In-work tax credit

Sections MA 7, MD 9 and MD 10 of the Income Tax Act 2007

Some shareholder employees work full-time for their company but do not pay themselves a wage because, for example, the company has made a loss for that year or has restricted cashflow. Under the previous full-time earner requirements, such a shareholder-employee would not qualify for the in-work tax credit as they did not receive and derive income as set out in section MD 9(1). This is in contrast to other business owners, such as partners in a partnership or a sole trader, in the same situation, who do qualify for the in-work tax credit. Provided their business derives some gross income they will meet the criteria of section MD 9(1) even if they do not pay themselves a wage.

A person can receive weekly compensation as a surviving spouse or partner of a deceased claimant under clause 66 of schedule 1 of the Accident Compensation Act 2001. Section MA 7(2)(b) of the Income Tax Act 2007 provides that a person receiving weekly compensation as a result of an incapacity is deemed to still be employed for the purpose of claiming the in-work tax credit. It was not clear that this provision applied when a person is a surviving spouse.

Furthermore, the wording in section MD 9 required a person to be receiving income from a work activity and deriving income or compensation as set out in section MD 9(2), (3) or (4). While an injured person receiving weekly compensation would meet this requirement, it was unclear that a surviving spouse would qualify as the weekly compensation they receive is not from their work activity but from the deceased spouse's work activity.

Key features

The Income Tax Act 2007 has been amended to remove the reference to a person having to receive income from a work activity from the requirements of the in-work tax credit in section MD 9(1). A person will qualify for the in-work tax credit when they are a full-time earner, as defined in section MA 7, and they:

• derive income as set out in subsections (2) and (3) of section MD 9 as a full-time earner; or
• derive an amount of compensation as described in subsection (4) of section MD 9; or
• are a major shareholder in a close company in which they are a full-time earner, and the company derives gross income in the income year.

Section MA 7 (definition of full-time earner) has been clarified to ensure that a person who is receiving ACC weekly compensation payments as a surviving spouse or partner of a deceased claimant meets the full-time earner definition if the deceased claimant or the couple together would have qualified before the accident causing death. This will allow the surviving spouse to continue to claim the in-work tax credit if they meet all other requirements.

Detailed analysis

Major shareholder-employee of a close company

Section MD 9(1) of the Income Tax Act 2007 has been amended to allow a major shareholder employed but unpaid by a close company to meet the full-time earner requirement of the in-work tax credit. A major shareholder who is a full-time earner in relation to a close company will not have to meet the requirement to derive income as set out in section MD 9(2). Instead, the close company they are a major shareholder in and work for must derive gross income in the income year. This aligns the treatment of shareholder employees and other business owners, such as partners in a partnership.

The major shareholder will still be required to meet all the other requirements for the in-work tax credit as set out in sections MD 5 to MD 8 relating to age, care of a dependent child, residence and not receiving a benefit. The person will also be required to meet the required hours of a full-time earner as set out in section MA 7. A full-time earner is a person who is normally employed for at least 20 hours a week, if they are a sole parent, or at least 30 hours a week in combination with a spouse, civil union or de facto partner.

The terms "major shareholder" and "close company" are defined in section YA 1. A major shareholder is a person who owns, or has the right to acquire, or power to control, at least 10% of the ordinary shares or voting rights, or control of the company. A close company means a company in which five or fewer natural persons hold more than 50% of the interests; or if a market value circumstance exists, five or fewer natural persons hold more than 50% of the market value interests. All natural persons (individuals) associated at the time are treated as one natural person.

Consequential amendments have been made to section MD 10, which relates to the calculation of the in-work tax credit.

ACC survivor spouse

Section MA 7, which defines "a full-time earner", has been amended to provide that a person receiving ACC weekly compensation as a surviving spouse or partner of a deceased claimant is treated as being employed, during the week in which compensation is paid, for the number of hours that the deceased claimant would have been employed previously but for their accident causing death. The deceased spouse's hours are added to the surviving spouse's own hours (if any) to determine if they meet the full-time earner test.

Section MD 9, which contains the full-time earner requirements to qualify for an in-work tax credit, has been amended to remove the requirement for the full-time earner to be receiving income directly from a "work activity". This will allow a surviving spouse to meet the requirements of the section if they derive income as set out in section MD 9(2), which includes ACC weekly compensation payments.

These changes are consistent with the original policy intention of the in-work tax credit. The issue was clearer before the enactment of the Income Tax Act 2007, which is why the clarifying amendment applies from 1 April 2008. A person receiving ACC weekly compensation, including a surviving spouse of a deceased claimant, should continue to receive the in-work tax credit the family previously qualified for, when the person or their spouse is no longer able to work caused by incapacity.

Application date(s)

The changes relating to an ACC surviving spouse are effective from 1 April 2008.

The changes relating to a major shareholder of a close company are effective from 1 April 2011.