in this regard. A set of the previous income year's accounts or a budgeted set of accounts must be included in the application before a Certificate of Entitlement can be issued.

20. Question:

What does the Commissioner expect by way of budgeted accounts? Will a single sheet of paper signed by my accountant suffice?

Answer:

Budgeted accounts will be accepted in a format which reflects an effort to estimate the business income.

21. Question:

My employer has told me that he disagrees with the FSTC Scheme and because it may cost him money he has said that we should not expect payment by instalments. What is my position?

Answer:

Initially the choice is yours whether you wish to receive FSTC by instalments or wait until the end of the year. If you choose instalments your employer is required by law pay you your FSTC on a pay period basis.

DELIVERY

22. Question:

My husband receives an income-tested social security benefit. I work part-time. What is my position after 1 October?

Answer:

There are two aspects to consider. Firstly in relation to FSTC you will be paid automatically half of the entitlement by DSW from 1 October onwards.

Secondly from 1 October the benefit will be equally split between you and your spouse so that each of you is paid your individual portion. Income-tested benefits will be taxed from 1 October. You will however not receive any less benefit and will receive the advantages of being a taxpayer ie able to claim for the tax rebates and exemptions, by filing an annual return of income.

23. Question:

My husband has just recently left me. I am receiving FSTC from DSW based on a Certificate of Entitlement issued by IRD. I understand as my family income has dropped dramatically that I am entitled to more FSTC. I have applied to DSW for the domestic purposes benefit, but I have been told that this may take up to 3 months to approve. What now is my position? Do I still receive FSTC based on my previous application? Does my husband still receive his share of FSTC?

Answer:

You will receive the FSTC based on the Certificate of Entitlement issued to you until the domestic purposes benefit has been approved. Once the benefit commences your present certificate of entitlement will be cancelled and you will receive the full FSTC entitlement automatically with your benefit payment.

Your husband's entitlement will cease from the date of separation. Please advise your separated husband present address.

24. Question:

I am changing my job. The Certificate of Entitlement issued to me is however addressed to my employer. I understand I must now reapply for FSTC. How quickly will it be before I can expect to receive my new certificate?

If there is a gap will I lose my entitlement?

Answer:

IRD will process applications as quickly as possible. If a gap does arise the entitlement relating to that period will not be lost, the end of year square up will ensure this. Please complete a new application as soon as you can, so any gap is kept to a minimum.

25. Question:

The Certificate of Entitlement issued to me says that my FSTC will be paid from DSW and that payments will be credited to my bank account. It goes on to say that if this is my first contact with DSW that department will approach me for bank account details. I was unemployed for a while about a year ago. Will DSW still contact me? How long will they take to contact me and how long will it be before I actually start to receive FSTC?

Answer:

DSW will contact you to confirm that the bank account number is still valid. The time taken to contact you by DSW cannot be given, however the FSTC when credited will be backdated to the date the Certificate of Entitlement was received.

26. Question:

I have just had an addition to my family. Family Benefit has been approved and I now wish to have my FSTC reviewed. Do I have to fill in a fresh application?

Answer:

So that you may receive your new entitlement you should provide full details to your local IRD office. They will then issue an amended entitlement for you.

27. Question:

I have been living in a de-facto relationship for the past 3 months. I have 4 children from a previous relationship. The person who I am living with does not support the children. Why should I not receive the full FSTC entitlement? Why does my de-facto partner become entitled to 50% of the FSTC entitlement?

Answer:

It was one of the Government's main policy objectives of the FSTC Scheme to recognise the contribution of both parents towards the support of the family. It would not be possible to differentiate between families where one parent may contribute more towards the support of the family than the other.

28. Question:

I have just commenced to derive income from self-employment. I am not liable to pay provisional tax until next year. How am I to be paid my FSTC entitlement?

Answer:

You will be paid by way of a credit of provisional tax. As you will not be liable for provisional tax that amount will be refunded to you.

29. Question:

I have derived income from self-employment for the period from 1.4.86 to 31.8.86. Should I include as part of my income used to calculate my FSTC entitlement for the period from 1.10.86 to 31.3.87 that income?

Answer:

Yes the assessable income for the period of self-employment should be included in your estimate of income for the period 1.10.86 to 31.3.87.

The income from self-employment is deemed to have been derived evenly throughout the year thus the need for inclusion. As the initial year's FSTC is for a half year only, you are to enter half only of the assessable income from self-employment.

30. Question:

I am on Accident Compensation being paid earnings related compensation for a work accident. I am presently being paid my normal salary from my employer and will continue to do so until my sick leave ends. As my accident will be long term I propose to resign and go onto full-time earnings related compensation.

What will my position be in relation to FSTC?

Answer:

Your employer will continue to pay you your FSTC until such time as you resign. From that date onwards, if you are being paid by the Accident Compensation Corporation, the Corporation will be your employer and will pay your FSTC entitlement. Of course, if your income has decreased you are entitled to apply for a review of your entitlement.

END OF YEAR

31. Question:

I am a housewife at home looking after my children. I receive no income and am being paid my FSTC based on a Certificate of Entitlement calculated using my husband's earnings. If my husband's earnings increase and I receive too much FSTC how am I expected to pay back the overpayment.

Answer:

Where an overpayment has occurred you will have until February of the following year to pay the amount. If the amount cannot be paid by you, IRD has the authority to make the amount payable by your husband.

32. Question:

I am a domestic purposes beneficiary who works part-time. If I elect to furnish a return to claim for my life insurance premiums will I have to complete a declaration and therefore have my FSTC recalculated even if it has been fixed by DSW.

Answer:

If you have elected to furnish a return you will be required to complete a declaration for FSTC purposes. The FSTC will be calculated based on your actual income, from all sources received during the year.

If you have been on the domestic purposes benefit for the full period you have no obligation to furnish a return.

33. Question:

I am a sickness beneficiary and my wife and I have received the benefit for the whole of the period from 1 October to 31 March. We are also in receipt of FSTC. Although I am not required to furnish a return I propose to do so as I wish to claim for donations. If I send in a return do I have to complete a FSTC declaration? What does my wife have to do?

Answer:

You will need to complete a FSTC declaration if you send in a return. All persons who furnish a return and have received FSTC during the year irrespective of the source will have to complete a declaration.

You wife will also have to complete a return and both returns should accompany the declaration.

34. Question:

I am on an income-tested social security benefit. I also derived income from interest and dividends to the extent that my benefit is abated. My FSTC will be paid automatically at the full rate. Do I have to furnish a return? If I do will my FSTC be recalculated.

Answer:

Yes, you are required to furnish a return because you receive investment income.

As you have received FSTC a declaration will be required and your FSTC will be recalculated based on your actual income for the year.

Appendix B

Fourth Schedule - New Eleventh Schedule To Principal Act - Section 17(2)

"ELEVENTH SCHEDULE

AMOUNT THAT, FOR THE PURPOSES OF SECTION 374G (4) OF THIS ACT, IS DEEMED TO BE THE EQUIVALENT OF AN ANNUAL AMOUNT Section 374G(4)

First Column Second Column
Amount that, in relation to any application for a certificate of entitlement to a credit of tax, is the annual amount Amount that, for the purposes of section 374G of this Act, is deemed to be the equivalent of that annual amount
Amount does not exceed $13,999 $14,000
Amount exceeds $13,999 but does not exceed $15,499 $15,500
Amount exceeds $15,499 but does not exceed $16.999 $17,000
Amount exceeds $16,999 but does not exceed $18,499 $18,500
Amount exceeds $18,499 but does not exceed $20,499 $20,500
Amount exceeds $20,499 but does not exceed $22,499 $22,500
Amount exceeds $22,499 but does not exceed $24,499 $24,500
Amount exceeds $24,499 but does not exceed $26,499 $26,500
Amount exceeds $26,499 but does not exceed $28,999 $29,000
Amount exceeds $28,999 but does not exceed $31,499 $31,500
Amount exceeds $31,499 but does not exceed $33,999 $34,000
Amount exceeds $33,999 but does not exceed $36,999 $37,000
Amount exceeds $36,999 but does not exceed $39,999 $40,000
Amount exceeds $39,999 but does not exceed $42,999 $43,000
Amount exceeds $42,999 but does not exceed $45,999 $46,000
Amount exceeds $45,999 but does not exceed $48,999 $49,000
Amount exceeds $48,999 but does not exceed $51,999 $52,000
Amount exceeds $31,999 but does not exceed $54,999 $55,000
Amount exceeds $54,999 but does not exceed $57,999 $58,000
Amount exceeds $57,999 but does not exceed $60,999 $61,000
Amount exceeds $60,999 but does not exceed $63,999 $64,000
Amount exceeds $63,999 but does not exceed $66,999 $67,000
Amount exceeds $66,999 the amount that is equal to the number of complete dollars comprised in theannual amount.